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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



Or



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



Commission File Number: 333-78573

333-78573-01



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MUZAK HOLDINGS LLC

MUZAK HOLDINGS FINANCE CORP

(Exact
Name of Registrants as Specified in their charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 04-3433730                          
|DELAWARE                                                       |  | 04-3433728                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



3318 LAKEMONT BLVD.

FORT MILL, SC 29708

(803) 396-3000

(Address, Including Zip Code and Telephone Number including Area Code of Registrants Principal
Executive Offices)



Securities registered pursuant to
Section 12(g) of the Act: None



Securities registered
pursuant to Section 12(b) of the Act: None



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Indicate by check mark whether the registrants have filed all documents and reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90
days.  Yes x   No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x



Indicate by check mark whether
the registrants are accelerated filers (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934)  Yes ̈No
x



Muzak Holdings Finance
Corp. meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.



DOCUMENTS INCORPORATED BY REFERENCE



None



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MUZAK HOLDINGS LLC

MUZAK HOLDINGS FINANCE CORP



FORM 10-K INDEX



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|         |  | PART I                                                                                                          |  |     
|Item 1.  |  | Business                                                                                                        |  | 3   
|Item 2.  |  | Properties                                                                                                      |  | 8   
|Item 3.  |  | Legal Proceedings                                                                                               |  | 8   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 9   
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |     
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 10  
|Item 6.  |  | Selected Financial Data                                                                                         |  | 10  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 12  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 18  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                     |  | 19  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 19  
|Item 9A. |  | Controls and Procedures                                                                                         |  | 19  
|Item 9B. |  | Other Information                                                                                               |  | 19  
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |     
|Item 10. |  | Directors and Executive Officers of the Registrants                                                             |  | 20  
|Item 11. |  | Executive Compensation                                                                                          |  | 22  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and, Related Stockholder Matters                 |  | 25  
|Item 13. |  | Certain Relationships and Related Transactions                                                                  |  | 26  
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 28  
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                      |  | 29  



Safe Harbor Statement



This Form 10-K contains statements which, to the extent
they are not historical facts (such as when we describe what we believe, expect, or anticipate will occur), constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the Safe Harbor Acts). All forward-looking statements involve risks and uncertainties. The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor
protection provided by the Safe Harbor Acts.



Risks and
uncertainties that could cause actual results to vary materially from those anticipated in the forward-looking statements included in this Form 10-K include, but are not limited to, industry-based factors such as the level of competition in the
business music industry, competitive pricing, concentrations in and dependence on satellite delivery capabilities, rapid technological changes, the impact of legislation and regulation, as well as factors more specific to the Company such as the
substantial leverage and debt service requirements, restrictions imposed by the Companys debt facilities, including financial covenants and limitations on the Companys ability to incur additional indebtedness, the Companys history
of net losses, the Companys future capital requirements, the Companys dependence on license agreements, and risks associated with economic conditions generally. The Registrants do not undertake any obligation to update any such
statements unless required by law.



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PART I



|ITEM 1. | BUSINESS
|------- | --------



Muzak LLC (Muzak) is the leading provider of business music programming in the United States based on market share. Muzak is a wholly owned
subsidiary of Muzak Holdings LLC, previously known as ACN Holdings, LLC. ACN Holdings, LLC was formed in September 1998 pursuant to the laws of Delaware and Muzak LLC began its operations on October 7, 1998 with the acquisition of independent
franchisees from Audio Communications Network, Inc. On March 18, 1999, Muzak Limited Partnership merged with and into Audio Communications Network LLC. At the time of the merger, ACN changed its name to Muzak LLC. We refer to Muzak Holdings and its
subsidiaries collectively as the Company. Based on our analysis of available competitor information, we believe that, together with our franchisees, we have a market share of approximately 60% of the estimated number of U.S. business
locations currently subscribing to business music programming.



Our two core products are Audio ArchitectureSMand VoiceSM. We provide our products to numerous types of businesses including specialty retailers, restaurants, department stores, supermarkets, drug stores, financial
institutions, hotels, health and fitness centers, business offices, manufacturing facilities and medical centers, among others. During 2004, our top twenty clients represented less than 21% of our revenues with no single client representing more
than 5% of our revenues. Our clients typically enter into a non-cancelable five-year contract that renews automatically for at least one additional five-year term unless specifically terminated at the initial contract expiration date. Our average
length of service per Audio Architecture client is approximately 10 years. We believe that our clients use our products because they recognize them as a key element in establishing their desired business environment, in promoting their corporate
identities and in strengthening their brand images at a low monthly cost.



We also sell, install, and maintain equipment, such as sound systems, noise masking, and drive-thru systems. We provide these services primarily for our existing clients.



We provide our products and services domestically through our integrated,
nationwide network of Company owned territories and franchisee territories. We believe our nationwide network is the largest in the industry and provides us with a key competitive advantage in effectively marketing and servicing clients ranging from
local accounts with single or multiple locations to national accounts with significant geographic presences. In 2004,95% of our revenues were generated by our owned operations and the remaining 5% were generated from fees from our
franchisees.



Recent Developments



On April 15, 2005, the Company entered into a new $105.0 million senior
secured term loan facility (New Senior Credit Facility) payable in quarterly installments of 0.25% beginning September 2005 until final maturity on April 15, 2008. A portion of the proceeds from the New Senior Credit Facility was used to
repay in full the outstanding term and revolving loans and associated interest and to collateralize outstanding letters of credit under the Companys then existing Senior Credit Facility, and to pay related fees and expenses. The then existing
Senior Credit Facility has been terminated.



On February 2,
2005, David Unger, a member of the Board of Directors resigned his position as director. Mr. Ungers resignation was received by the Company via electronic mail on February 2, 2005. The circumstances which the Company believes caused the
resignation were Mr. Ungers insistence that the Company establish an audit committee and his belief that the Company was not timely reporting material business developments to the board of directors. As the Company does not have securities
listed on a national securities exchange, it is not required to have a separate audit committee. The Company believes that necessary safeguards are in place as its board of directors functions as the audit committee. Further, the Company believes
that the board is fully apprised of all material business developments in a timely manner and that it discloses material issues in its filings with the Securities and Exchange Commission in accordance with securities laws and regulations.



On January 20, 2005, the Company received an amended and
restated secured promissory note (revised note) from the purchaser of the Companys closed circuit television systems (CCTV) product line. The revised note is secured by the inventory and recurring revenue contracts sold
to the purchaser on March 1, 2004 as well as by all inventory and recurring revenue contracts acquired by the purchaser subsequent to the sale. The terms of the revised note of $1.9 million require principal payments to commence on March 31, 2005
and are payable quarterly thereafter until the note is paid in full on March 31, 2007. The first principal payment was received by the Company in March 2005. Each quarterly principal payment increases in amount such that payments to be received in
2005, 2006, and 2007 are $0.5 million, $1.1 million, and $0.3 million, respectively. In addition, on January 20, 2005 the Company received an executed guaranty agreement from a third party of $0.5 million as further security for the note receivable
from the purchaser of the CCTV assets. The guaranty will continue in full force and effect until the purchasers obligations under the amended and restated promissory note are fully paid, performed, and discharged.



The industry-wide agreement between business music providers and the American
Society of Composers, Authors, and Publishers (ASCAP) expired in May 1999. The Company has continued to pay ASCAP royalties at the 1999 rates for all periods through December 31, 2004. While the Company began negotiations with ASCAP in
June 1999, ASCAP commenced a rate court proceeding in 2003 to establish a new royalty rate. During the fourth quarter of 2004, the Company and ASCAP pursued further



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settlement negotiations and advanced their conversations toward reaching a new five-year music license agreement. The culmination of such efforts has
resulted in a recent agreement in principle that will result in more favorable license fees. The Company anticipates that a final license agreement will be executed prior to the end of the second quarter of 2005. In the interim, payments will be
made in accordance with the agreement in principle and the parties will postpone any further activities in the pending rate court proceeding. In addition, in January 2005, the Company made a payment for settlement of all claims for open audit
periods prior to January 1, 2005, and as a result, ASCAP no longer has the right to audit royalty payments made by the Company prior to January 1, 2005. As part of this audit settlement, the interim license rates for all periods prior to January 1,
2005 are considered final and not subject to any retroactive adjustments.



The industry-wide agreement between business music providers and Broadcast Music, Inc. (BMI) expired in December 1993. Until recently, the Company was operating under an interim agreement pursuant to which
the Company continued to pay royalties at the 1993 rates. As previously disclosed, the Company and BMI reached an agreement in principle in August 2004 on the terms of a new, five-year music license, and on December 31, 2004 the definitive license
was executed. The term of the agreement extends from July 1, 2004 through June 30, 2009, and the agreement provides for an annual license fee of $6.0 million per annum for the five year period. The fixed license fee of $6.0 million per annum is
subject to an annual 8% cap on net subscriber growth. In the event that the Companys subscriber growth exceeds 8% per annum or in the event that the Company was to acquire a franchisee or a competitor, the license fee would be subject to
adjustment. Although the interim license rates for all periods prior to July 1, 2004 are considered final, and as a result, not subject to any retroactive adjustments, BMI has the right to audit open periods from January 1, 2002 onward.



On November 9, 2004, the Company amended the following aspects of its then
existing Senior Credit Facility: (i) amended financial covenants for the third quarter of 2004 and prospectively to make such covenants less restrictive (ii) revised the maturity dates of the revolver and its $35.0 million term loan facility
(Term Loan B) to May 2007 and November 2007, respectively, (iii) increased Term Loan B margins to 4.25% in the case of Eurodollar loans and 3.25% in the case of Base Rate Loans (iv) amended the definition of consolidated EBITDA to
exclude up to $1.9 million in restructuring charges, and (v) reduced the revolving commitment from $60.0 million to $55.0 million. The Company incurred fees of $0.2 million in connection with this amendment. In addition, the Company recorded a loss
on extinguishment of debt of $0.2 million, which was comprised of the write off of deferred financing fees associated with the reduction in revolving commitment. As previously discussed, this senior credit facility was terminated on April 15, 2005.



Effective August 2004, the Company reorganized into five
functional areas: Sales, Operations, Administration, Client Service, and Product and Marketing. The Company also centralized the administrative function and certain aspects of operations, such as purchasing and scheduling, at its home office. In
connection with this reorganization, the Company incurred charges of $1.8 million associated with severance and other termination benefits, relocation costs, duplicate salaries, and temporary facility requirements.



On May 10, 2004, the Company amended its then existing Senior Credit Facility
to include a Term Loan B in the amount of $35.0 million payable in quarterly installments beginning June 30, 2006 until final maturity on November 21, 2007, as amended. The proceeds of the term loan were used to repurchase $32.7 million in aggregate
outstanding principal amount of the Companys 13% Senior Discount Notes due 2010 and to pay associated interest and expenses. The Company recorded a loss on extinguishment of debt of $1.7 million in connection with this transaction. The loss on
extinguishment of debt is comprised of $1.0 million premium paid on the repurchase and $0.7 million write off of deferred financing fees. We incurred financing fees of $1.4 million in connection with this transaction. As previously discussed, this
Senior Credit Facility was terminated on April 15, 2005.



Products



Audio Architecture is business music programming designed
to enhance a clients brand image. Our in-house staff of audio architects analyzes a variety of music to develop and maintain 77 core music programs in 10 genres ranging from current top of the charts hits to jazz, classic rock, urban, country,
Latin, classical music and others. Our audio architects change our music programs on a daily basis, incorporating newly released original artists music recordings and drawing from our extensive music library. In designing our music programs,
our audio architects use proprietary computer software that allows them to access the extensive library. Our library contains subjective and objective data (commonly referred to as meta data) unique to each recording that enables us to avoid
repetition and manage tempo, mood, and music variety to provide clients with high quality, seamlessly arranged programs. The combination of our proprietary software and our librarys meta data is driving new efficiencies in programming and
enabling us to offer unique experiences to a greater number of clients. In addition, we offer individual music programs to clients who seek further customization beyond that offered by our core music programs.



Voice is telephone music and marketing on-hold, as well as in-store
messaging. Our Voice staff creates customized music and messages that allow clients telephone systems to deliver targeted music and messaging during their customers time on hold. In addition, they also provide customized in-store
messages that allow our clients to deliver targeted music and messaging to support their in-store point of sale merchandising. Our fully integrated sound studios and editing and tape duplication facilities provide flexibility in responding to
clients needs. Our telephone and satellite delivery technologies allow us to expeditiously change our clients music and messages.



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In connection with the sale of our Audio Architecture and Voice products, we sell or provide various
system-related products, principally sound systems. As part of a typical music programming contract, we provide music receiving or playback equipment to our client. Our business music clients generally purchase audio equipment, such as sound
systems, from us that supplements the music receiving or playback equipment.



We also sell, install and maintain non-music related equipment, such as drive-thru systems, intercom and paging systems. We provide these services for our business music and other clients. Maintenance of
program-receiving equipment that we provide to business music clients is typically included as part of the overall music service. Installation and maintenance of audio or other equipment not directly related to reception of our business music
service is provided on a contractual or time-and-materials basis. All of the equipment is manufactured by third parties, although some items bear the MUZAK®brand name.



We offer drive-thru systems maintenance service. This service provides for the maintenance and repair of intercom systems, headsets and radio transmitters
commonly used in drive-thru systems found at our quick service restaurant clients. We receive recurring monthly revenues for each client location typically under a five-year contract. We respond to our clients repair calls which typically
involve the repair of headsets. In most cases we are able to exchange the damaged headset for an operable headset which we send to our clients through overnight delivery. Our staff repairs the damaged item which then becomes available for future
distribution to another client. We believe that quick turnaround is important to our clients as a significant portion of their revenues is derived from their drive-thru windows.



Nationwide Franchise Network



Our franchise network is nationwide, and we believe that this network is a strength that distinguishes us from our competitors. Our business relationships
with our franchisees are governed by license agreements that have renewable ten-year terms. Under these agreements, the franchisee is granted an exclusive license to offer and sell our Audio Architecture and Voice products, as well as other
products. The franchisee is also permitted to use our registered trademarks within a defined territory which allows us to promote a uniform Muzak brand image nationally. The agreements also contain terms relating to distribution of services via our
direct broadcast satellite distribution system and reciprocal exclusivity provisions which preclude franchisees from selling products which compete with our Audio Architecture and Voice products.



Pursuant to the agreements, each franchisee pays us a monthly fee based on
the number of businesses within its territory and a monthly royalty equal to approximately 10% of its billings for music services. Typically, this combined fee and royalty payment represents approximately $5 per month per client location. However,
this monthly royalty is subject to adjustments, as we charge the franchisee additional amounts for on-premise tape services and other services. The agreements also provide franchisees with guidelines regarding coordination of sales, installation and
service to national client locations.



Distribution Systems



We transmit our offerings through various mediums including direct
broadcast satellite transmission, local broadcast transmission, audio and videotapes and compact discs. During 2004, we served our music client locations through the following means: approximately 83% through direct broadcast satellite transmission,
approximately 4% through local broadcast technology, and approximately 13% through on-premises tapes or compact discs.



Our transmissions via direct broadcast satellite to clients are primarily from transponders leased from Microspace Communications Corporation
(Microspace) and EchoStar Satellite Corporation (EchoStar). Microspace provides us with facilities for uplink transmission of medium-powered direct broadcast satellite signals to the transponders. Microspace, in turn, leases
its transponder capacity on satellites operated by third parties. Such satellites include the Galaxy IIIC satellite operated by PanAmSat, through which a majority of our direct broadcast satellite client locations are served, and AMC-1, operated by
SES Americom.



In January 2001, we began utilizing transponder
capacity on Telstar 4 in order to provide the signal for certain of our client locations. On September 19, 2003, Telstar 4 experienced a technical malfunction. We secured comparable transponder capacity through Microspace on AMC-1, a digital
satellite of SES Americom. We successfully restored service, which required re-pointing of satellite dishes, to all affected client locations within nine days. At the time of the disruption, we had insurance on Telstar 4 that provided $1.5 million
of coverage for re-pointing efforts. We received reimbursement of our $1.5 million claim on March 25, 2004.



To mitigate our expenditures in the event of a future satellite disruption, we have secured insurance to cover our re-pointing costs of up to $5.0 million
in the event of a Galaxy IIIC satellite failure. In addition, we have secured insurance coverage on AMC-1 to cover costs up to $2.9 million in the first quarter of 2005 stepping up to $3.8 million by the end of 2005.



The term of our transponder lease with Microspace for the Galaxy IIIC
satellite is projected to end in 2016 while the lease for AMC-1 is projected to end in 2011. Microspace can terminate its agreements with us immediately upon termination of its underlying agreements with PanAmSat and SES Americom. We regularly
review the availability of alternate transponders.



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As part of our arrangements with EchoStar, we furnish 60 music channels to commercial subscribers and 52
of the 60 music channels to residential subscribers over EchoStars satellite system. Pursuant to the agreements with EchoStar, EchoStar pays us a programming fee for each of its residential subscribers and pays us, and our franchisees, a
commission for sales made by EchoStar or its agents to commercial subscribers in the respective territories. We pay EchoStar a fee for uplink transmission of music channels to our clients and we rent space at EchoStars Cheyenne, Wyoming uplink
facility. We also pay EchoStar a royalty and combined access fees on music programs sold by the Company, which are distributed by EchoStar to commercial subscribers. The term of each of our agreements with EchoStar is dependent upon the life of one
of its satellites, which is estimated to cease operations sometime in 2010. During the first quarter of 2004, EchoStar informed us that it had agreed to distribute Sirius Satellite Radios programming to EchoStars residential subscribers.
At that time we believed that such programming would replace our music channels offered to EchoStars residential subscribers and, possibly, EchoStars commercial subscribers. As of December 31, 2004, EchoStar has continued to utilize our
music channels for EchoStars residential and commercial subscribers, and we do not foresee a change in such use in the near future. Even if EchoStar were to discontinue utilizing our programming, EchoStar would remain obligated to uplink and
provide space segment to distribute our 60 music channels currently being offered to our commercial subscribers over EchoStars satellite system. In any event, we believe that any future discontinuation of our programming to EchoStars
commercial and/or residential subscribers would not have a material financial impact on the Company.



EchoStar has agreed that it will not provide transponder space to, enter into or maintain distributor agreements or relationships with, or enter into any
agreements for the programming or delivery of any audio services via direct broadcast satellite frequencies with, a specified group of our competitors. We have agreed that we will not secure transponder space for, enter into or maintain distributor
agreements or relationships with, or enter into any agreement for the programming or delivery of any of our services with any competitor of EchoStar via direct broadcast satellite frequencies or with specified competitors of EchoStar via specified
frequencies.



Competition



We compete with many local, regional, national and international providers
of business music services. National competitors include DMX Music, Inc., PlayNetworks, and In-Store Broadcasting Network (IBN). Local and regional competitors are typically smaller entities that target businesses with few locations.



We compete on the basis of service, the quality and variety of
our music programs, versatility and flexibility, the availability of our non-music services and, to a lesser extent, price. Even though we are seldom the lowest-priced provider of business music in any territory, we believe that we can compete
effectively due to the widespread recognition of the Muzak name, our nationwide network, the quality and variety of our music programming, the talent of our audio architects and our multiple delivery systems.



On February 14, 2005, DMX Music, Inc. announced it had signed an asset
purchase agreement for the sale of all of its domestic and international operations with THP Capstar, Inc. DMX Music Inc.s domestic companies voluntarily filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. We do
not know how the bankruptcy, the sale process, or DMX Music, Inc. under THP Capstars ownership will impact competition.



We also compete with companies that are not principally focused on providing business music services. Such competitors include Sirius Satellite Radio, XM
Radio, traditional radio broadcasters that encourage workplace listening, video services that provide business establishments with music videos or television programming, and performing rights societies (ASCAP, BMI, and SESAC) that license business
establishments to play sources such as CDs, tapes, MP3 files, and the radio. While we believe that we compete effectively against such services for many of the same reasons stated above, such competitors have established client bases and are
continually seeking new ways to expand such client bases and revenue streams.



There are numerous methods by which our existing and future competitors can deliver programming, including various forms of direct broadcast satellite services, wireless cable, fiber optic cable, digital compression
over existing telephone lines, advanced television broadcast channels, digital audio radio service and the Internet. We cannot assure you that we will be able to:



| |  |  | compete successfully with our existing or potential new competitors,
| | - |  | --------------------------------------------------------------------



| |  |  | maintain or increase our current market share,
| | - |  | ----------------------------------------------



| |  |  | use, or compete effectively with competitors that adopt new delivery methods and technologies, or
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | keep pace with discoveries or improvements in the communications, media and entertainment industries such that our existing technologies or delivery systems that we currently rely
upon will not become obsolete.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Sales and Marketing



We employ a direct sales process in marketing products, which is focused on securing new client contracts and renewing existing contracts. Once we obtain
a new client, there are only minimal maintenance costs associated with that client. As a result, we continually try to increase not only our market share but also the market penetration of both business music and marketing on-hold and in-store
messaging products.



We publish targeted, industry specific
marketing materials and conduct extensive training of our sales force. Client agreements typically have a non-cancelable term of five years and renew automatically for at least one additional five-year term unless specifically terminated at the
initial contract expiration date. We have local and national sales forces. Local account executives typically focus on clients that have fewer than 50 locations, which may include individual franchisees of national chains. In addition, we have
various other sales positions to support the sales process, including sales leads and sales managers.



National Salesforce



Our national sales group is responsible for securing new national and key accounts and maintaining our existing client base of national and key accounts.
We have a total of five account executives focused exclusively on selling services to clients that have approximately 50 or more locations. Each owned operation and franchisee is responsible for installing and servicing the national accounts within
its territory.



Local Salesforce



As of December 31, 2004, we had a team of 191 local sales account
executives. Local account executives typically focus on clients that have fewer than 50 locations, which may include individual franchisees of national chains. Our local account executives are compensated on commission.



Music Licenses



We pay performance royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as ASCAP, BMI, and the Society of European Stage Authors and Composers (SESAC). We also license rights to re-record and distribute music from a variety of sources such as record companies
and publishers when we provide our services via recorded media.



The industry-wide agreement between business music providers and the American Society of Composers, Authors, and Publishers (ASCAP) expired in May 1999. The Company has continued to pay ASCAP royalties at the 1999 rates for all
periods through December 31, 2004. While the Company began negotiations with ASCAP in June 1999, ASCAP commenced a rate court proceeding in 2003 to establish a new royalty rate. During the fourth quarter of 2004, the Company and ASCAP pursued
further settlement negotiations and advanced their conversations toward reaching a new five-year music license agreement. The culmination of such efforts has resulted in a recent agreement in principle that will result in more favorable license
fees. The Company anticipates that a final license agreement will be executed prior to the end of the second quarter of 2005. In the interim, payments will be made in accordance with the agreement in principle and the parties will postpone any
further activities in the pending rate court proceeding. In addition, in January 2005, the Company made a payment for settlement of all claims for open audit periods prior to January 1, 2005, and as a result, ASCAP no longer has the right to audit
royalty payments made by the Company prior to January 1, 2005. As part of this audit settlement, the interim license rates for all periods prior to January 1, 2005 are considered final and not subject to any retroactive adjustments.



The industry-wide agreement between business music providers and Broadcast
Music, Inc. (BMI) expired in December 1993. Until recently, the Company was operating under an interim agreement pursuant to which the Company continued to pay royalties at the 1993 rates. As previously disclosed, the Company and BMI
reached an agreement in principle in August 2004 on the terms of a new, five-year music license, and on December 31, 2004 the definitive license was executed. The term of the agreement extends from July 1, 2004 through June 30, 2009, and the
agreement provides for an annual license fee of $6.0 million per annum for the five year period. The fixed license fee of $6.0 million per annum is subject to an annual 8% cap on net subscriber growth. In the event that the Companys subscriber
growth exceeds 8% per annum or in the event that the Company was to acquire a franchisee or a competitor, the license fee would be subject to adjustment. Although the interim license rates for all periods prior to July 1, 2004 are considered final,
and as a result, not subject to any retroactive adjustments, BMI has the right to audit open periods from January 1, 2002 onward.



In the years ended December 31, 2004 and 2003, the Company incurred expense of $13.6 million and $9.5 million, respectively, in royalties to ASCAP, BMI,
SESAC, and the record companies. Although the Company began incurring the higher royalties associated with the new BMI agreement in July 2004, these incremental fees were not paid until January 2005. In addition, we reduced our reserve for prior
period licensing royalties and related expenses by $1.5 million due to the resolution and closure of certain audit periods.



In October 1998, the Digital Millennium Copyright Act was enacted. The Act provides for a statutory license from the copyright owners of master recordings
to make and use ephemeral copies of such recordings. Ephemeral copies refer to temporary copies of master sound recordings made to enable or facilitate the digital transmission of such recordings.



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In June 2002, a ten percent (10%) ephemeral royalty rate was established which covered the period from
October 1998 through December 31, 2002. In connection with the establishment of such rate, we accrued royalties owed and remitted a payment on October 20, 2002 for royalties payable. With respect to future revenue subject to such ephemeral royalty
rate, we believe our exposure is minimal, as the Company believes its current satellite technologies do not require use of ephemeral copies. Nonetheless, there can be no assurances that the collective for the copyright owners will refrain from
investigating or otherwise challenging the applicability of the statute to our satellite technologies.



Government Regulation



We are subject to governmental regulation by the United States and the governments of other countries in which we provide services. We provide music services in a few areas in the United States through 928 to 960 megahertz frequencies
licensed by the Federal Communications Commission (FCC). Additionally, the FCC licenses the frequencies used by satellites on which we transmit direct broadcast satellite services in the United States. If the FCC or any other person
revokes or refuses to extend any of these licenses, we would be required to seek alternative transmission facilities. Laws, regulations and policies, or changes therein, in other countries could also adversely affect our existing services or
restrict the growth of our business in these countries.



Employees



As of December 31, 2004, we had 1,385 full-time and 51
part-time employees. 150 of our technical and service personnel are union members. These personnel belong to 14 bargaining units, 13 of which are represented by the International Brotherhood of Electrical Workers and one of which is represented by
the Communication Workers of America. All of our union contracts are current with the exception of a ratified but yet to be finalized contract with the local covering our operations in the District of Columbia and surrounding areas. We believe that
our relations with our employees and with the unions that represent them are generally good.



Available Financial Information



The Companys most recent quarterly report on Form 10-Q can be found on the Companys website, www.muzak.com and on the SECs website, www.sec.gov. The Companys 2004 annual report on Form 10-K will be available
on the Companys website as soon as reasonably practical.



|ITEM 2. | PROPERTIES
|------- | ----------



The Company leases its headquarters located at 3318 Lakemont Boulevard, Fort Mill, South Carolina. The telephone number of our headquarters is (803)
396-3000. Our headquarters consists of approximately 100,000 square feet which accommodates our executive offices, operations, national sales, marketing, technical, finance and administrative staffs, and a warehouse. We also have local sales offices
in various locations, and lease space at two satellite uplink facilities and warehouses in various locations. Approximately 95% of the total square footage of all of the Companys facilities is leased and the remainder is owned.



The Company considers all of its properties, both owned and leased, suitable
for its existing needs.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



Muzak and CVS Pharmacy, Inc. are co-defendants in a lawsuit filed by DMX Music, Inc. in Los Angeles County Superior Court on July 25, 2003. DMX Music,
Inc. is asserting claims against CVS Pharmacy, Inc. for breach of contract and breach of the covenant of good faith and fair dealing while asserting claims against Muzak for predatory pricing, unfair business practices, intentional interference with
contract, and intentional interference with prospective economic advantage. The case has arisen as a result of a Request for Proposal prepared by CVS Pharmacy, Inc. in 2001 that solicited bids for music programming. DMX Music, Inc. contends that
Muzak improperly entered into two contracts with CVS Pharmacy, Inc. subsequent to such Request for Proposal. While damages have yet to be definitively alleged, DMX Music, Inc. is seeking an award of no less than $3.0 million for lost profits, treble
damages and an injunction prohibiting Muzak from allegedly selling its services below cost. While it is unable to predict the outcome of this case, Muzak contends that DMX Music. Inc.s assertions, claims, and allegations against Muzak are
without merit and is vigorously contesting the same. While the parties participated in mediation in October of 2004, they were unable to reach a settlement. A trial date is currently set for July 2005.



Muzak and the Company are co-defendants in a lawsuit filed in the U.S.
District Court, Northern District of Illinois, Eastern Division, by Sound of Music, Ltd., a former franchisee of Muzak. Sound of Music, Ltd. is asserting claims against Muzak and the Company for violation of Federal securities laws, breach of
contract and common law fraud. The case has arisen as a result of Sound of Music, Ltd.s sale of substantially all of its MUZAK® related assets to Muzak and the Company in 2001. Sound of Music, Ltd. commenced this lawsuit more than three years after the parties consummated the
purchase and sale transaction and now contends that it did not receive the total consideration promised and that the value of certain Class A units of the Company received in consideration for the assets was misrepresented. Sound of Music, Ltd. is
seeking damages in excess of $1 million. While it is unable to predict the outcome of this case, the Company contends that Sound of Music, Ltd.s assertions, claims, and allegations against Muzak and the



8



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Company are without merit and is vigorously contesting the same. While discovery in this case has yet to commence, preliminary motions have been filed.



In March 2004, a jury found against Muzak and another
defendant in Bono vs. Muzak LLC et-al and awarded the plaintiff approximately $0.4 million in damages for claims of sexual harassment and battery. In April 2005, the Company and Bono entered into a settlement agreement under which Muzak will pay
$0.7 million, which includes an amount for damages as well as the plaintiffs legal fees.The Company expects to pay such settlement during the second and third quarters of 2005.



The Company is subject to various other proceedings in the ordinary course of
its business. Management believes that such proceedings are routine in nature and incidental to the conduct of its business, and that none of such proceedings, if determined adversely to the Company, would have a material adverse effect on the
consolidated financial condition or results of operations of the Company.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



None.



9



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ---------------------------------------------------------------------------------------------------------------



The Company does not have an established trading market for its equity
securities. The equity securities of the Company are held by MEM Holdings LLC, AMFM Systems Inc., New York Life Capital Partners, Northwestern Mutual Life Insurance Company, BancAmerica Capital Investors I, L.P., and by current or former management.
ABRY Broadcast Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM Holdings.



The Companys bank agreement, the indentures with respect to the Senior Notes and Senior Subordinated Notes of Muzak and Muzak Finance Corporation,
the indenture with respect to the Companys Senior Discount Notes, and the Securities Purchase Agreement between the Company and BancAmerica Capital Investors I, L.P, and various Investors, restrict the ability of the Company to make dividends
and distributions in respect of their equity.



During 2004, the
Company repurchased 153.5 Class B-1 Units, 153.4 Class B-2 Units, and 153.4 Class B-3 Units from members of management.



All of such repurchases were deemed exempt from registration under the Securities Act by virtue of Section 4 (2) thereof, as transactions not involving a
public offering.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The five year selected financial data below has been revised to reflect a restatement. In preparing the Companys 2004 year end financial statements
and supporting schedules, an issue was discovered pertaining to revenue and accounts receivable cutoff procedures dating back to the time of the merger of Audio Communications Network and Muzak Limited Partnership in March 1999. In addition, it was
determined that the redeemable Class A units should be presented outside of members deficiency on the consolidated balance sheets. See Note 2 to the Consolidated Financial statements for a more detailed discussion of this restatement.



Set forth below is Selected Financial Data for the Company for
the years ended December 31, 2004, 2003, 2002, 2001, and 2000. The table should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial
statements included elsewhere in this report.



|                                                |  |                            |         |   |                            |   |         |                            |  |   |                               |   |  |                               |         |   |  |   |         |  
|----------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -------------------------- |  | - | ----------------------------- | - |  | ----------------------------- | ------- | - |  | - | ------- | -
|                                                |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |   |         | Year EndedDecember 31,2002 |  |   | Year EndedDecember 31,2001(1) |   |  | Year EndedDecember 31,2000(1) |        
|                                                |  |                            |         |   | Restated                   |   |         | Restated                   |  |   | Restated                      |   |  | Restated                      |        
|Statement Of Operations Data:                   |  |                            |         |   |                            |   |         |                            |  |   |                               |   |  |                               |         |   |  |   |         |  
|Net revenues                                    |  | $                          | 245,862 |   |                            | $ | 235,014 |                            |  | $ | 217,717                       |   |  | $                             | 203,926 |   |  | $ | 191,483 |  
|Income (loss) from continuing operations        |  |                            | (560    | ) |                            |   | 8,309   |                            |  |   | (2,636                        | ) |  |                               | (11,356 | ) |  |   | (4,215  | )
|Interest expense                                |  |                            | 44,148  |   |                            |   | 40,253  |                            |  |   | 36,533                        |   |  |                               | 39,390  |   |  |   | 46,288  |  
|Net loss (2)                                    |  |                            | (46,129 | ) |                            |   | (34,812 | )                          |  |   | (38,021                       | ) |  |                               | (50,632 | ) |  |   | (51,276 | )
|Balance Sheet Data (At Period End):             |  |                            |         |   |                            |   |         |                            |  |   |                               |   |  |                               |         |   |  |   |         |  
|Total assets                                    |  | $                          | 446,072 |   |                            | $ | 470,574 |                            |  | $ | 470,673                       |   |  | $                             | 494,780 |   |  | $ | 536,500 |  
|Intangible assets, net                          |  |                            | 234,012 |   |                            |   | 253,934 |                            |  |   | 270,756                       |   |  |                               | 292,546 |   |  |   | 324,544 |  
|Working capital (deficit)                       |  |                            | 14,705  |   |                            |   | 14,342  |                            |  |   | (2,328                        | ) |  |                               | (4,041  | ) |  |   | 5,647   |  
|Long-term debt, including current portion       |  |                            | 429,337 |   |                            |   | 411,518 |                            |  |   | 377,769                       |   |  |                               | 361,920 |   |  |   | 370,171 |  
|Capital lease obligations                       |  |                            | 4,938   |   |                            |   | 5,232   |                            |  |   | 4,224                         |   |  |                               | 4,720   |   |  |   | 5,282   |  
|Redeemable preferred stock and Class A units    |  |                            | 163,104 |   |                            |   | 137,479 |                            |  |   | 116,902                       |   |  |                               | 100,054 |   |  |   | 87,550  |  
|Other Data:                                     |  |                            |         |   |                            |   |         |                            |  |   |                               |   |  |                               |         |   |  |   |         |  
|Capital expenditures for property and equipment |  | $                          | 36,044  |   |                            | $ | 39,902  |                            |  | $ | 37,384                        |   |  | $                             | 41,476  |   |  | $ | 43,638  |  
|Cash flows provided by (used in) operations     |  |                            | 24,591  |   |                            |   | 27,865  |                            |  |   | 31,589                        |   |  |                               | 38,035  |   |  |   | (3,456  | )
|Cash flows used in investing activities         |  |                            | (37,947 | ) |                            |   | (41,489 | )                          |  |   | (38,789                       | ) |  |                               | (42,908 | ) |  |   | (90,109 | )
|Cash flows provided by financing activities     |  |                            | 11,493  |   |                            |   | 14,127  |                            |  |   | 6,398                         |   |  |                               | 4,444   |   |  |   | 94,302  |  
|EBITDA pursuant to the Notes (3)                |  |                            | 65,387  |   |                            |   | 72,231  |                            |  |   | 67,665                        |   |  |                               | 63,831  |   |  |   | 57,933  |  
|Consolidated Leverage Ratio for the Company     |  |                            | 6.76    | x |                            |   |        |                            |  |   |                              |   |  |                               |        |   |  |   |        |  
|Consolidated Leverage Ratio for Muzak           |  |                            | 6.38    | x |                            |   |        |                            |  |   |                              |   |  |                               |        |   |  |   |        |  

---

|(1) | The following tables present the impact of the correction of the error to the financial statements for the years ended December 31, 2001 and 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



10



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|                                  |  |                   |         |   |                   |   |        |          |  |   |             |   |  |            |         |   |          |   |        |   |  |   |         |  
|--------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------ | -------- |  | - | ----------- | - |  | ---------- | ------- | - | -------- | - | ------ | - |  | - | ------- | -
|                                  |  | December 31, 2001 |         |   | December 31, 2000 |  
|Selected Financial Data           |  | As reported       |         |   | Adjustment        |   |        | Restated |  |   | As reported |   |  | Adjustment |         |   | Restated |  
|Statement of Operations Data:     |  |                   |         |   |                   |   |        |          |  |   |             |   |  |            |         |   |          |   |        |   |  |   |         |  
|Net Revenues                      |  | $                 | 203,361 |   |                   | $ | 565    |          |  | $ | 203,926     |   |  | $          | 192,148 |   |          | $ | (665   | ) |  | $ | 191,483 |  
|Income from continuing operations |  |                   | (11,921 | ) |                   |   | 565    |          |  |   | (11,356     | ) |  |            | (3,550  | ) |          |   | (665   | ) |  |   | (4,215  | )
|Net loss                          |  |                   | (51,197 | ) |                   |   | 565    |          |  |   | (50,632     | ) |  |            | (50,611 | ) |          |   | (665   | ) |  |   | (51,276 | )
|Balance Sheet Data:               |  |                   |         |   |                   |   |        |          |  |   |             |   |  |            |         |   |          |   |        |   |  |   |         |  
|Total assets                      |  |                   | 498,324 |   |                   |   | (3,544 | )        |  |   | 494,780     |   |  |            | 540,075 |   |          |   | (3,575 | ) |  |   | 536,500 |  
|Other Data:                       |  |                   |         |   |                   |   |        |          |  |   |             |   |  |            |         |   |          |   |        |   |  |   |         |  
|EBITDA pursuant to the Notes      |  |                   | 63,167  |   |                   |   | 664    |          |  |   | 63,831      |   |  |            | 58,383  |   |          |   | (450   | ) |  |   | 57,933  |  



Beginning accumulated deficit as of
December 31, 1999 was $30.4 million and was $33.8 million as adjusted for the correction of the error.



|(2) | Net loss for the year ended December 31, 2004 includes incremental royalty expenses of $1.6 million related to the new BMI agreement, a $1.5 million reduction in reserves for prior
period licensing royalties due to resolution and closure of certain audit periods, $1.8 million relating to severance and other termination benefits, a $0.6 million impairment of a note receivable, a $6.5 million impairment of deferred production
costs, and a $1.8 million loss on early extinguishment of debt related to the repurchase of Senior Discount Notes as well as a reduction in revolver commitment. Net loss for the year ended December 31, 2003 includes a $3.7 million loss on early
extinguishment of debt related to the write-off of financing fees associated with the Companys refinanced Senior Credit Facility. Net loss for the year ended December 31, 2002 includes a $3.1 million charge to increase reserves for estimated
prior period licensing royalties and related expenses and a charge of $0.5 million in connection with exploring various financing alternatives. Net loss for the year ended December 31, 2001 includes a $1.2 million charge related to a license fee
audit and a charge of $0.7 million related to the postponed private placement of Senior Subordinated Notes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The Company evaluates the operating performance of its business using several measures, one of them being EBITDA as defined by our Senior Discount Notes, Senior Subordinated Notes,
and Senior Notes indentures (defined as earnings before interest, income taxes (benefits), depreciation, and amortization plus all non-cash items reducing consolidated net income for such period except for any non-cash items that represent accruals
of, or reserves for, cash disbursements to be made in any future accounting period, minus all non-cash items increasing consolidated net income for such period) (EBITDA pursuant to the Notes). EBITDA pursuant to the Notes is not intended
to be a performance measure that should be regarded as an alternative to, or more meaningful than, net income as a measure of performance, as determined in accordance with generally accepted accounting principles, known as GAAP. However, management
believes that EBITDA pursuant to the Notes provides useful information because it is used to determine our ability to incur additional indebtedness. Consolidated Leverage ratios are the measure used to determine our ability to incur additional
indebtedness under the indentures.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table provides
a reconciliation from net income to EBITDA pursuant to the Notes.



|                                        |  |                            |         |   |                            |   |         |                            |  |   |                            |   |  |                            |         |   |  |   |         |  
|--------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -------------------------- |  | - | -------------------------- | - |  | -------------------------- | ------- | - |  | - | ------- | -
|                                        |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |   |         | Year EndedDecember 31,2002 |  |   | Year EndedDecember 31,2001 |   |  | Year EndedDecember 31,2000 |        
|Net loss                                |  | $                          | (46,129 | ) |                            | $ | (34,812 | )                          |  | $ | (38,021                    | ) |  | $                          | (50,632 | ) |  | $ | (51,276 | )
|Interest expense                        |  |                            | 44,148  |   |                            |   | 40,253  |                            |  |   | 36,533                     |   |  |                            | 39,390  |   |  |   | 46,288  |  
|Income tax benefit                      |  |                            | (168    | ) |                            |   | (625    | )                          |  |   | (956                       | ) |  |                            | (595    | ) |  |   | (1,082  | )
|Depreciation and amortization           |  |                            | 60,043  |   |                            |   | 63,721  |                            |  |   | 70,109                     |   |  |                            | 75,668  |   |  |   | 63,125  |  
|Non-cash loss on extinguishment of debt |  |                            | 874     |   |                            |   | 3,694   |                            |  |   |                           |   |  |                            |        |   |  |   | 878     |  
|Non-cash impairment charges             |  |                            | 6,619   |   |                            |   |        |                            |  |   |                           |   |  |                            |        |   |  |   |        |  
|                                        |  |                            |         |   |                            |   |         |                            |  |   |                            |   |  |                            |         |   |  |   |         |  
|EBITDA pursuant to Notes                |  | $                          | 65,387  |   |                            | $ | 72,231  |                            |  | $ | 67,665                     |   |  | $                          | 63,831  |   |  | $ | 57,933  |  



During 2004, the
Company recorded $6.6 million and $0.5 million of impairment charges relating to deferred production costs and a note receivable from the purchaser of the Companys CCTV assets, respectively. Approximately $2.0 million of the $6.6 million
impairment of deferred production costs represents cash expenditures during 2004. In addition, the Company recorded $1.5 millions of charges to reflect the write-off of capitalized installation labor upon client contract terminations.



11



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The Company has restated the consolidated balance sheet as of December 31, 2003 and the consolidated statements of income,
consolidated statements of changes in members deficiency and consolidated statements of cash flows for the years ended December 31, 2003 and 2002 and the first three interim quarters in 2004 in this Annual Report on Form 10-K. The Company did
not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the financial statements and related financial information contained in such reports should no longer be relied upon.
Managements discussion and analysis of financial condition and results of operations reflects the financial statements as restated. See Note 2 to the Consolidated Financial statements for a more detailed discussion of this restatement.



Business Overview



Muzak is the leading provider of business music programming in the United
States based on market share. We believe that, together with our franchisees, we have a market share of approximately 60% of the estimated number of U.S. business locations currently subscribing to business music programming.



For a typical Audio Architecture client generated by our owned operations, we
make an initial one-time investment of approximately $1,200 (including equipment, installation labor, and sales commissions, net of installation fees) and currently generate approximately $45 of contribution per month per client location.
This allows us to recover our investment in that location within 24 months and generate a 63.3% annual return on investment per Audio Architecture client location, based on an average client relationship of 10 years.



For a typical Voice client generated by our owned operations, we make an
initial one-time investment of approximately $740 (including equipment, installation labor and sales commissions, net of installation fees) and currently generate approximately $45 of contribution (gross revenues less direct variable costs) per
month per client location. This allows us to recover our investment in that location within 16 months and generate a 99% annual return on investment per Voice client location based on a typical five-year contract term.



For clients generated by our franchisees, we receive a net monthly fee of
approximately $5 for each Audio Architecture client location and a fee for each program that we produce for a Voice client. The initial one-time investment for a new Audio Architecture or Voice client location generated by a franchisee is borne
exclusively by the franchisee.



Revenues, Cost of Revenues, Expenses and New
Client Investments



Revenues from franchisees and from the
sale of music and other business services represented 74.8 % of our total revenue in 2004, while equipment and other services revenue represented the remaining 25.2% of our total revenue in 2004.



Revenues



Our music and other business services revenue is generated from:



| |  |  | the sale of our core products, Audio Architecture and Voice, by our owned operations to clients who pay monthly subscription fees;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | fees received from franchisees related to Audio Architecture, Voice and the servicing of drive-thru systems; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | service contract revenues for maintenance and repair of drive-thru systems used by our quick-service restaurant clients.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



We derive equipment and related services revenues from the sale of audio
system-related products such as sound systems, noise masking, and intercoms, and certain non audio system related products to business music clients and other clients. Equipment and related services revenues also include revenue from the
installation, service and repair of equipment installed under a client contract. Installation, service and repair revenues consist principally of revenues from the installation of sound systems and other equipment that is not expressly part of a
client contract. Installation revenues from sales of music and other business services are deferred and recognized over the term of the respective contracts.



Costs of Revenues



The cost of revenues for music and other business services consists primarily of broadcast delivery, programming and licensing associated with providing
music and other business programming to a client or a franchisee. The cost of revenues for equipment represents the purchase cost plus handling, and shipping expenses. The cost of revenues for related services, which includes installation, service
and repair, consists primarily of service and repair labor and labor for installation that is not associated with new



12



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client locations. The costs for installation that are associated with new client locations are capitalized as part of property and equipment and are
depreciated over the initial contract term.



Expenses



Selling, general and administrative expenses include salaries, benefits,
commissions, travel, marketing materials, training and occupancy costs associated with staffing and operating local sales offices. These expenses also include personnel and other costs in connection with our headquarters functions. Subscriber
acquisitions costs (sales commissions) are amortized as a component of selling, general and administrative expense over the initial contract term. If a clients contract is terminated early, the unamortized sales commission is typically
recovered from the salesperson. Any remaining subscriber acquisition costs are reduced to reflect the termination of the client contract.



New Client Investment



The majority of our investments are comprised of our initial outlay for each new client location. We incur these costs only after receiving a signed
contract from a client. Our typical initial one-time client installation investment per client location (including equipment, installation labor and sales commissions, net of installation fees) is approximately $1,200 and $740 per Audio Architecture
and Voice client location, respectively. The cost of equipment and labor installed at the clients premises is recorded within property and equipment and amortized over five years. In the event of a contract termination, we can typically
recover and reuse the installed equipment. Subscriber acquisitions costs incurred in connection with acquiring new client locations are amortized as a component of selling, general and administrative expense over the initial contract term. If a
clients contract terminates early, the unamortized sales commission is typically recovered from the salesperson. Any remaining subscriber acquisition and capitalized installation labor costs are reduced to reflect the termination of the client
contract.



Critical Accounting Policies



The Companys discussion and analysis of its financial condition and
results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates can also affect supplemental
information contained in the external disclosures of the Company including information regarding contingencies, risk and the financial condition. On an on-going basis, the Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, fixed assets and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions which could materially
affect the financial statements.



Credit Allowance. The
Company evaluates the need for a reserve against revenues for estimated losses resulting from the inability of clients to make required payments under their contracts. This analysis takes into consideration trends in accounts receivable agings,
cancellation rates, and the reasons for cancellations. Such allowances include client balances that are not otherwise taken into account in establishing the allowance for doubtful accounts.



Allowance for doubtful accounts. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its clients to make required payments under their contracts. Management evaluates the credit risk and financial viability of the client to estimate the allowance.



Allowance for inventory. The Company maintains allowances for
inventory for estimated losses resulting from obsolescence or shrinkage. Management evaluates the adequacy of this allowance by assessing the age and utility of its existing inventory.



Property and equipment. The Company has significant property and equipment on its balance sheet which is primarily
comprised of equipment provided to subscribers and the labor associated with the installation of the equipment provided to subscribers. The Company capitalizes labor by identifying the labor hours tracked by our technicians for installations of
equipment provided to subscribers for receipt of the Companys products. If a client contract terminates early, the Company estimates and records a charge in selling, general, and administrative expenses to reflect the write-off of the
unamortized capitalized installation labor. Due to the significant volume of transactions that occurs each year for both new installations and cancellations, we do not track costs specifically by customer contract, and therefore estimates are
required to determine the costs to expense for cancellations when a client contract terminates early. Upon a contract cancellation, the Company retrieves the equipment provided to the client from the client location to be re-used at another client
location. Additionally, the valuation and classification of these assets and the assignment of useful depreciable lives involves judgment and the use of estimates. Changes in business conditions, technology, or customer preferences could potentially
require future adjustments to asset valuations.



13



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Intangible Assets. The Company has significant intangible assets on its balance sheet that include
goodwill and other intangibles resulting from numerous acquisitions. The valuation and classification of these assets and the assignment of useful amortization lives involves significant judgments and the use of estimates. The testing of these
intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. The Companys assets are tested and reviewed for impairment on an ongoing basis under the established accounting
guidelines. Changes in business conditions could potentially require future adjustments to asset valuations.



Deferred Subscriber Acquisition Costs. The Company has significant deferred subscriber acquisition costs on its balance sheet, which consist of
commissions incurred in connection with acquiring new subscribers. The deferred subscriber acquisition costs are amortized into selling, general, and administrative expenses over the life of the client contract or five years, whichever is shorter,
on a straight-line basis. If a client contract terminates early, the unamortized subscriber acquisition cost is typically recovered from the salesperson. Any remaining subscriber acquisition costs are reduced to reflect the termination of the client
contract.



Contingencies. The Company is involved in
various claims and lawsuits arising out of the normal conduct of its business. The Company reviews a claim and records a charge when it is both probable and can be reasonably estimated. The determination of when a claim is both probable and can be
reasonably estimated is based upon numerous factors including information available, historical experience, and the advice of internal and external counsel. Managements evaluation of a claim may change based upon changes in these and other
factors.



Results of Operations



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003



Revenues.Revenues increased 4.6% to $245.9
million in 2004 from $235.0 million in 2003. Music and other business services revenue increased 5.4% from $175.0 million in 2003 to $184.4 million in 2004. This increase is due to a net increase in the number of client locations at consistent
prices and to existing client rate increases. $1.8 million, or approximately 1% of the music and other business service revenue increase is attributable to net rate changes during 2004. Our music and other business service revenue growth of 5.4% is
lower than historical periods due to fewer new client installations as our cancellation rate of 10.1% was consistent with 2003 levels. The reduction in new client locations added was primarily due to disruptions associated with the reorganization
and the centralization of the scheduling function at the home office. During 2004, we added, net of cancellations, 3,400 Audio Architecture, 4,700 Voice, and 500 other locations.



Equipment and labor revenues increased 2.3% over 2003 despite the sale of the Companys CCTV product line in early
2004. The CCTV product line contributed approximately $7.0 million in equipment and labor revenues during 2003. This increase is due to the sale of system related products, such as sound systems that support our core products as well as non-music
related equipment such as drive-thru systems and plasma screens.



Cost of Revenues.Cost of music and other business services revenues increased $2.6 million to $34.9 million in 2004 from $32.3 million in 2003. Cost of music and other business services revenues as a percentage of revenues was 18.9%
and 18.5% in 2004 and 2003, respectively. This increase is due to incremental royalty expenses of $1.6 million relating to our new licensing agreement with BMI, an increase in amounts due to licensing collectives and record companies as a result of
more clients opting to receive music via an on-premise device, as well as to an increase in the amounts paid in 2004 for licensing royalties based on a detailed review of the amounts owed to licensing collectives in late 2003. These increases are
offset by a $1.5 million reduction in licensing royalty accruals in the fourth quarter of 2004 due to the closure of certain audit periods.



Costs of equipment and related services revenue increased 13.7% to $56.9 million in 2004 from $50.1 million in 2003. Costs of equipment and related
services as a percentage of revenues increased from 83.4% in 2003 to 92.6% in 2004. This 9.2 percentage point increase is due to the following: (i) 3.6% is due to lower new client installations resulting in excess installation labor capacity as well
as capitalized installation labor impairment charges associated with client contract terminations (ii) 2.5% is due to the equipment sales at lower margins and (iii) the remaining 3.1% is attributable to higher salaries and related benefits for our
technicians. The reduction in new client installations is due to implementation challenges associated with the centralization of the scheduling function and the learning curve for the new employees performing this function. The lower margin
equipment sales was primarily due to the sale of music receiving equipment that we typically provide as part of the music service and to the sale of more drive-thru systems to the quick service industry during 2004, which carry lower margins than
our typical equipment sales.



Selling, General, and
AdministrativeSelling, general, and administrative expenses increased 9.2% to $88.0 million in 2004 from $80.6 million in 2003. Amortization of deferred subscriber acquisition costs, a non-cash component of selling, general, and administrative
expenses was relatively flat at $15.8 million in 2004 as compared to $15.6 million 2003 due to 1999 subscriber acquisition costs becoming fully amortized during 2004. The remaining increase of $7.2 million is comprised of the following: (i) $1.8
million of costs associated with the Companys reorganization (ii) $0.6 million impairment on a note receivable from the purchaser of our CCTV assets (iii) $2.5 million of professional fees, including legal and accounting expenses (iv) $2.3
million bad



14



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debt expense and (v) $0.6 million increase in insurance premiums. These increases of $7.8 million are offset by reductions in sales and administrative
workforces during the fourth quarter of 2003 and throughout 2004. The increase in professional fees is primarily due to legal costs incurred in connection with rate court proceedings and various lawsuits as well as to an increase in accounting fees
due to the ongoing implementation of standards imposed by the Sarbanes Oxley legislation.



Impairment charge.The Company recorded a $6.6 million impairment of its deferred production costs during the fourth quarter of 2004. Historically, deferred production costs were incurred to create master music
programs for future distribution to the Companys clients. As a result of technological enhancements in the Companys processes for creating and distributing many of its core music programs, the use of master recordings in the music
creation and delivery process has been substantially eliminated.



Deprecation and amortization expense.Depreciation and amortization expense was $60.0 million and $63.7 million in 2004 and 2003, respectively. Depreciation expense decreased $0.6 million to $44.6 million in 2004 from $45.2 million
in 2003. This decrease is due to the 1999 subscriber investments becoming fully depreciated during 2003 and 2004. Amortization expense decreased $3.1 million to $15.4 million in 2004 from $18.5 million in 2003 due to several trademarks and
non-compete agreements becoming fully amortized during 2003 and 2004.



Interest expense.Interest expense increased $3.9 million or 9.7% in 2004 as compared to 2003. The increase is due to the issuance of our 10% Senior Notes and repayment of our previous Senior Credit Facility in 2003 and overall
higher indebtedness. The Old Senior Credit Facility bore interest rates at the Companys choice of LIBOR or the Base Rate plus a margin, based on the Companys leverage ratio. In May 2004, the Company issued $35.0 million in term loans and
used the proceeds to repurchase $32.7 million in aggregate principal amount of the Companys 13% Senior Discount Notes.



Loss on extinguishment of debt.The $1.9 million loss on extinguishment of debt in 2004 is comprised of (i) $1.7 million relating to the repurchase
of $32.7 million in aggregate principal amount of the Companys 13% Senior Discount Notes at a premium of $1.0 million and the write off of related deferred financing fees of $0.7 million and (ii) $0.2 million relating to the write off of
financing fees associated with the $5.0 million reduction in revolving commitments. The $3.7 million loss on extinguishment of debt in 2003 was recorded in connection with the issuance of 10% Senior Notes due 2009 and was comprised of $5.2 million
write off of deferred financing fees related to the then existing Senior Credit Facility, $0.4 million reclassification of other comprehensive loss to earnings, offset by a $1.9 million gain on the repurchase of $18.1 million principal amount of
Senior Discount Notes.



Net Loss.Net loss increased
$11.3 million to $46.1 million in 2004 from $34.8 million in 2003 due to the reasons stated above.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002



Revenues. Revenues increased 7.9% to $235.0 million in 2003 from $217.7 million in 2002. Music and other business
services revenue increased 7.3% to $175.0 million in 2003. Our 2003 music and other business services revenue growth is consistent with historical periods and validates the stability of our recurring revenue base. This increase is due primarily to a
net increase in the number of client locations at consistent prices. In addition, we implemented a rate increase to our existing client base during the year, which increased revenues approximately 1.0% over 2002. During 2003, we were able to reduce
our cancellation rate to 10.2% from 10.7% in 2002 and from 11.8% in 2001 as a result of client relations programs throughout the Company. During 2003, we added, net of cancellations, 11,700 Audio Architecture, 5,000 Voice, and 1,700 other locations.



Equipment and related services revenue increased 9.8% or $5.3
million to $60.1 million in 2003. This increase was related to sales of closed circuit television systems (CCTV). We began focusing on this product line in late 2002 and made an investment in sales, administrative, and operational
resources to support its growth. During 2003, we realized that significant resources were and would continue to be required to address the ever-increasing sophistication and complexity of technology and related product offerings in the CCTV
marketplace. In light of the anticipated demands and complexities of this product line, we made a strategic decision to reallocate our capital resources and management efforts to our core products and services and exit the CCTV product line in late
2003. On March 1, 2004, we sold this product line to a third party for $1.9 million in notes receivable.



Cost of Revenues. Cost of music and other business services revenues decreased 6.3% or $2.2 million to $32.3 million in 2003. This reduction
reflects the fact that the Company made no increases in reserves for estimated prior period licensing royalties during 2003 while a $3.1 million charge for prior period licensing royalties was recorded in 2002. Excluding the increase in reserves
during 2002, cost of music and other business services revenues as a percentage of revenues was 18.5% and 19.2% in 2003 and 2002, respectively. The improvement in margin is due to the leveraging of our fixed cost infrastructure, a reduction in our
on premise media fulfillment costs, as well as synergies realized through the use of our voice website for message fulfillment.



Cost of equipment and related services increased 14.5% or $6.3 million in 2003 from 2002. Cost of equipment and related services as a percentage of
revenues was 83.4% and 79.9% during the 2003 and 2002 period, respectively. This increase is partially due to additional labor costs incurred during the fourth quarter of 2003 as a result of the September 2003 Telstar 4 satellite disruption. During
the nine day period following the satellite disruption our technicians were primarily focused on re-pointing satellite dishes of



15



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affected client locations. As a result, we incurred additional labor costs of approximately $0.9 million in the fourth quarter in order to meet client
installation schedules. The remaining increase is primarily due to costs related to the additional resources needed to support the start-up phase of our CCTV product line.



Selling, General, and Administrative. Selling, general, and administrative expenses were $80.6 million and $72.0
million for the years ended December 31, 2003 and 2002, respectively. This increase is largely attributable to the amortization of sales commissions, a non-cash component of selling, general, and administrative expenses. Amortization of sales
commissions was $15.6 million and $12.4 million for the years ended December 31, 2003 and 2002, respectively. This increase is directly related to the increase in music and other business services revenues. Excluding the amortization of sales
commissions, selling, general, and administrative expenses increased 9.1% to $65.0 million in 2003 from $59.6 million in 2002. This increase is attributable to the targeted investments made in sales and client relations infrastructure, higher
commissions on equipment revenues, a $0.5 million reserve in connection with Bono vs. Muzak, and increased insurance costs. This increase is slightly offset by approximately $0.5 million in savings from bringing in house certain administrative
functions previously performed by a third party. Excluding the amortization of sales commissions, selling, general, and administrative expenses as a percentage of revenues were 27.7% and 27.4% for the fiscal years ended December 31, 2003 and 2002,
respectively.



Depreciation and Amortization Expense.
Depreciation and amortization expense decreased $6.4 million to $63.7 million in 2003 from $70.1 million in 2002, a decrease of 9.1%. Depreciation was $45.2 million and $46.9 million in 2003 and 2002, respectively. The decrease is primarily due to
subscriber provided equipment becoming fully depreciated in early 2003. Amortization expense decreased $4.7 million to $18.5 million in 2003 due to several non-compete agreements becoming fully amortized in late 2002.



Interest expense. Interest expense increased 10.2% to $40.3 million in
2003 from $36.5 million in 2002. This increase is due to the issuance of our 10% Senior Notes and the repayment of our Old Senior Credit Facility in May 2003 as well as to an overall increase in indebtedness of approximately $25 million. The Old
Senior Credit Facility bore interest at the Companys choice of LIBOR or the Base Rate plus a margin, based on the Companys leverage ratio. This increase is offset by a $0.7 million reduction in interest expense due to our interest rate
swap agreement. The effective interest rate for the years ended December 31, 2003 and 2002 was 9.3%, respectively.



Loss on extinguishment of debt. Loss on extinguishment of debt was $3.7 million for the year ended December 31, 2003. This loss was recorded in
connection with the issuance of 10% Senior Notes due 2009 and is comprised of a $5.2 million write off of financing fees related to the Old Senior Credit Facility, $0.4 million reclassification of other comprehensive loss to earnings, offset by a
$1.9 million gain on the repurchase of $18.1 million principal amount of Senior Discount Notes.



Income tax benefit. Income tax benefit decreased to $0.6 million from $1.0 million in the years ended December 31, 2003 and 2002, respectively.
Although the Company is a limited liability company and is treated as a partnership for income tax purposes, the Company has several subsidiaries that are corporations. The income tax benefit relates to these corporate subsidiaries.



Net Loss. The combined effect of the foregoing resulted in a net loss
of $34.8 million and $38.0 million in the years ended December 31, 2003 and 2002, respectively.



2005 Expectations of Results of Operations



We expect that the 2005 business services revenue growth rate will be below historical levels as the Companys business plan anticipates less growth in new client locations. Although the 2005 growth rate will be
consistent with the latter half of 2004, we believe we will be able to maintain this growth rate with a lower cost base. In addition, the business services revenue margin will decrease slightly due to the increases in royalty payments under our new
agreements with the licensing societies. We expect that equipment and related services revenue will be flat as compared to 2004 levels. Although the equipment and related services revenue margin will be impacted in the first quarter and will
continue to be impacted by lower installation activity, the implementation of certain initiatives should enable the Company to more efficiently manage its resources in the latter half of the year. A majority of the 2004 increase in selling, general,
and administrative expenses, excluding the non cash amortization of sales commissions, was due to legal fees incurred in connection with rate court proceedings with the licensing societies and other various lawsuits, as well as bad debt expense and
severance and related charges associated with our reorganization efforts. While we believe that we will benefit from decreases in certain selling, general, and administrative expenses such as legal costs, we expect that selling, general, and
administrative expenses in 2005 will be similiar to 2004 levels.



Liquidity
and Capital Resources



Sources and Uses. Our
principal sources of funds have been cash generated from operations and borrowings under the senior credit facility. Cash was primarily used during 2004 to make investments relating to new client locations and to make interest payments on our
indebtedness. Cash flows provided by operations were $24.6 million, $27.9 million, and $31.6 million and cash flows used in investing activities were $37.9 million, $41.5 million, and $38.8 million during the years ended December 31, 2004, 2003, and
2002, respectively. During the years ended December 31, 2004, 2003, and 2002, cash flows provided by financing activities were $11.5 million, $14.1 million, and $6.4 million, respectively.



16



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The majority of our capital expenditures are comprised of the initial one-time investment for the
installation of equipment for new client locations. During the year ended December 31, 2004, our total initial investment in new client locations was $46.5 million, which was comprised of equipment and installation costs attributable to new client
locations of $29.6 million and $16.9 million in subscriber acquisition costs (included in cash provided by operating activities in the consolidated statement of cash flows) relating to these new locations. The subscriber acquisition costs are
capitalized and are amortized as a component of selling, general and administrative expenses over the initial contract term. We also receive installation revenue relating to new locations. This revenue is deferred and amortized as a component of
equipment and related services revenue over the initial contract term of five years.



We also invested $2.3 million in system upgrades, furniture and fixtures, and computers to be used at our headquarters Our investment to replenish the equipment exchange pool relating to our drive-thru systems client
locations was $3.3 million during 2004. In addition, during 2004, we incurred equipment and installation costs of $1.0 million relating to conversions from one delivery platform to another delivery platform. We used existing receivers for the
majority of these conversions, but incurred installation costs and costs associated with procuring satellite dishes.



Due to the centralization of the administrative, purchasing, and scheduling functions, and the associated learning curve of new employees performing these
functions, we experienced an increase in both receivables and inventory balances during 2004. However, the centralization has enabled us to implement consistent policies and procedures in all functional areas as well as to standardize product
offerings. This should enable the Company to improve working capital balances throughout 2005. In addition, we recently amended a purchase commitment for receivers used on our AMC-1 delivery platform, which will result in a reduction in commitment
of $2.6 million during 2005. This commitment is included in unconditional purchase obligations below.



Our future need for liquidity will arise primarily from capital expenditures for investments in new client locations and from interest payments on our
indebtedness. The following table summarizes contractual obligations and commitments at December 31, 2004 (in thousands).



|                                   |  |                        |        |           |   |           |  |               |         |       |   |        |  |   |        
|---------------------------------- |  | ---------------------- | ------ | --------- | - | --------- |  | ------------- | ------- | ----- | - | ------ |  | - | -------
|                                   |  | Payments due by period
|                                   |  | 1 year                 |        | 2-3 years |   | 4-5 years |  | After 5 years |         | Total
|Long-term debt                     |  | $                      | 101    |           | $ | 69,228    |  | $             | 335,275 |       | $ | 25,608 |  | $ | 430,212
|Interest                           |  |                        | 41,377 |           |   | 81,405    |  |               | 52,057  |       |   | 2,065  |  |   | 176,904
|Royalties payable to ASCAP and BMI |  |                        | 12,800 |           |   | 25,600    |  |               | 25,600  |       |   |       |  |   | 64,000 
|Capital lease obligations          |  |                        | 2,979  |           |   | 2,555     |  |               | 34      |       |   |       |  |   | 5,568  
|Operating leases                   |  |                        | 9,021  |           |   | 16,317    |  |               | 14,447  |       |   | 34,090 |  |   | 73,875 
|Unconditional purchase obligations |  |                        | 7,611  |           |   | 12,505    |  |               | 6,610   |       |   |       |  |   | 26,726 
|                                   |  |                        |        |           |   |           |  |               |         |       |   |        |  |   |        
|Total contractual cash obligations |  | $                      | 73,889 |           | $ | 207,610   |  | $             | 434,023 |       | $ | 61,763 |  | $ | 777,285
|                                   |  |                        |        |           |   |           |  |               |         |       |   |        |  |   |        



We currently
anticipate that our total initial investment in new client locations during 2005 will be approximately $43.8 million including $28.1 million of equipment and installation costs attributable to new client locations, and $15.7 million in sales
commissions relating to new client locations. The Company is focused on reducing the initial investment associated with new client locations through the re-use of equipment and efficiencies gained from product standardization, vendor consolidation
and labor management, and a reduction in the new client location growth rate. In addition, we anticipate our investment in property and equipment to be used at headquarters, equipment for use in the exchange pool for servicing drive-thru systems
client locations, and equipment and installation costs for conversions will be approximately $5.0 million.



We currently expect that our primary source of funds will be cash flows from operations and our secondary source to be approximately $21.0 million of net
proceeds from our New Senior Credit Facility. As of April 15, 2005, we had outstanding debt of $80.1 million (including letters of credit of $2.6 million) under our $90.0 million then existing Senior Credit Facility. On April 15, 2005, the Company
refinanced its then existing Senior Credit Facility with a $105.0 million term loan. A portion of the proceeds was used to repay the existing outstanding term and revolving loans and associated interest and to collateralize outstanding letters of
credit under the then existing Senior Credit facility, and to pay related fees and expenses. Total cash available, after giving effect to this refinancing and to existing cash balances as of April 15, 2005, was approximately $27.2 million. Although
the Company believes that it will generate positive operating cash flows in fiscal 2005, it expects that a portion of the excess cash resulting from the financing transaction described above will be required to fund its growth in new client
locations and debt service for at least the next twelve months.



Overall, the Companys business plan anticipates reduced growth in new client locations and operational and administrative improvements. Our future performance is subject to industry based factors such as the level of competition in
the business music industry, competitive pricing, concentrations in and dependence on satellite delivery capabilities, rapid technological changes, the impact of legislation and regulation, our dependence on license agreements and other factors that
are beyond our control. Given that the Company no longer has a revolving credit facility, if it required cash in excess of amounts on hand, it may be required, among other things, to incur additional indebtedness, enter into other financing
transactions, defer business opportunities, reduce its expenses, or sell assets.



Mandatory Debt Repayments. The new Senior Credit Facility entered into in April 2005 provides for mandatory prepayments with net cash proceeds of certain asset sales, net cash proceeds of permitted debt
issuances, and net cash proceeds from insurance recovery and condemnation events. The 10% Senior Notes mature in February 2009, the 97/8% senior subordinated notes mature in March 2009, and the 13% senior



17



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discount notes mature in March 2010. The indentures governing the 10% Senior Notes, 97/8% senior subordinated notes and the 13% senior discount notes provide that in the event of certain asset dispositions, the Company must apply net proceeds first to repay, as
required, senior credit facility indebtedness. To the extent the net proceeds have not been applied within 360 days to an investment in capital expenditures or other long term tangible assets used in the business, and to the extent the remaining net
proceeds exceed $10.0 million, we must make an offer to purchase outstanding 10% Senior Notes at 100% of the accreted value. To the extent there are excess funds after the purchase of the 10% Senior Notes, the Company must make an offer to purchase
97/8% senior subordinated notes at 100% of their principal amount plus accrued interest. To the extent there are
excess funds after the purchase of the 97/8% senior subordinated notes, the Company must make an offer to purchase
outstanding senior discount notes at 100% of the accreted value. The Company must also make an offer to purchase outstanding 10% Senior notes, 97/8% senior subordinated notes and the 13% senior discount notes at 101% of their principal amount plus accrued and unpaid interest if a change in control of the Company occurs.



Interest Rate Protection Agreements. The Companys interest rate
swap agreement, entered into in May 2003 to mitigate the fixed interest costs associated with the Senior Notes, ended in November 2004. This interest rate swap agreement effectively exchanged $220.0 million of fixed rate debt at 10.0% for six month
LIBOR plus 7.95%.



Related party transactions



The Company has a Management and Consulting Services Agreement
(Management Agreement) with ABRY Partners, which provides that Muzak will pay a management fee as defined in the Management Agreement. During 2004, 2003 and 2002, Muzak incurred fees and expenses of $0.3 million, $0.4 million, and $0.4
million, respectively under this agreement. Either Muzak or ABRY Partners, with the approval of the Board of Directors of the Company, may terminate the Management Agreement by prior written notice to the other. In addition, we accrued $0.9 million
of fees and expenses payable to ABRY Partners for services rendered in connection with the private placement of the Senior Notes during 2003 and accrued $0.1 million for services rendered for financing efforts in 2002.



On May 20, 2003, the Company repaid $10.0 million of junior subordinated
unsecured notes (sponsor notes) and related interest of $1.9 million to MEM Holdings with the proceeds from the issuance of 10% Senior Notes. The Company originally borrowed this $10.0 million in sponsor notes on March 15, 2002. MEM
Holdings is a holding company that owns 64.2% of the voting membership interests in the Company. ABRY Broadcast Partners III, L.P. and ABRY Broadcast Partners II, L.P. are the beneficial owners of MEM Holdings.



Seasonality



Muzak experiences slight seasonality in its equipment and related services revenues and costs of revenues during the third
and fourth quarters resulting primarily from our retail client base which constructs and opens new retail stores in time for the fourth quarter holiday season.



Inflation and Changing Prices



We do not believe that inflation and other changing prices have had a significant impact on our operations.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Interest Rate Exposure



As a result of the issuance of 10% Senior Notes in May 2003 and the use of proceeds therefrom, the majority of our debt is fixed rate debt. Our exposure
to market risk for changes in interest rates is limited to our Senior Credit Facility. The interest rate exposure for our variable rate debt obligations is currently indexed to LIBOR of one, two, three, six, nine, or twelve months as selected by us,
or the Alternate Base Rate as defined. We have used interest rate protection agreements in the past to reduce borrowing rates although none are in effect as of December 31, 2004.



The table below provides information about our debt obligations. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates. Weighted average variable interest rates are based on implied LIBOR in the yield curve at the reporting date. The principal cash flows are in thousands.



|                      |  |      |      |   |      |   |      |      |  |   |        |   |  |      |      |   |            |   |         |       |  |                            |        |   |  |   |         |  |   |        
|--------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | - |  | ---- | ---- | - | ---------- | - | ------- | ----- |  | -------------------------- | ------ | - |  | - | ------- |  | - | -------
|                      |  | 2005 |      |   | 2006 |   |      | 2007 |  |   | 2008   |   |  | 2009 |      |   | Thereafter |   |         | Total |  | Fair ValueDecember 31,2004
|Debt:                 |  |      |      |   |      |   |      |      |  |   |        |   |  |      |      |   |            |   |         |       |  |                            |        |   |  |   |         |  |   |        
|Fixed rate ($US)      |  | $    | 101  |   |      | $ | 110  |      |  | $ | 118    |   |  | $    | 131  |   |            | $ | 335,144 |       |  | $                          | 25,608 |   |  | $ | 361,212 |  | $ | 300,948
|Average interest rate |  |      | 10.2 | % |      |   | 10.2 | %    |  |   | 10.2   | % |  |      | 10.2 | % |            |   | 12.3    | %     |  |                            | 10.7   | % |  |   |         |  |   |        
|Variable rate ($US)   |  | $    |     |   |      | $ |     |      |  | $ | 69,000 |   |  | $    |     |   |            | $ |        |       |  | $                          |       |   |  | $ | 69,000  |  | $ | 69,000 
|Average interest rate |  |      | 7.6  | % |      |   | 8.4  | %    |  |   | 8.6    | % |  |      |     | % |            |   |        | %     |  |                            |       | % |  |   |         |  |   |        



18



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



See index in Item 15 of this annual report on Form 10-K. Quarterly information (unaudited) is presented in a Note to the consolidated financial
statements.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



SEC rules require us to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual
and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us is accumulated and communicated to our management, our CEO and CFO, to allow timely decisions regarding required disclosure.



The Companys management and its Board of Directors concluded on March
28, 2005 that the Companys fiscal year 2003 and 2002 consolidated financial statements should be restated to correct an error resulting from revenue and accounts receivable cut-off procedures as well as a revision in classification to reflect
redeemable Class A units outside of members deficiency on the consolidated balance sheet.



In preparing our 2004 year end financial statements, we discovered an error pertaining to revenue and accounts receivable cutoff procedures dating back to
the time of the merger of Audio Communications Network and Muzak Limited Partnership in March 1999. The error impacted earnings in 1999 and had an immaterial impact on earnings subsequent to 1999. The balance sheet impact of the error is an
overstatement of accounts receivable, an overstatement of accrued expenses for the portion of such receivables that related to billings on behalf of our franchisees, and an understatement of inventory and accumulated deficit balances. Because the
error in cut-off occurred consistently at each balance sheet date since December 31, 1999, the correction of this error did not result in materially different earnings for the periods reported since 1999. The errors in cut-off related to both our
billings for recurring revenue services and equipment and labor revenues. The cutoff error resulted from recording revenues in advance of the period earned. The error relating to recurring services revenue also resulted in an overstatement of
amounts payable to our franchisees for billings performed on their behalf.



Based on our evaluation of disclosure controls and procedures, as of the date of the end of the period covered by this Annual Report, our CEO and CFO have concluded that our disclosure controls and procedures were
ineffective as a result of the restatement item discussed in the preceding paragraph. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our financial reports have been made known to
management, including our CEO and CFO, and other persons responsible for preparing such reports and is recorded, processed, summarized and reported.



Based on managements evaluation of the restatement item described above, management has determined that a material weakness existed in our internal
control over financial reporting. In response to the identified weakness, we have taken steps to strengthen our internal controls over financial reporting, which were implemented in the first quarter of 2005, to prevent recurrence of the
circumstances that resulted in our determination to restate our financial statements for the years ended December 31, 2003 and 2002 and the first three quarters of 2004. Our new control procedures provide for formal reconciliation and review
procedures surrounding all financial statement accounts on a monthly basis. Such reconciliations are reviewed and approved by a manager in our accounting department. We are reviewing all work orders completed by the end of the period and recording
all completed but unbilled equipment revenues to ensure proper cut-off. We believe that our accounting personnel are adequately trained and that we have appropriate staffing levels.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



On April 15, 2005, the Company entered into a new $105.0 million senior secured term loan facility (New Senior Credit Facility) payable in
quarterly installments of 0.25% beginning September 2005 until final maturity on April 15, 2008. A portion of the proceeds from the New Senior Credit Facility was used to repay in full the outstanding term and revolving loans and associated interest
and to collateralize outstanding letters of credit under the Companys then existing Senior Credit Facility, and to pay related fees and expenses. The then existing senior credit facility has been terminated. The New Senior Credit facility is
guaranteed by certain of our direct and indirect subsidiaries and is secured by a first priority security interest in (i) substantially all of our tangible and intangible assets and (ii) the capital stock of our subsidiaries. The non-guarantor
subsidiary is minor and the consolidated amounts in the Companys financial statements are representative of the combined guarantors financial statements. The New Senior Credit Facility contains a senior secured leverage ratio and various
other restrictive covenants, which are customary for such facilities. In addition, the Company is generally prohibited from incurring additional indebtedness, incurring liens, paying dividends or making other restricted payments, consummating asset
sales, entering into transactions with affiliates, merging or consolidating with any other person or selling, assigning, transferring, leasing, conveying, or otherwise disposing of assets.



19



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PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



Muzak is a wholly owned subsidiary of the Company. The Company is a limited liability company whose affairs are governed by a Board of Directors. The
following table sets forth information about the directors of the Company and the executive officers of Muzak as of December 31, 2004. Each of the persons identified below as a director is currently a director of the Company with the exception of
Mr. Unger. Mr. Yudkoff is the sole director of Muzak. The election of directors is subject to the terms of the Members Agreement and Securityholders Agreement and is described below under Item 13. Certain Relationships and Related
Transactions.



|                     |  |     |  |                                                               
|-------------------- |  | --- |  | --------------------------------------------------------------
|Name                 |  | Age |  | Position and Offices                                          
|Lon E. Otremba       |  | 47  |  | Director, President, and Chief Executive Officer              
|Stephen P. Villa     |  | 41  |  | Director, Chief Operating Officer, and Chief Financial Officer
|Scott J. Wolf        |  | 49  |  | Senior Vice President, Sales                                  
|Kenneth F. Kahn      |  | 42  |  | Senior Vice President, Product and Marketing                  
|David M. Moore       |  | 41  |  | Chief Technology Officer                                      
|Mary Ann Lusk        |  | 45  |  | Senior Vice President, Client Services                        
|Thomas J. Gantert    |  | 45  |  | Senior Vice President, Operations                             
|Michael F. Zendan II |  | 41  |  | General Counsel, Vice President and Assistant Secretary       
|William A. Boyd      |  | 63  |  | Director and Chairman Emeritus                                
|Royce G. Yudkoff     |  | 49  |  | Director                                                      
|Peni A. Garber       |  | 41  |  | Director                                                      
|Robert P. MacInnis   |  | 38  |  | Director                                                      
|David W. Unger       |  | 48  |  | Director                                                      
|Hilary Kaiser Grove  |  | 29  |  | Director                                                      
|Andrew Banks         |  | 49  |  | Director                                                      



The following sets
forth biographical information with respect to the directors of the Company and executive officers of Muzak.



Lon E. Otrembahas been the Chief Executive Officer of the Company since April 2004 and a Director and the Companys President since September
2003. He served as Executive Vice President of America Onlines Interactive Marketing Group from May 2002 to September 2003. From January 2002 to April 2002 he served as Executive Vice President of Strategic Planning for America Onlines
Local Partnership Group. From November 2000 to January 2002, he served as Chief Executive Officer of BountySystems, Inc. Prior to joining BountySystems, he was President of Mail.com from March 2000 to October 2000 and served as Mail.coms Chief
Operating Officer from October 1997 to March 2000.



Stephen
P. Villa has been a Director and our Chief Operating Officer since October 2001 and has been Muzaks Chief Financial Officer since September 2000. He served as the Chief Financial Officer and Treasurer of Frisby Technologies, Inc., from
April 1998 to September 2000. From January 1997 to March 1998, Mr. Villa was the controller of Harman Consumer Group, an operating company of Harman International, Inc., which sells consumer electronic products. From September 1986 through January
1997, Mr. Villa held numerous positions with Price Waterhouse LLP in their New York and Paris offices. Mr. Villas last position with Price Waterhouse LLP was audit senior manager.



Scott J. Wolfhas been the Companys Senior Vice President of Sales since August 2004. From April 2004 to
August 2004, Mr. Wolf served as the Companys Senior Vice President of National Sales. Prior to joining the Company in April 2004, Mr. Wolf was the Executive Vice President of Sales for Vivendi Universals Music Internet Group from June
2002 to September 2003. From June 1999 to December 2001, he served as the Senior Vice President of Sales and Business Development of NetCreations.



Kenneth F. Kahn has served as Senior Vice President of Product and Marketing since May 2004. From September 2002 to May 2004 he served as the
Senior Vice President of the Owned Operations, North Region. From April 2002 to September 2002, he served as Vice President of Sales and Marketing and as Vice President of Marketing from March 1999 to April 2002. Mr. Kahn served as the Vice
President of Marketing for Old Muzak from 1997 to March 1999 and as Sales Manager for Old Muzaks New York office from 1996 to 1997. Prior to joining Old Muzak, Mr. Kahn worked for Emphasis Music, Astroland Amusement Park, and Phase One
Distribution.



David M. Moorehas served as Chief
Technology Officer since November 2004 and served as Senior Vice President of Technical Operations from May 2000 to September 2004. Mr. Moore served as Vice President of the Network Operations Center from March 1999 to May 2000. Mr. Moore served as
an Account Executive at Foundation Telecom, Inc. from 1996 to 1997. From 1990 to 1996 and June 1998 to March 1999, Mr. Moore held various positions at Old Muzak.



20



---

Mary Ann Luskhas served as the Companys Senior Vice President of Client Services since July
2004. Prior to joining Muzak, Ms. Lusk was an independent service consultant from December 2003 to July 2004. From July 2002 to November 2003, Ms. Lusk served as the Vice President of Customer Interaction at CNA Insurance. From September 1995 to
December 2001, Ms. Lusk was the Director of Client Service Business Markets for Ameritech Communications.



Thomas J. Gantert has been the Companys Senior Vice President of Operations since October 2004 and served as the Companys Vice
President of Field Operations from May 2004 to October 2004. From October 2002 to May 2004, he served as the regional general manager of the Companys Denver, Dallas, Houston, Kansas City, and Omaha offices. From March 1999 to October 2002, Mr.
Gantert served as the Regional Vice President of the Companys California, Portland, Seattle, Denver, Phoenix, Salt Lake City and Boise offices. From December 1986 to March 1999, he held various positions at Old Muzak.



Michael F. Zendan II has been the Companys Vice President and
General Counsel since October 1999. From 1996 to October 1999, Mr. Zendan was Assistant General Counsel (Aerospace) and Assistant Secretary for Coltec Industries Inc., and was Assistant General Counsel (Industrial) for Coltec Industries Inc. from
1994-1996, and served as Attorney and Senior Attorney for Coltec Industries Inc. from 1992-1994.



William A. Boydhas served as Chairman Emeritus since March 2004 and has served on the Board of Directors since March 1999. Mr. Boyd served as the
Chief Executive Officer of the Company from March 1999 to March 2004 and was the Chief Executive Officer of Old Muzak from 1997 to March 1999. Mr. Boyd started his career with Muzak in 1969 and has held various positions during his tenure with the
Companys predecessors. In addition, Mr. Boyd owned and operated one of Muzaks franchises during his Muzak career.



Royce G. Yudkoff has served as Director since March 1999 and as the sole director of Muzak since March 1999. He is the President and Managing
Partner of ABRY Partners, a private equity investment firm which focuses exclusively on media and communications companies. Prior to co-founding ABRY Partners, Mr. Yudkoff was a partner at Bain & Company, where he shared significant
responsibility for the firms media practice. Mr. Yudkoff is presently a director or the equivalent of various companies including Penton Media, Inc., USA Mobility, Inc., and Nexstar Broadcasting Group LLC.



Peni A. Garber has served as Director since March 1999. She is a
partner and Secretary of ABRY Partners, a private equity investment firm which focuses exclusively on media and communication companies. She joined ABRY Partners in 1990 from Price Waterhouse, where she served as Senior Accountant in the Audit
Division from 1985 to 1990. Ms. Garber is presently a director or the equivalent of CommerceConnect Media Holdings, Inc., Penton Media, Inc., and Dolan Media Company.



Robert P. MacInnis has served as Director since November 2003. He is a partner of ABRY Partners, a private equity
firm which focuses exclusively on media and communication companies. Prior to joining ABRY Partners, he was Chief Financial Officer of Weather Services Corporation, an ABRY portfolio company. From 1991 to 1997, he was associated with
PricewaterhouseCoopers, where he was a senior manager in the Mergers and Acquisitions Group. Mr. MacInnis is presently a director or the equivalent of various companies including Hispanic Yellow Pages Network LLC and Consolidated Theatres.



David W. Unger served as a Director from March 1999
until his resignation in February 2005. He is the Managing Partner of Avalon Equity Partners and has served in this capacity since its inception in December 1999. Mr. Unger previously served as Vice President of Muzak from March 1999 to August 1999
and was Executive Vice President of Audio Communications Network from May 1997 to March 1999. Prior to May 1997, he was chairman of SunCom Communications, LLC, a franchise of Muzak.



Hilary Kaiser Grovehas served as Director since November 2003. She joined ABRY Partners, a private equity firm which
focuses exclusively on media and communication companies, in July 1999. Prior to joining ABRY Partners, Ms. Grove was an investment banking analyst at Lehman Brothers in the Media and Telecommunications Group from July 1997 to July 1999. She is a
director or the equivalent of CommerceConnect Media Holdings and Billing Services Group, LLC.



Andrew Banks has served as a Director since March 1999. He is Chairman of ABRY Partners. Prior to co-founding ABRY, Mr. Banks was a partner at Bain & Company where he shared significant responsibility for
the firms media practice.



Audit Committee Financial Expert



Since our equity is not currently listed on or with a
national securities exchange or national securities association, we are not required to have an audit committee and therefore do not have an audit committee financial expert. As such, the Board of Directors performs the function of an audit
committee.



21



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Code of Ethics



The Company and Muzak have adopted a code of ethics applicable to the companys senior financial officers, including the companys principal
executive officer. This Code of Ethics (the Code) has been adopted by the Company and Muzak in accordance with Section 406 of the Sarbanes-Oxley Act of 2002, and the rules issued by the Securities and Exchange Commission thereunder. We
make such code available free of charge within the Investor Relations information section of our internet website, at www.muzak.com. We intend to disclose any amendments to our code of ethics that would otherwise be disclosed on Form 8-K
and any waiver from a provision of that code granted to our executive officers or directors that would otherwise be disclosed on Form 8-K on our internet website within five business days following such amendment or waiver. The information contained
on or connected to our internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the Securities and Exchange Commission.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The following table sets forth information concerning the compensation of Muzaks Chief Executive Officer and Muzaks four most highly
compensated executive officers, at December 31, 2004, for services in all capacities to the Company.



Summary Compensation Table



|                                                                      |  |              |            |                       |           |                       |                              |                    |                               |                       |        |                 |  | 
|--------------------------------------------------------------------- |  | ------------ | ---------- | --------------------- | --------- | --------------------- | ---------------------------- | ------------------ | ----------------------------- | --------------------- | ------ | --------------- |  | 
|                                                                      |  | Year         |            | Annual Compensation   |           | Long TermCompensation |                              |                    |                               | All OtherCompensation
|Name and Principal Position                                           |  |              | Salary ($) |                       | Bonus ($) |                       | Other AnnualCompensation ($) |                    | RestrictedStock Awards ($)(a) |                       | ($)(b)
|William A. Boyd(c)Chairman Emertius                                   |  | 200420032002 |            | 305,800337,665300,023 |           | 75,000              |                              | 42,00045,00042,000 |                               |                    |        | 3,6623,6002,908
|                                                                      |  |              |            |                       |           |                      
|Lon E. Otremba(d)Chief Executive Officer                              |  | 20042003     |            | 329,37581,260         |           |                     |                              | 91,95514,218       |                               | 2,829                 |        |              
|                                                                      |  |              |            |                       |           |                      
|Stephen P. Villa(e)Chief Operating Officer andChief Financial Officer |  | 200420032002 |            | 278,702219,746212,117 |           | 100,000             |                              | 3,6003,6004,474    |                               | 234                 |        | 7,2357,1786,600
|                                                                      |  |              |            |                       |           |                      
|Scott Wolf (f)Senior Vice President Sales                             |  | 2004         |            | 116,308               |           | 80,000                |                              | 4,431              |                               |                      |        |               
|                                                                      |  |              |            |                       |           |                      
|Kenneth F. Kahn(g)Senior Vice President,Products and Marketing        |  | 200420032002 |            | 173,999174,329159,923 |           | 25,000              |                              | 6,0006,0006,000    |                               | 88                  |        | 3,3734,794     

---

|(a) | Consists of non-voting equity interests issued by the Company to key employees.
|--- | -------------------------------------------------------------------------------



|(b) | Consists of contributions by the Company to a defined contribution 401(k) plan.
|--- | -------------------------------------------------------------------------------



|(c) | Other Annual Compensation consists of a housing allowance of $36,000, $39,000 and $36,000 and a car allowance of $6,000, $6,000 and $6,000 in 2004, 2003, and 2002, respectively.
Aggregate restricted stock holdings were 898 shares, with a value on December 31, 2004 of zero. Mr. Boyd is 100% vested in all of his restricted stock holdings. Effective March 15, 2004, Mr. Boyd stepped down as Chief Executive Officer and is
serving as the Companys Chairman Emeritus, as well as a Director, and is rendering certain executive services to Muzak.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Has served as the Companys Chief Executive Officer since April 2004 and the Companys President since September 2003. Other annual compensation includes housing of
$25,100 and $4,358 and the use of a Company car of $6,546 and $1,635 in 2004 and 2003, respectively. In addition, other annual compensation includes $60,309 and $8,225 in 2004 and 2003, respectively, of travel and other related expenses for Mr.
Otremba to commute between the Companys headquarters and his home during 2004. Aggregate restricted stock holdings were 2,829 shares, with a value of zero on December 31, 2004. The 2,829 restricted stock holdings vested 20% on September 29,
2004 and will vest in four additional installments of 565.80 each on September 29, 2005, September 29, 2006, September 29, 2007, and September 29, 2008. He is eligible to receive additional restricted stock holdings upon meeting certain financial
targets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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|(e) | Has served as Chief Operating Officer since October 2001 and as Chief Financial Officer since September 2000. Other Annual Compensation consists of a car allowance of $3,600,
$3,600, and $4,474 in 2004, 2003 and 2002, respectively. Aggregated restricted stock holdings were 1,056 shares, with a value on of zero on December 31, 2004. The vesting schedule of the restricted stock holdings is as follows:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  |                 |  |                        |  |                  |  |      |  |   
|------------------ |  | --------------- |  | ---------------------- |  | ---------------- |  | ---- |  | --
|                   |  | Number ofShares |  | Vested as of12/31/2004 |  | Vesting Schedule
|Date of Grant      |  |                 |  | 2005                   |  | 2006             |  | 2007
|September 27, 2000 |  | 294             |  | 235.2                  |  | 58.8             |  |     |  |  
|January 1, 2001    |  | 57              |  | 34.0                   |  | 11.5             |  | 11.5 |  |  
|November 5, 2002   |  | 470             |  | 282                    |  | 94               |  | 94   |  |  
|June 16, 2003      |  | 235             |  | 94                     |  | 47               |  | 47   |  | 47



|(f) | Joined the Company in April 2004. Other annual compensation consists of a car allowance of $4,432 in 2004.
|--- | ----------------------------------------------------------------------------------------------------------



|(g) | Has served as Senior Vice President, Products and Marketing since May 2004. Other annual compensation consists of a car allowance of $6,000 in 2004, 2003, and 2002. Aggregated
restricted stock holdings were 439 shares, with a value of zero on December 31, 2004. 351 shares of the restricted stock holdings are fully vested as of December 31, 2004. The vesting schedule for the remaining 88 shares of the restricted stock
holdings is as follows: 20% each on September 12, 2003, September 12, 2004, September 12, 2005, and September 12, 2006. After September 11, 2007, the restricted stock holdings are 100% vested.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Voting and Terms of Office



Pursuant to the Amended and Restated Limited Liability Company Agreement of
the Company, each director of the Company is designated as either a Class A Director or a Class B Director. Each Class A Director is entitled to three votes and each Class B Director is entitled to one vote. Any decisions to
be made by the Board of Directors, requires the approval of a majority of the votes of the Board of Directors. The authorized number of each class of directors is three Class A Directors, Messrs. Banks and Yudkoff and Ms. Garber, and five Class B
Directors, Messrs. Boyd, Villa, MacInnis, Otremba, and Mrs. Grove. The number of directors may be increased or decreased by the Board of Directors. Directors hold office until their respective successors are elected and qualified or until their
earlier death, resignation or removal.



Management Employment Agreements



William A. Boyd. Pursuant to the employment
agreement dated as of March 16, 2001, as subsequently amended, by and among Mr. Boyd, the Company and Muzak, Muzak agreed to employ Mr. Boyd as Chairman Emeritus until his resignation, death, disability or termination of employment. Under the
employment agreement, Mr. Boyd is:



| |  |  | entitled to a minimum base salary of $295,417, with a 5% annual increase,
| | - |  | -------------------------------------------------------------------------



| |  |  | prohibited from competing with the Company during the term of his employment period and for a period of twenty-four months thereafter; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibited from disclosing any confidential information gained during his employment period.
| | - |  | --------------------------------------------------------------------------------------------



Lon E. Otremba. Pursuant to the employment agreement dated as of September 29, 2003 by and among Mr. Otremba, the
Company and Muzak, Muzak agreed to employ Mr. Otremba as President until his resignation, death, disability or termination of employment. Under the employment agreement, Mr. Otremba is:



| |  |  | entitled to a minimum base salary of $325,000, with a 5% annual increase;
| | - |  | -------------------------------------------------------------------------



| |  |  | eligible for an annual bonus, as determined by the Board of Directors of the Company, as well as an additional annual bonus based on meeting certain targets in connection with
fiscal year EBITDA;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eligible for a one-time bonus based on meeting certain targets in connection with the sale of the Company;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | eligible to receive annual grants of Incentive units on meeting certain targets;
| | - |  | --------------------------------------------------------------------------------



| |  |  | prohibited from competing with the Company during the term of his employment period and for a period of twenty-four months thereafter; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibited from disclosing any confidential information gained during his employment period.
| | - |  | --------------------------------------------------------------------------------------------



23



---

If Muzak terminates Mr. Otrembas employment without cause, Mr. Otremba will be entitled
to receive his base salary for a period of one year thereafter.



Stephen P. Villa. Pursuant to the employment agreement dated as of November 5, 2002, as subsequently amended, by and among Mr. Villa, the Company and Muzak, Muzak agreed to employ Mr. Villa as Chief Operating Officer and Chief
Financial Officer until his resignation, death, disability or termination of employment. Under the employment agreement, Mr. Villa is:



| |  |  | entitled to a minimum base salary of $275,000, with a 5% annual increase;
| | - |  | -------------------------------------------------------------------------



| |  |  | eligible for a bonus, as determined by the Board of Directors of the Company;
| | - |  | -----------------------------------------------------------------------------



| |  |  | prohibited from competing with the Company during the term of his employment period and for a period of twenty-four months thereafter; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibited from disclosing any confidential information gained during his employment period.
| | - |  | --------------------------------------------------------------------------------------------



If Muzak terminates Mr. Villas employment without cause, Mr. Villa will be entitled to receive his base
salary for a period of one year thereafter.



Other Executive
Officers. Each of Messrs., Kahn and Wolf is a party to an employment agreement with the Company, the terms of which are the same in all material respects. Each agreement may be terminated at any time by either party. Under the agreements, the
executive is:



| |  |  | entitled to compensation in accordance with the Companys employee compensation plan, which may be amended by the Company at any time;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibited from competing with the Company during the term of employment and for 18 months thereafter; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | prohibited from disclosing any confidential information gained during the executives employment period.
| | - |  | --------------------------------------------------------------------------------------------------------



24



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|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The following table sets forth information regarding the beneficial ownership of the Class A and Class A-1 units of the
Company, which are the only outstanding membership interests in the Company with voting rights, as of March 15, 2005, by:



| |  |  | holders having beneficial ownership of more than 5% of the voting equity interest of the Company;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | each director of the Company;
| | - |  | -----------------------------



| |  |  | each of Muzaks executive officers shown in the summary compensation table; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | all directors and executive officers as a group.
| | - |  | ------------------------------------------------



|                                                                                     |  |                         |  |            |  
|------------------------------------------------------------------------------------ |  | ----------------------- |  | ---------- | -
|                                                                                     |  | Beneficial Ownership(a) | 
|Beneficial Owner                                                                     |  | Number                  |  | Percentage |  
|MEM Holdings, LLC(b)111 Huntington Avenue, 30th floorBoston, MA 02199                |  | 84,991                  |  | 64.2       | %
|AMFM Systems Inc.(c)200 East Basse RoadSan Antonio, Texas 78209                      |  | 27,233                  |  | 20.6       | %
|William A. Boyd                                                                      |  | 1,323                   |  | 1.0        | %
|Lon E. Otremba                                                                       |  |                        |  | *          |  
|Stephen P. Villa                                                                     |  |                        |  | *          |  
|Scott J. Wolf                                                                        |  |                        |  | *          |  
|Kenneth F. Kahn                                                                      |  | 11                      |  | *          |  
|Andrew Banks                                                                         |  |                        |  | *          |  
|Peni A. Garber                                                                       |  |                        |  | *          |  
|Robert P. MacInnis                                                                   |  |                        |  | *          |  
|Hilary K. Grove                                                                      |  |                        |  | *          |  
|Royce G. Yudkoff(d)                                                                  |  | 84,991                  |  | 64.2       | %
|All directors of the Company and executive officers of Muzak as a group (10 persons) |  | 87,580                  |  | 66.1       | %

---

|* | Less than 1%
|- | ------------



|(a) | Beneficial ownership generally means any person who, directly or indirectly, has or shares voting or investment power with respect to a security or has the right to
acquire such power within 60 days. Unless otherwise indicated, the Company believes that each holder has sole voting and investment power with regard to the equity interests listed as beneficially owned.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | MEM Holdings, LLC is controlled by ABRY Broadcast Partners II, L.P. and ABRY Broadcast Partners III, L.P., both of which are affiliates of ABRY Partners.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | AMFM Systems Inc. is owned by Clear Channel Communications, Inc.
|--- | ----------------------------------------------------------------



|(d) | Mr. Yudkoff is the sole owner of the equity interests of ABRY Holdings III, Inc., the general partner of ABRY Equity Investors, L.P., the general partner of ABRY Broadcast Partners
III. Mr. Yudkoff is also the sole owner of ABRY Holdings, Inc., the general partner of ABRY Capital, L.P., which is the general partner of ABRY Broadcast Partners II. As a result, Mr. Yudkoff may be deemed to beneficially own the shares owned by
ABRY Broadcast Partners III, and ABRY Broadcast Partners II, which are the beneficial owners of MEM Holdings. The address of Mr. Yudkoff is the address of MEM Holdings.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



Members Agreement



The Company, MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership, CMS Diversified Partners, L.P. and
Stephen Jones are parties to a Second Amended and Restated Members Agreement dated as of October 18, 2000. Pursuant to the Members Agreement, MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership, CMS
Diversified Partners, L.P. and Stephen Jones have agreed to vote their equity interests in the Company to elect Mr. Unger and Mr. Boyd to the Board of Directors of the Company. The Members Agreement also contains:



| |  |  | co-sale rights exercisable in the event of specified sales by MEM Holdings or its permitted transferees;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | drag along sale rights exercisable by the Board of Directors of the Company and holders of a majority of the then outstanding Class A units in the event of an Approved
Company Sale, as defined in the Members Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | preemptive rights;
| | - |  | ------------------



| |  |  | restrictions on transfers of membership interests by Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership, CMS Diversified Partners, L.P. and
Stephen Jones and its permitted transferees; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | rights to first refusal exercisable by MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd and the Company on any transfer by Music Holdings Corp.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



The voting restrictions will terminate with respect to Mr. Unger upon the
first to occur of an Approved Company Sale or a specified liquidity event with respect to Mr. Ungers Class A units, and with respect to Mr. Boyd upon the earlier of an Approved Company Sale and the date on which he ceases to serve as the CEO
of the Company. The co-sale, drag along, transfer restrictions and rights of first refusal will terminate upon consummation of the first to occur of a Qualified Public Offering, as defined in the Members Agreement, or an Approved Company Sale.



Securityholders Agreement



The Company, MEM Holdings, AMFM Systems and other investors are parties to
an Amended and Restated Securityholders Agreement dated as of March 15, 2002. Pursuant to the Securityholders Agreement, the parties have agreed to vote their equity interests in the Company to establish the composition of the Board of Directors of
the Company and to provide observer rights for specified investors to attend meetings of the Board of Directors. The Securityholders Agreement also contains:



| |  |  | co-sale rights exercisable in the event of specified sales by MEM Holdings or AMFM Systems;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | drag along rights exercisable by the Board of Directors of the Company and holders of a majority of the then outstanding Class A units and Class A-1 units, in the event
of an Approved Company Sale, as defined in the Securityholders Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | preemptive rights;
| | - |  | ------------------



| |  |  | restrictions on transfers of membership interests by MEM Holdings, AMFM Systems and other investors party to the Securityholders Agreement and its permitted transferees; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | rights of first offer exercisable by AMFM Systems on any transfer by MEM Holdings, and vice versa, and rights of first offer exercisable by MEM Holdings and AMFM Systems on any
transfer by the other parties to the Securityholders Agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The voting restrictions will terminate upon an Approved Company Sale. The co-sale rights will terminate upon the consummation of the first to occur of an initial Public Offering by the Company, as defined in the
Securityholders Agreement, or an Approved Company Sale. The drag along rights, preemptive rights and the rights of first offer will terminate on the consummation of the first to occur of a Qualified Public Offering, as defined in the Securityholders
Agreement, or an Approved Company Sale.



Indemnification



Muzaks Limited Liability Company Agreement dated as of March 18, 1999,
as amended, provides for indemnification of directors and officers, including advancement of reasonable attorneys fees and other expenses, in connection with all claims, liabilities and expenses arising out of the management of Muzaks
affairs. Such indemnification obligations are limited to the extent Muzaks assets are sufficient to cover such obligations. Muzak carries directors and officers insurance that covers such exposure for indemnification up to certain limits. As
of December 31, 2004 and 2003, we had accrued $50,000 to cover indemnification.



26



---

Registration Agreement



The Company, MEM Holdings, Mr. Koff, Mr. Boyd, Mr. Unger, Music Holdings Corp., AMFM Systems, Inc, and other investors are parties to a Second Amended
and Restated Registration Agreement dated as of October 18, 2000. Pursuant to this Registration Agreement, the holders of a majority of the ABRY Registrable Securities, as defined in the Registration Agreement, may request a demand registration
under the Securities Act of all or any portion of the ABRY Registrable Securities:



| |  |  | on Form S-1 or any similar long-form registration,
| | - |  | --------------------------------------------------



| |  |  | on Form S-2 or S-3 or any similar short-form registration, if available, and
| | - |  | ----------------------------------------------------------------------------



| |  |  | on any applicable form pursuant to Rule 415 under the Securities Act.
| | - |  | ---------------------------------------------------------------------



In accordance with the Registration Agreement, the holders of a majority of AMFM Registrable Securities, as defined in the Registration Agreement, may
request a demand registration under the Securities Act of all or any portion of the AMFM Registrable Securities on Form S-1 or any similar long-form registration and on Form S-2 or S-3 or any similar short-form registration. In addition, the holders
of at least 60% of the Preferred Registrable Securities, as defined in the Registration Agreement, may request a demand registration under the Securities Act of all or any portion of the Preferred Registrable Securities on Form S-1, but the
registration will be affected as a short-form registration, if available. All holders of Registrable Securities, as defined in the Registration Agreement, will have piggyback registration rights, which entitle them to include their
Registrable equity securities in registrations of securities by the Parent, subject to the satisfaction of specified conditions.



The Company is responsible for all expenses incident to its performance under the Registration Agreement, including without limitation all registration
and filing fees, and expenses of compliance with securities or blue sky laws, printing expenses, fees of counsel for the Company and the holders of Registrable securities and all independent certified public accountants and underwriters.



ABRY Partners Management and Consulting Services Agreement



Pursuant to an Amended and Restated Management and Consulting Services
Agreement between ABRY Partners and the Company dated March 18, 1999, ABRY Partners is entitled to a management fee when, and if, it provides advisory and management consulting services to the Company. During 2004, 2003 and 2002, Muzak incurred fees
and expenses of $0.3 million, $0.4 million, and $0.4 million, respectively under this agreement. Either ABRY Partners or the Company, with the approval of the Board of Directors of the Company, may terminate the Management Agreement by prior written
notice to the other. In addition, during 2003, the Company incurred fees and expenses of $0.9 million payable to ABRY Partners for services rendered in connection with the private placement of the Senior Notes and incurred fees of $0.1 million for
services rendered for financing efforts during 2002.



Related Party Debt



On March 15, 2002, Muzak borrowed $10.0 million from MEM
Holdings in the form of junior subordinated unsecured notes, which we refer to as the sponsor notes. We repaid the sponsor notes together with accrued interest with the proceeds of the Senior Notes offering in May 2003.



From July 1, 1999 through November 24, 1999, the Company borrowed an
aggregate amount of $30.0 million from MEM Holdings in the form of sponsor notes. We repaid $3.0 million of the sponsor note with the proceeds received from a preferred membership unit offering in October 2000. The remaining $27.0 million, plus $6.7
million of accrued interest, was converted into Class A units of the Company in May 2001.



27



---

|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The following table discloses the aggregate fees for each of the last two fiscal years for professional services rendered by our principal accountant:



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|Professional Services |  | 2004 |         | 2003
|Audit Fees            |  | $    | 350,000 |      | $ | 236,000
|Audit-Related Fees    |  |      |        |      |   | 180,000
|Tax Fees              |  |      | 235,000 |      |   | 230,000
|All Other Fees        |  |      |        |      |   |       



Audit- related fees
relate to professional services rendered by our principal accountant in conjunction with the issuance of the 10% Senior Notes in May 2003.



Since our equity interests are not currently listed on or with a national securities exchange or national securities association, we are not required to
have an audit committee and therefore do not have an audit committee financial expert. As such, the Board of Directors performs the function of an audit committee. Prior to engaging our principal accountant to render audit or non-audit services, the
engagement as well as charges for such services is approved by our Board of Directors. All fees incurred during 2004 were pre-approved by the Board of Directors.



28



---



PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



(a)(1) Financial Statements:



|                                                                                                                                      |  |           
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                      |  | PageNumber
|MUZAK HOLDINGS LLC                                                                                                                    |  |           
|                                                                                                                                      | 
|Report of Independent Registered Public Accounting Firm                                                                               |  | F-1       
|                                                                                                                                      | 
|Consolidated Balance Sheets at December 31, 2004 and 2003                                                                             |  | F-2       
|                                                                                                                                      | 
|Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                            |  | F-3       
|                                                                                                                                      | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                            |  | F-4       
|                                                                                                                                      | 
|Consolidated Statements of Changes in Members Deficiency and Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002 |  | F-5       
|                                                                                                                                      | 
|Notes to Consolidated Financial Statements                                                                                            |  | F-6       



All other schedules,
for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required, are inapplicable, or the information is included in the Consolidated Financial Statements or
the Notes thereto.



(a)(2) Exhibits:



|              |  |                                                                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                      
|              | 
|2.1           |  | Agreement and Plan of Merger, dated as of January 29, 1999 among ACN Holdings, LLC, Audio Communication Network, LLC, Muzak Limited Partnership, MLP Acquisition L.P. and Muzak Holdings
Corp.(1)                                                                                                
|              | 
|2.2           |  | First Amendment to the Agreement and Plan of Merger dated as of March 17, 1999 by and among Muzak Holdings LLC (f/k/a ACN Holdings, LLC), Audio Communications Network, LLC, Muzak Limited
Partnership, MLP Acquisition, L.P. and Muzak Holdings Corp.(1)                                        
|              | 
|2.3           |  | Contribution Agreement between Capstar Broadcasting Corporation and ACN Holdings, LLC dated as of February 19, 1999.(2)                                                                                                                                                                          
|              | 
|2.4           |  | First Amendment dated as of March 18, 1999, to the Contribution Agreement dated as of February 19, 1999, between Capstar Broadcasting Corporation and Muzak Holdings, LLC (f/k/a ACN Holdings,
LLC).(2)                                                                                          
|              | 
|3.1           |  | Certificate of Formation of ACN Operating, LLC.(1)                                                                                                                                                                                                                                               
|              | 
|3.2           |  | Certificate of Amendment of the Certificate of Formation of ACN Operating, LLC.(1)                                                                                                                                                                                                               
|              | 
|3.3           |  | Certificate of Merger merging Muzak Limited Partnership into Audio Communications Network, LLC.(1)                                                                                                                                                                                               
|              | 
|3.4           |  | Certificate of Incorporation of ACN Holdings, Inc. (N/K/A Muzak Holdings Finance Corporation)(2)                                                                                                                                                                                                 
|              | 
|3.5           |  | Bylaws of ACN Holdings, Inc. (N/K/A Muzak Holdings Finance Corporation)(2)                                                                                                                                                                                                                       
|              | 
|3.6           |  | Fourth Amended and Restated Limited Liability Agreement of Muzak Holdings LLC dated as of March 15, 2002.(5)                                                                                                                                                                                     
|              | 
|4.1           |  | Indenture, dated as of March 18, 1999 by and among Muzak LLC and Muzak Finance Corp., as Issuers, Muzak Capital Corporation, MLP Environmental Music, LLC, Business Sound, Inc. and ACN
Holdings LLC, as Guarantors and State Street Bank and Trust Company, as Trustee.(1)                      
|              | 
|4.2           |  | Form of 97/8% Senior Subordinated Notes due 2009
(included in Exhibit 4.1 above as Exhibit A).(1)                                                                                                                                                                                                
|              | 
|4.3           |  | Supplemental Indenture, dated as of August 30, 1999 by and among Muzak LLC, Muzak Finance Corp., Muzak Capital Corporation, MLP Environmental Music, LLC, Business Sound, Inc., Muzak Holdings
LLC and BI Acquisition, LLC, as Guarantors and State Street Bank and Trust Company, as Trustee.(1)
|              | 
|4.4           |  | Indenture, dated as of March 18, 1999 by and among Muzak Holdings LLC and Muzak Holdings Finance Corp., as Issuers and State Street Bank and Trust Company, as Trustee.(2)                                                                                                                       
|              | 
|4.5           |  | Form of Series A 13% Senior Discount Notes due 2010 (included in Exhibit 4.1 above as Exhibit A).(2)                                                                                                                                                                                             
|              | 
|4.6           |  | Indenture, dated as of May 20, 2003 by and among Muzak LLC and Muzak Finance Corp., as Issuers, and the Guarantors named therein, and U.S. Bank National Association, as Trustee
(9)                                                                                                             
|              | 
|4.7           |  | Form of 10% Senior Notes due 2009 (included in Exhibit 4.6 above)                                                                                                                                                                                                                                



29



---

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|4.8           |  | Registration Rights Agreement, dated as of May 20, 2003 by and among Muzak LLC, Muzak Finance Corp, the Guarantors named herein and Bear Stearns and Co, Inc, Lehman Brothers Inc. and Fleet
Securities Inc. as Initial Purchasers (9)                                                                                                                                                                                             
|              | 
|10.1          |  | Pledge and Security Agreement, dated as of March 18, 1999, among Audio Communications Network, LLC, Muzak Holdings LLC, and certain present and future domestic subsidiaries of Audio
Communications Network, LLC, as Guarantors, and Canadian Imperial Bank of Commerce, as agent for the benefit of Lenders and Lender Counterparties and Indemnities.(1)                                                                        
|              | 
|10.2*         |  | Amended and Restated Members Agreement, dated as of March 18, 1999, by and among Muzak Holdings LLC (f/k/a ACN Holdings, LLC), MEM Holdings LLC, David Unger, Joseph Koff, William Boyd and
Music Holdings Corp.(1)                                                                                                                                                                                                                
|              | 
|10.3*         |  | Management and Consulting Services Agreement dated as of October 6, 1998 by and between ABRY Partners, Inc. and ACN Operating, LLC.(1)                                                                                                                                                                                                                                                                                             
|              | 
|10.4*         |  | Form of Employment Agreement by and between Muzak LLC and each of the executive officers of Muzak other than William A. Boyd and David Unger.(1)                                                                                                                                                                                                                                                                                   
|              | 
|10.5*         |  | Amended and Restated Executive Employment Agreement, dated as of March 16, 2001, among Muzak Holdings LLC, Muzak LLC, and William A. Boyd.(4)                                                                                                                                                                                                                                                                                      
|              | 
|10.6          |  | Securities Repurchase Agreement dated as of October 6, 1998 by and among ACN Holdings, LLC, David Unger and ABRY Broadcast Partners III, L.P.(2)                                                                                                                                                                                                                                                                                   
|              | 
|10.7          |  | Amended and Restated Securityholders Agreement dated as of October 18, 2000 by and among Muzak Holdings LLC and the various parties named therein.(3)                                                                                                                                                                                                                                                                              
|              | 
|10.8          |  | Securities Purchase Agreement between Muzak Holdings LLC as Issuer and BancAmerica Capital Investors I, L.P. and various investors as purchasers dated as of October 18,
2000.(3)                                                                                                                                                                                                                                                  
|              | 
|10.9          |  | Investor Securities Purchase Agreement dated as of October 6, 1998 by and among ACN Holdings, LLC and the investors named therein.(2)                                                                                                                                                                                                                                                                                              
|              | 
|10.10         |  | Form of Incentive Unit Agreement by and among Muzak Holdings LLC, each of the Name Executives and ABRY Broadcast Partners III, L.P.(2)                                                                                                                                                                                                                                                                                             
|              | 
|10.11         |  | First Amendment dated as of May 8, 2001 to the Securities Purchase Agreement between Muzak Holdings LLC as Issuer and BancAmerica Capital Investors I, L.P. and various investors as purchasers
dated as of October 18, 2000.(8)                                                                                                                                                                                                   
|              | 
|10.12         |  | Second Amendment dated as of March 8, 2002 to the Securities Purchase Agreement between Muzak Holdings LLC as Issuer and BancAmerica Capital Investors I, L.P. and various investors as
purchasers dated as of October 18, 2000.(8)                                                                                                                                                                                                
|              | 
|10.13         |  | Amended and Restated Securityholders Agreement dated as of March 15, 2002 by and among Muzak Holdings LLC and the various parties named therein.(6)                                                                                                                                                                                                                                                                                
|              | 
|10.14         |  | Executive Employment Agreement dated as of November 5, 2002, among Muzak Holdings LLC, Muzak LLC, and Stephen P. Villa.(7)                                                                                                                                                                                                                                                                                                         
|              | 
|10.15         |  | Executive Employment Agreement, dated as of September 29, 2003, among Muzak Holdings LLC, Muzak LLC, and Lon Otremba.(10)                                                                                                                                                                                                                                                                                                          
|              | 
|10.16         |  | Incentive Unit Agreement, dated as of October 28, 2003, among Muzak Holdings LLC, Lon Otremba, and ABRY Broadcast Partners III.(10)                                                                                                                                                                                                                                                                                                
|              | 
|10.17         |  | Credit Agreement, dated as of May 20, 2003 among Muzak Holdings, as Parent Guarantor, Muzak LLC, as Borrower, several lenders from time to time parties thereto, Lehman Commercial Paper Inc.
and Fleet National Bank as Co-Syndicating Agents, General Electric Capital Corporation, as Documentation Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent.(9)                                                  
|              | 
|10.18         |  | Amendment to the Executive Employment agreement dated as of November 4, 2003 among Muzak Holdings LLC, Muzak LLC, and Stephen Villa.(10)                                                                                                                                                                                                                                                                                           
|              | 
|10.19         |  | First Amendment dated March 5, 2004 to Amended and Restated Executive Employment agreement dated as of March 16, 2001, among Muzak Holdings LLC, Muzak LLC, and William A.
Boyd.(11)                                                                                                                                                                                                                                               
|              | 
|10.20         |  | First Amendment to the Credit Agreement, dated as of March 9, 2004, to the Credit Agreement among Muzak Holdings, as Parent Guarantor, Muzak LLC, as Borrower, several lenders from time to
time parties thereto, Lehman Commercial Paper Inc. and Fleet National Bank as Co-Syndicating Agents, General Electric Capital Corporation, as Documentation Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent.(11)



30



---

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.21         |  | First Consent and Waiver, dated as of February 25, 2004, to the Credit Agreement among Muzak Holdings, as Parent Guarantor, Muzak LLC, as Borrower, several lenders from time to time parties
thereto, Lehman Commercial Paper Inc. and Fleet National Bank as Co-Syndicating Agents, General Electric Capital Corporation, as Documentation Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent. (11)                                                                                                                                          
|              | 
|10.22         |  | Acknowledgement dated as of March 26, 2004, to the Credit Agreement among Muzak Holdings, as Parent Guarantor, Muzak LLC, as Borrower, several lenders from time to time parties thereto,
Lehman Commercial Paper Inc. and Fleet National Bank as Co-Syndication Agents, General Electric Capital Corporation, as Documentation Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent. (11)                                                                                                                                                       
|              | 
|10.23         |  | Amended and Restated Credit Agreement, dated as of May 10, 2004, among Muzak Holdings LLC, as parent guarantor, Muzak LLC, as borrower, several lenders from time to time parties hereto,
Lehman Commercial Paper Inc and Fleet National bank and GECC Capital Markets Group Inc, as Co-Syndication Agents, and General Electric Capital Corporation as Documentation Agent and Collateral Agent and Bear Stearns Corporate Lending Inc as
Administrative Agent (12)                                                                                               
|              | 
|10.24         |  | First Amendment to the Amended and Restated Credit Agreement dated as of May 10, 2004 among Muzak Holdings LLC, Muzak LLC as Borrower, the lenders from time to time parties thereto, Bear
Stearns and Co. Inc. and Lehman Brothers Inc., as Joint Lead Arrangers and Joint Bookrunners, Lehman Commercial Paper Inc., Fleet National Bank and GECC Capital Markets Groups Inc., as Co-Syndication Agents, General Electric Capital Corporation, as
Documentation Agent and Collateral Agent and Bear Stearns Corporate Lending Inc., as Administrative Agent. (13)
|              | 
|10.25         |  | Credit Agreement, dated as of April 15, 2005, among Muzak Holdings, as Parent Guarantor, Muzak LLC, as Borrower, several lenders from time to time parties thereto, Bear Stearns & Co. Inc,
as Sole Lead Arranger and Sole Bookrunner, and Bear Stearns Corporate Lending Inc, as Administrative Agent and Collateral Agent.                                                                                                                                                                                                                                       
|              | 
|21.1          |  | Subsidiaries of Muzak LLC and Muzak Finance Corp.(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|31.1          |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|31.2          |  | Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

|* | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



|(1) | Incorporated by reference to Muzak LLCs Registration Statement on Form S-4, File No. 333-78571.
|--- | ------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to the Companys Registration Statement on Form S-4, File No. 333-78573.
|--- | --------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended June 30, 2001.
|--- | ----------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the Companys Report on Form 10-K for the year ended December 31, 2001.
|--- | ----------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended March 31, 2002
|--- | ----------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2002
|--- | --------------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the Companys Report on Form 10-K for the year ended December 31, 2002
|--- | ---------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to Muzak LLCs Registration Statement on Form S-4, File No. 333-78571.
|--- | ------------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2003.
|---- | ---------------------------------------------------------------------------------------------------------------



|(11) | Incorporated by reference to the Companys Report on Form 10-K for the year ended December 31, 2003.
|---- | ----------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended March 31, 2004
|---- | ----------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------



31



---



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 15thday of April 2005.



MUZAK HOLDINGS FINANCE
CORP. MUZAK HOLDINGS LLCBy:

/s/    LON E. OTREMBALon E. OtrembaChief Executive Officer




Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the 15th day of April 2005.



|                      |  |  |  |                                                      
|--------------------- |  |  |  | -----------------------------------------------------
|Signature             |  |  |  | Title                                                
|                      |  | 
|/s/    LON E. OTREMBA |  |  |  | Chief Executive Officer (Principal Executive Officer)
|Lon E. Otremba        |  |  |  |                                                      

|                        |  |  |  |                                                                                       
|----------------------- |  |  |  | --------------------------------------------------------------------------------------
|                        |  | 
|/s/    STEPHEN P. VILLA |  |  |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|Stephen P. Villa        |  |  |  |                                                                                       



32



---

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Members

of Muzak Holdings LLC:



In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Muzak Holdings LLC (the Company) and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 2, the Company has restated its consolidated financial statements for
the years ended December 31, 2003 and 2002.



PricewaterhouseCoopers LLP

Charlotte, North Carolina

April 15, 2005



F-1



---



MUZAK HOLDINGS LLC



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                            |  |                  |          |   |                  |   |          |  
|----------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                            |  | December 31,2004 |          |   | December 31,2003 |  
|                                                            |  |                  |          |   | Restated, Note 2 |  
|ASSETS                                                      |  |                  |          |   |                  |   |          |  
|Current Assets:                                             |  |                  |          |   |                  |   |          |  
|Cash                                                        |  | $                | 421      |   |                  | $ | 2,284    |  
|Accounts receivable, net of allowances of $4,486 and $1,798 |  |                  | 28,293   |   |                  |   | 25,196   |  
|Inventories                                                 |  |                  | 17,425   |   |                  |   | 14,741   |  
|Prepaid expenses and other assets                           |  |                  | 4,612    |   |                  |   | 3,974    |  
|                                                            |  |                  |          |   |                  |   |          |  
|Total current assets                                        |  |                  | 50,751   |   |                  |   | 46,195   |  
|Property and equipment, net                                 |  |                  | 100,697  |   |                  |   | 108,591  |  
|Goodwill                                                    |  |                  | 140,805  |   |                  |   | 140,805  |  
|Intangible assets, net                                      |  |                  | 93,207   |   |                  |   | 113,129  |  
|Deferred subscriber acquisition costs, net                  |  |                  | 47,332   |   |                  |   | 46,208   |  
|Deferred charges and other assets, net                      |  |                  | 13,280   |   |                  |   | 15,646   |  
|                                                            |  |                  |          |   |                  |   |          |  
|Total assets                                                |  | $                | 446,072  |   |                  | $ | 470,574  |  
|                                                            |  |                  |          |   |                  |   |          |  
|LIABILITIES AND MEMBERS DEFICIENCY                         |  |                  |          |   |                  |   |          |  
|Current Liabilities:                                        |  |                  |          |   |                  |   |          |  
|Accounts payable                                            |  | $                | 6,162    |   |                  | $ | 6,528    |  
|Accrued expenses                                            |  |                  | 25,125   |   |                  |   | 20,436   |  
|Current maturities of other liabilities                     |  |                  | 3,692    |   |                  |   | 3,711    |  
|Current maturities of long term debt                        |  |                  | 101      |   |                  |   | 94       |  
|Advance billings                                            |  |                  | 966      |   |                  |   | 1,084    |  
|                                                            |  |                  |          |   |                  |   |          |  
|Total current liabilities                                   |  |                  | 36,046   |   |                  |   | 31,853   |  
|Long-term debt                                              |  |                  | 429,236  |   |                  |   | 411,424  |  
|Other liabilities                                           |  |                  | 9,083    |   |                  |   | 9,461    |  
|Commitments and contingencies                               |  |                  |          |   |                  |   |          |  
|Redeemable preferred units                                  |  |                  | 155,316  |   |                  |   | 129,691  |  
|Redeemable purchased Class A units                          |  |                  | 7,788    |   |                  |   | 7,788    |  
|Members deficiency                                         |  |                  |          |   |                  |   |          |  
|Class A units                                               |  |                  | 63,275   |   |                  |   | 88,900   |  
|Accumulated deficit                                         |  |                  | (254,672 | ) |                  |   | (208,543 | )
|                                                            |  |                  |          |   |                  |   |          |  
|Total members deficiency                                   |  |                  | (191,397 | ) |                  |   | (119,643 | )
|                                                            |  |                  |          |   |                  |   |          |  
|Total liabilities and members deficiency                   |  | $                | 446,072  |   |                  | $ | 470,574  |  
|                                                            |  |                  |          |   |                  |   |          |  



The Notes are an
integral part of these consolidated financial statements.



F-2



---



MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)



|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -------------------------- |  | - | ------- | -
|                                                                                                                     |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |   |         | Year EndedDecember 31,2002 | 
|                                                                                                                     |  |                            |         |   | Restated, Note 2           |   |         | Restated, Note 2           | 
|Net Revenues:                                                                                                        |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Music and other business services                                                                                    |  | $                          | 184,397 |   |                            | $ | 174,945 |                            |  | $ | 162,985 |  
|Equipment and related services                                                                                       |  |                            | 61,465  |   |                            |   | 60,069  |                            |  |   | 54,732  |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            | 245,862 |   |                            |   | 235,014 |                            |  |   | 217,717 |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            |        
|Cost of revenues:                                                                                                    |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Music and other business services (excluding $42,676, $43,185, and $44,851 of depreciation and amortization expense) |  |                            | 34,858  |   |                            |   | 32,285  |                            |  |   | 34,467  |  
|Equipment and related services                                                                                       |  |                            | 56,935  |   |                            |   | 50,082  |                            |  |   | 43,754  |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            | 91,793  |   |                            |   | 82,367  |                            |  |   | 78,221  |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            | 154,069 |   |                            |   | 152,647 |                            |  |   | 139,496 |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            |        
|Selling, general and administrative expenses                                                                         |  |                            | 88,008  |   |                            |   | 80,617  |                            |  |   | 72,023  |  
|Impairment of deferred production costs                                                                              |  |                            | 6,578   |   |                            |   |        |                            |  |   |        |  
|Depreciation and amortization expense                                                                                |  |                            | 60,043  |   |                            |   | 63,721  |                            |  |   | 70,109  |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            |        
|Income (loss) from operations                                                                                        |  |                            | (560    | ) |                            |   | 8,309   |                            |  |   | (2,636  | )
|Other income (expense):                                                                                              |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Interest expense                                                                                                     |  |                            | (44,148 | ) |                            |   | (40,253 | )                          |  |   | (36,533 | )
|Other, net                                                                                                           |  |                            | 257     |   |                            |   | 201     |                            |  |   | 192     |  
|Loss from extinguishment of debt, net                                                                                |  |                            | (1,846  | ) |                            |   | (3,694  | )                          |  |   |        |  
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                                                                     |  |                            |        
|Loss before income taxes                                                                                             |  |                            | (46,297 | ) |                            |   | (35,437 | )                          |  |   | (38,977 | )
|Income tax benefit                                                                                                   |  |                            | (168    | ) |                            |   | (625    | )                          |  |   | (956    | )
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Net loss                                                                                                             |  | $                          | (46,129 | ) |                            | $ | (34,812 | )                          |  | $ | (38,021 | )
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Preferred return on redeemable preferred units                                                                       |  |                            | (25,625 | ) |                            |   | (20,576 | )                          |  |   | (17,169 | )
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  
|Net loss attributable to common unit holders                                                                         |  | $                          | (71,754 | ) |                            | $ | (55,388 | )                          |  | $ | (55,190 | )
|                                                                                                                     |  |                            |         |   |                            |   |         |                            |  |   |         |  



The Notes are an
integral part of these consolidated financial statements.



F-3



---



MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|------------------------------------------------------------ |  | -------------------------- | ------- | - | -------------------------- | - | -------- | -------------------------- |  | - | ------- | -
|                                                             |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |   |          | Year EndedDecember 31,2002 | 
|                                                             |  |                            |         |   | Restated, Note 2           |   |          | Restated, Note 2           | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Net loss                                                     |  | $                          | (46,129 | ) |                            | $ | (34,812  | )                          |  | $ | (38,021 | )
|Adjustments to derive cash flow from operating activities:   |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Loss from extinguishment of debt, net                        |  |                            | 1,846   |   |                            |   | 3,694    |                            |  |   |        |  
|Impairment of deferred production costs                      |  |                            | 6,578   |   |                            |   |         |                            |  |   |        |  
|Impairment of note receivable                                |  |                            | 558     |   |                            |   |         |                            |  |   |        |  
|Other non-cash expenses                                      |  |                            | 1,453   |   |                            |   |         |                            |  |   |        |  
|Gain on disposal of fixed assets                             |  |                            | (123    | ) |                            |   | (40      | )                          |  |   | (27     | )
|Deferred income tax benefit                                  |  |                            | (242    | ) |                            |   | (959     | )                          |  |   | (1,365  | )
|Depreciation and amortization                                |  |                            | 60,043  |   |                            |   | 63,721   |                            |  |   | 70,109  |  
|Amortization of senior discount and senior notes             |  |                            | 1,618   |   |                            |   | 7,392    |                            |  |   | 7,623   |  
|Amortization of deferred financing fees                      |  |                            | 2,691   |   |                            |   | 2,495    |                            |  |   | 2,308   |  
|Amortization of deferred subscriber acquisition costs        |  |                            | 15,776  |   |                            |   | 15,574   |                            |  |   | 12,387  |  
|Deferred subscriber acquisition costs                        |  |                            | (16,900 | ) |                            |   | (20,373  | )                          |  |   | (16,355 | )
|Unearned installment income                                  |  |                            | (225    | ) |                            |   | (144     | )                          |  |   | (1,384  | )
|Change in certain assets and liabilities:                    |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Increase in accounts receivable                              |  |                            | (3,850  | ) |                            |   | (1,884   | )                          |  |   | (2,241  | )
|Increase in inventory                                        |  |                            | (3,606  | ) |                            |   | (3,642   | )                          |  |   | (1,999  | )
|(Decrease) increase in accrued expenses                      |  |                            | 4,585   |   |                            |   | 2,485    |                            |  |   | (2,313  | )
|Increase (decrease) in accounts payable                      |  |                            | (683    | ) |                            |   | (592     | )                          |  |   | 1,442   |  
|(Decrease) increase in advance billings                      |  |                            | (118    | ) |                            |   | 44       |                            |  |   | 170     |  
|Other, net                                                   |  |                            | 1,319   |   |                            |   | (5,094   | )                          |  |   | 1,255   |  
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Net cash provided by operating activities                    |  |                            | 24,591  |   |                            |   | 27,865   |                            |  |   | 31,589  |  
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|                                                             |  |                            |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Proceeds from the sale of fixed assets                       |  |                            | 126     |   |                            |   | 67       |                            |  |   | 41      |  
|Capital expenditures for property and equipment              |  |                            | (36,044 | ) |                            |   | (39,902  | )                          |  |   | (37,384 | )
|Capital expenditures for intangibles                         |  |                            | (2,029  | ) |                            |   | (1,654   | )                          |  |   | (1,446  | )
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Net cash used in investing activities                        |  |                            | (37,947 | ) |                            |   | (41,489  | )                          |  |   | (38,789 | )
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|                                                             |  |                            |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Change in book overdraft                                     |  |                            | 317     |   |                            |   | (2,929   | )                          |  |   | 2,987   |  
|Proceeds from issuance of Term Loan B                        |  |                            | 35,000  |   |                            |   |         |                            |  |   |        |  
|Proceeds from issuance of senior notes                       |  |                            |        |   |                            |   | 218,869  |                            |  |   |        |  
|Borrowings under revolver                                    |  |                            | 18,000  |   |                            |   | 24,700   |                            |  |   | 15,000  |  
|Repayment of revolver                                        |  |                            | (4,000  | ) |                            |   | (31,000  | )                          |  |   | (10,000 | )
|Repayments of senior credit facility                         |  |                            |        |   |                            |   | (159,514 | )                          |  |   | (6,693  | )
|Repurchase of senior discount notes                          |  |                            | (33,670 | ) |                            |   | (14,440  | )                          |  |   |        |  
|(Repayment) issuance of notes payable to related parties     |  |                            |        |   |                            |   | (10,000  | )                          |  |   | 10,000  |  
|Termination (purchase) of interest rate protection agreement |  |                            |        |   |                            |   | 4        |                            |  |   | (372    | )
|Repayment of capital lease obligations and other debt        |  |                            | (2,848  | ) |                            |   | (2,477   | )                          |  |   | (2,600  | )
|Payment of fees associated with obtaining financing          |  |                            | (1,306  | ) |                            |   | (9,086   | )                          |  |   | (1,924  | )
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Net cash provided by financing activities                    |  |                            | 11,493  |   |                            |   | 14,127   |                            |  |   | 6,398   |  
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|                                                             |  |                            |        
|INCREASE (DECREASE) IN CASH                                  |  |                            | (1,863  | ) |                            |   | 503      |                            |  |   | (802    | )
|CASH, BEGINNING OF PERIOD                                    |  |                            | 2,284   |   |                            |   | 1,781    |                            |  |   | 2,583   |  
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|                                                             |  |                            |        
|CASH, END OF PERIOD                                          |  | $                          | 421     |   |                            | $ | 2,284    |                            |  | $ | 1,781   |  
|                                                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Significant non-cash activities:                             |  |                            |         |   |                            |   |          |                            |  |   |         |  
|Capital lease obligations                                    |  |                            | 2,572   |   |                            |   | 3,071    |                            |  |   | 2,030   |  
|Issuance of note receivable for disposition of CCTV assets   |  |                            | 1,806   |   |                            |   |         |                            |  |   |        |  



The Notes are an
integral part of these consolidated financial statements.



F-4



---



MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS
DEFICIENCY

AND COMPREHENSIVE LOSS

(In thousands)



|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|------------------------------------------------------ |  | ------- | - |  | ------- | ------- | - | ------------------ | ------ | - | --------------------------------- | - | ------ | ----------------------- |  | - | -------- | - |  | - | ------ | - |  | - | -------- | -
|                                                       |  | Class A |   |  | Class B |         |   | AccumulatedDeficit |        |   | AccumulatedOtherComprehensiveLoss |   |        | TotalMembersDeficiency | 
|                                                       |  | Units   |   |  | Dollars |         |   | Units              |        |   | Dollars                           |   |        |                         | 
|Balance, December 31, 2001 (as previously reported)    |  | 132,422 |   |  | $       | 133,141 |   |                    | 10,526 |   |                                   | $ | 1,263  |                         |  | $ | (132,161 | ) |  | $ | (2,455 | ) |  | $ | (212     | )
|Effect of restatement, Note 2                          |  | (7,258  | ) |  |         | (7,788  | ) |                    |        |   |                                   |   |        |                         |  |   | (3,549   | ) |  |   |        |   |  |   | (11,337  | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Balance, December 31, 2001 (restated)                  |  | 125,164 |   |  |         | 125,353 |   |                    | 10,526 |   |                                   |   | 1,263  |                         |  |   | (135,710 | ) |  |   | (2,455 | ) |  | $ | (11,549  | )
|Comprehensive loss:                                    |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Net loss (restated)                                    |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   | (38,021  | ) |  |   |       |   |  |   | (38,021  | )
|Change in unrealized losses on derivative              |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |         |   |  |   | 2,165  |   |  |   | 2,165    |  
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Total comprehensive loss                               |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   | (38,021  | ) |  |   | 2,165  |   |  |   | (35,856  | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Net issuance of units                                  |  |         |   |  |         |         |   |                    | 893    |   |                                   |   |       |                         |  |   |         |   |  |   |       |   |  |   |         |  
|Vesting of Class B units                               |  |         |   |  |         |         |   |                    |       |   |                                   |   | 29     |                         |  |   |         |   |  |   |       |   |  |   | 29       |  
|Preferred return on preferred units                    |  |         |   |  |         | (15,974 | ) |                    |       |   |                                   |   | (1,195 | )                       |  |   |         |   |  |   |       |   |  |   | (17,169  | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Balance, December 31, 2002 (restated)                  |  | 125,164 |   |  | $       | 109,379 |   |                    | 11,419 |   |                                   | $ | 97     |                         |  | $ | (173,731 | ) |  | $ | (290   | ) |  | $ | (64,545  | )
|Comprehensive loss:                                    |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Net loss (restated)                                    |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   | (34,812  | ) |  |   |       |   |  |   | (34,812  | )
|Current period change in value of derivative           |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |         |   |  |   | (78    | ) |  |   | (78      | )
|Sale of interest rate cap-reclassification to earnings |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |         |   |  |   | 368    |   |  |   | 368      |  
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Total comprehensive loss                               |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   | (34,812  | ) |  |   | 290    |   |  |   | (34,522  | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Net issuance of units                                  |  |         |   |  |         |         |   |                    | 3,118  |   |                                   |   |       |                         |  |   |         |   |  |   |       |   |  |   |         |  
|Preferred return on preferred units                    |  |         |   |  |         | (20,479 | ) |                    |       |   |                                   |   | (97    | )                       |  |   |         |   |  |   |       |   |  |   | (20,576  | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Balance, December 31, 2003 (restated)                  |  | 125,164 |   |  | $       | 88,900  |   |                    | 14,537 |   |                                   | $ |       |                         |  | $ | (208,543 | ) |  | $ |       |   |  | $ | (119,643 | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Net loss                                               |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   | (46,129  | ) |  |   |       |   |  |   | (46,129  | )
|Repurchase of units                                    |  |         |   |  |         |         |   |                    | (461   | ) |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  
|Preferred return on preferred units                    |  |         |   |  |         | (25,625 | ) |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   | (25,625  | )
|Balance, December 31, 2004                             |  | 125,164 |   |  | $       | 63,275  |   |                    | 14,076 |   |                                   | $ |       |                         |  | $ | (254,672 | ) |  | $ |       |   |  | $ | (191,397 | )
|                                                       |  |         |   |  |         |         |   |                    |        |   |                                   |   |        |                         |  |   |          |   |  |   |        |   |  |   |          |  



The Notes are an
integral part of these consolidated financial statements.



F-5



---



MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



OrganizationMuzak Holdings LLC (and its subsidiaries (the Company)), previously known as ACN Holdings, LLC, was formed in
September 1998 pursuant to the laws of Delaware. The Company provides business music programming to clients through its integrated nationwide network of owned operations and franchises. All of the operating activities are conducted through the
Company and its subsidiaries. The Company manages its business on the basis of one operating segment.



As of December 31, 2004, ABRY Partners, LLC and its respective affiliates, collectively own approximately 64.2% of the beneficial interests in the
Companys voting interests.



Basis of
PresentationThe consolidated financial statements include the accounts of the Company and its subsidiaries: Muzak LLC, Muzak Holdings Finance Corporation, Muzak Capital Corporation, Muzak Finance Corporation, Business Sound Inc., Electro
Systems Corporation, BI Acquisition LLC, MLP Environmental Music LLC, Audio Environments Inc., Background Music Broadcasters Inc., Telephone Audio Productions Inc., Vortex Sound Communications Company Inc., Music Incorporated, and Muzak Houston Inc.
All significant intercompany items have been eliminated in consolidation.



The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financials statements and the reported amounts of revenues and expenses during the period. Actual results could differ
from those estimates.



Liquidity-On April 15, 2005, the
Company entered into a new $105.0 million senior secured term loan facility (New Senior Credit Facility) payable in quarterly installments of 0.25% beginning September 2005 until final maturity on April 15, 2008. A portion of the
proceeds from the New Senior Credit Facility was used to repay in full the outstanding term and revolving loans and associated interest and to collateralize outstanding letters of credit under the Companys then existing Senior Credit Facility,
and to pay related fees and expenses. The then existing Senior Credit Facility has been terminated. We currently expect that our primary source of funds will be cash flows from operations and our secondary source to be approximately $21.0 million of
net proceeds from our New Senior Credit Facility. Total cash available, after giving effect to this refinancing and to existing cash balances as of April 15, 2005, was approximately $27.2 million. Although the Company believes that it will generate
positive operating cash flows in fiscal 2005, it expects that a portion of the excess cash resulting from the financing transaction described above will be required to fund its growth in new client locations and debt service for at least the next
twelve months.



Overall, the Companys business plan
anticipates reduced growth in new client locations and operational and administrative improvements. Our future performance is subject to industry based factors such as the level of competition in the business music industry, competitive pricing,
concentrations in and dependence on satellite delivery capabilities, rapid technological changes, the impact of legislation and regulation, our dependence on license agreements and other factors that are beyond our control. Given that the Company no
longer has a revolving credit facility, if it required cash in excess of amounts on hand, it may be required, among other things, to incur additional indebtedness, enter into other financing transactions, defer business opportunities, reduce its
expenses, or sell assets.



Book overdraftBook
overdraft of $0.1 million as of December 31, 2003 is included in accounts payable. There was no book overdraft as of December 31, 2004.



Concentration of Credit RiskConcentrations of credit risk with respect to trade accounts receivable are limited as the Company sells its
products to clients in diversified industries throughout the United States. The Company does not require collateral from its clients but performs ongoing credit evaluations of its clients financial condition and maintains allowances for
potential credit losses. Actual losses have been within managements expectations and estimates.



In addition, the Company leases satellite capacity primarily through three lessors under operating leases. Although alternate satellite capacity exists,
loss of these suppliers of satellite capacity could temporarily disrupt operations. The Company attempts to mitigate these risks by working closely with the lessors to identify alternate capacity if needed.



Accounts Receivable and Allowance for credits and doubtful accounts.
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments under their
contracts. Management evaluates the credit risk and financial viability of the client to estimate the allowance. Account balances are charged off against the allowance when we feel it is probable that the receivable will not be recovered. In
addition, we maintain allowances for credits issued to clients, which is recorded as a reduction to revenue. We do not have any off-balance sheet credit exposure related to our customers.



F-6



---

|                                                       |  |                               |       |                                        |   |                                 |  |   |                         |   |  |   |      
|------------------------------------------------------ |  | ----------------------------- | ----- | -------------------------------------- | - | ------------------------------- |  | - | ----------------------- | - |  | - | -----
|(in thousands)                                         |  | Balance atBeginning of Period |       | Additions/Charges toCosts and Expenses |   | Write-offs net ofrecoveries (a) |  |   | Balance atend of Period
|For the year ended December 31, 2004                   |  |                               |       |                                        |   |                                 |  |   |                         |   |  |   |      
|Allowance for credits and doubtful accounts receivable |  | $                             | 1,798 |                                        | $ | 4,918                           |  | $ | (2,230                  | ) |  | $ | 4,486
|For the year ended December 31, 2003                   |  |                               |       |                                        |   |                                 |  |   |                         |   |  |   |      
|Allowance for doubtful accounts receivable             |  |                               | 2,284 |                                        |   | 2,290                           |  |   | (2,776                  | ) |  |   | 1,798
|For the year ended December 31, 2002                   |  |                               |       |                                        |   |                                 |  |   |                         |   |  |   |      
|Allowance for doubtful accounts receivable             |  |                               | 1,943 |                                        |   | 3,481                           |  |   | (3,140                  | ) |  |   | 2,284

---

|(a) | Current year write-offs include bad debts associated with both prior year and current year sales. Recoveries were $0.7 million, $1.0 million, and $0.8 million in the years ended
December 31, 2004, 2003, and 2002, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



InventoriesInventories consist primarily of electronic equipment and are valued at the lower of cost or market. Cost is determined on the first-in, first-out basis.



Property and EquipmentProperty and equipment are stated at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets. Sound and music equipment installed at client premises under contracts to provide music programming services is transferred from inventory to property and equipment at cost plus an allocation of
installation costs and is amortized over 5 years. The Company capitalizes labor by identifying the labor hours charged to installations of equipment provided to subscribers for receipt of the Companys voice or audio architecture products. If a
client contract terminates early, the Company records a charge to reflect the write-off of the unamortized capitalized installation labor. The Company retrieves the equipment from the client location to be re-used at another client location.



Intangible AssetsEffective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This standard changed the accounting for goodwill and certain other intangible assets other than
goodwill and requires at least an annual test for impairment of goodwill and intangibles with indefinite lives. As of December 31, 2004 and 2003, the Companys valuation based on discounted cash flows exceeded its carrying value, including
goodwill. Note 4 provides additional information concerning goodwill and other identifiable intangible assets.



Identifiable intangible assets with finite lives continue to be amortized on a straight-line basis over their estimated useful lives and are reviewed for
impairment whenever events or circumstances indicated that their carrying amount may not be recoverable.



Deferred Subscriber Acquisition Costs, netSubscriber acquisition costs are direct sales commissions incurred in connection with acquiring new
subscribers. Because we obtain recurring contracts from new subscribers, these subscriber acquisition costs are capitalized and are amortized as a component of selling, general, and administrative expenses over the life of the client contract on a
straight-line basis. Accumulated amortization totaled $61.7 million and $45.9 million as of December 31, 2004, and 2003, respectively. If a client contract terminates early, the unamortized subscriber acquisition cost is typically recovered from the
salesperson. Any remaining subscriber acquisition costs are reduced to reflect the termination of the client contract.



Other Assets, NetOther assets, net consist primarily of deferred financing costs. Deferred financing costs are charged to interest expense
over the term of the related agreements.



Advance
BillingsThe Company invoices certain clients in advance for contracted music and other business services. Amounts received in advance of the service period are deferred and recognized as revenue in the period services are provided.



Income TaxesThe Company is a Limited Liability
Company that is treated as a partnership for income tax purposes. No provision for income taxes is required by the Company, as its income and expenses are taxable to or deductible by its members. The Companys corporate subsidiaries are subject
to income taxes and account for deferred income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities.



Revenue
RecognitionRevenues from music and other business services are recognized during the period the service is provided based upon the contract terms. Revenues for equipment sales of sound systems and other non-music related equipment are
recognized upon installation. All revenues are reported net of credits and allowances. Contracts are typically for a five-year non-cancelable period with renewal options for an additional five years. Fees received for services to franchisees are
recognized as revenues in the month services are provided. During 2004, 2003, and 2002, 5%, 4%, and 4%, respectively, of our revenues were generated from fees from our franchisees. There are 123 independent franchisees owned by 54 individuals or
companies. All domestic franchisee territories have been assigned for at least 20 years and the average franchisee relationship is approximately 20 years. There have been no significant changes to the franchisee territories during 2004, 2003, or
2002.



F-7



---

Derivative Financial InstrumentsThe Company uses derivative financial instruments from time
to time to mitigate its interest costs.



In August 2003, the
Company entered into an interest rate swap agreement to mitigate its interest costs associated with its Senior Notes. The swap agreement was recognized on the balance sheet at its fair value. Because the swap was not designated as a hedge under SFAS
133, changes in the fair value of the swap were recorded as an adjustment to interest expense. The swap agreement matured in November 2004.



During 2002, the Company had an interest rate swap agreement to exchange floating rate date to fixed rate debt and during 2001 had an interest rate cap to
protect the Company against LIBOR increases as required by our previous Senior Credit Facility. The interest rate swap was recognized on the balance sheet at its fair value and was 100% effective for exposures to interest rate fluctuations. The
Company designated the interest rate swap as a hedge under SFAS 133 and, as a result of the 100% effectiveness of the hedge, changes in the fair value of the derivative were recorded each period in other comprehensive loss during the period the swap
was outstanding. The Company amortized the premium paid for the interest rate cap over the life of the agreement using the caplets approach. No amounts were received under the interest rate cap. This swap agreement was terminated effective May 20,
2003.



|2. | Restatement
|-- | -----------



In preparing the 2004 year end financial statements, the Company discovered an error pertaining to revenue and accounts receivable cutoff procedures
dating back to the time of the merger of Audio Communications Network and Muzak Limited Partnership in March 1999. The errors in cut-off related to both our billings for recurring revenue services and equipment and labor revenues. The cutoff error
resulted from recording revenues in advance of the period earned. The error relating to recurring services revenue also resulted in an overstatement of amounts payable to franchisees for billings performed on their behalf. As such, the Company has
restated its 2003 and 2002 financial statements to recognize revenue in the year earned as well as to restate accounts receivable and related payables to franchisees.



During the 2004 year end closing process, the Company reconsidered the financial reporting related to its accounting for the
redeemable Class A common units (Purchased Class A units) issued in conjunction with the private placement of preferred units in October 2000. Because the holders of the preferred units have the option to cause the Company to redeem all
or any portion of the Purchased Class A units upon a change of control, the Company believes that the Purchased Class A units should be presented in mezzanine equity and not permanent equity. As such, the Company has revised the classification of
the Purchased Class A units in the consolidated balance sheet as of December 31, 2003 and the consolidated statement of members deficiency as of December 31, 2002 and 2001. The reduction to Class A units in the Statement of Members
Deficiency as of December 31, 2003 as a result of this reclassification was $7.8 million. In addition, neither our preferred units nor purchased Class A units meet the definition of a mandatorily redeemable financial instrument in accordance with
Statement on Financial Accounting Standards No. 150,  Accounting for Certain Financial Instruments with Characteristics of Both liabilities and Equity as there is no unconditional obligation to redeem the instruments at a specified or
determinable date. As such, we have corrected the description of our preferred units from mandatorily redeemable units to redeemable preferred units.



The following tables present the impact of the restatement described above as well as the change in classification of the redeemable Purchased Class A
units.



|                                   |  |                   |          |   |            |   |        |             |  |   |          |  
|---------------------------------- |  | ----------------- | -------- | - | ---------- | - | ------ | ----------- |  | - | -------- | -
|                                   |  | December 31, 2003 |         
|                                   |  | As reported       |          |   | Adjustment |   |        | As restated | 
|Balance Sheet                      |  |                   |          |   |            |   |        |             |  |   |          |  
|Current Assets:                    |  |                   |          |   |            |   |        |             |  |   |          |  
|Accounts receivable, net           |  | $                 | 29,579   |   |            | $ | (4,383 | )           |  | $ | 25,196   |  
|Inventory                          |  |                   | 15,016   |   |            |   | (275   | )           |  |   | 14,741   |  
|Current Liabilities:               |  |                   |          |   |            |   |        |             |  |   |          |  
|Accrued expenses                   |  |                   | 21,311   |   |            |   | (875   | )           |  |   | 20,436   |  
|                                   |  |                   |         
|Redeemable Purchased Class A units |  |                   |         |   |            |   | 7,788  |             |  |   | 7,788    |  
|Members interest (deficiency)     |  |                   |          |   |            |   |        |             |  |   |          |  
|Class A units                      |  |                   | 96,688   |   |            |   | (7,788 | )           |  |   | 88,900   |  
|Accumulated deficit                |  |                   | (204,760 | ) |            |   | (3,783 | )           |  |   | (208,543 | )



F-8



---

|                                          |  |                              |         |   |                              |   |      |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|----------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ---- | ----------- |  | - | ----------- | - |  | ---------- | ------- | - | ----------- | - | --- | - |  | - | ------- | -
|                                          |  | Year ended December 31, 2003 |         |   | Year ended December 31, 2002 |  
|                                          |  | As reported                  |         |   | Adjustment                   |   |      | As restated |  |   | As reported |   |  | Adjustment |         |   | As restated |  
|Statement of Operations                   |  |                              |         |   |                              |   |      |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|Revenues:                                 |  |                              |         |   |                              |   |      |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|Music and other business services revenue |  | $                            | 175,049 |   |                              | $ | (104 | )           |  | $ | 174,945     |   |  | $          | 162,999 |   |             | $ | (14 | ) |  | $ | 162,985 |  
|Equipment and related services revenue    |  |                              | 60,187  |   |                              |   | (118 | )           |  |   | 60,069      |   |  |            | 54,757  |   |             |   | (25 | ) |  |   | 54,732  |  
|                                          |  |                              |         |   |                              |  
|Cost of Revenues:                         |  |                              |         |   |                              |   |      |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|Equipment and related services            |  |                              | 50,109  |   |                              |   | (27  | )           |  |   | 50,082      |   |  |            | 43,754  |   |             |   |    |   |  |   | 43,754  |  
|Net loss                                  |  |                              | (34,617 | ) |                              |   | (195 | )           |  |   | (34,812     | ) |  |            | (37,982 | ) |             |   | (39 | ) |  |   | (38,021 | )



|                              |  |                              |         |   |                              |   |       |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|----------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ----- | ----------- |  | - | ----------- | - |  | ---------- | ------- | - | ----------- | - | --- | - |  | - | ------- | -
|                              |  | Year ended December 31, 2003 |         |   | Year ended December 31, 2002 |  
|                              |  | As reported                  |         |   | Adjustment                   |   |       | As restated |  |   | As reported |   |  | Adjustment |         |   | As restated |  
|Statement of Cash Flows       |  |                              |         |   |                              |   |       |             |  |   |             |   |  |            |         |   |             |   |     |   |  |   |         |  
|Net loss                      |  | $                            | (34,617 | ) |                              | $ | (195  | )           |  | $ | (34,812     | ) |  | $          | (37,982 | ) |             | $ | (39 | ) |  | $ | (38,021 | )
|Change in Accounts receivable |  |                              | (3,048  | ) |                              |   | 1,164 |             |  |   | (1,884      | ) |  |            | (2,218  | ) |             |   | (23 | ) |  |   | (2,241  | )
|Change in Inventory           |  |                              | (3,615  | ) |                              |   | (27   | )           |  |   | (3,642      | ) |  |            |         |   |             |   |     |   |  |   |         |  
|Change in accrued expenses    |  |                              | 3,427   |   |                              |   | (942  | )           |  |   | 2,485       |   |  |            | (2,375  | ) |             |   | 62  |   |  |   | (2,313  | )



|3. | Property and Equipment
|-- | ----------------------



Property and equipment consist of the following (in thousands):



|                                  |  |                   |  |                  |          |   |                  |   |          |  
|--------------------------------- |  | ----------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                  |  | Usefullife(Years) |  | December 31,2004 |          |   | December 31,2003 |  
|Equipment provided to subscribers |  | 5                 |  | $                | 179,322  |   |                  | $ | 161,275  |  
|Capitalized installation labor    |  | 5                 |  |                  | 88,549   |   |                  |   | 76,900   |  
|Equipment                         |  | 47               |  |                  | 35,350   |   |                  |   | 29,875   |  
|Other                             |  | 330              |  |                  | 21,231   |   |                  |   | 20,478   |  
|                                  |  |                   |  |                  |          |   |                  |   |          |  
|                                  |  |                   |  |                  | 324,452  |   |                  |   | 288,528  |  
|Less accumulated depreciation     |  |                   |  |                  | (223,755 | ) |                  |   | (179,937 | )
|                                  |  |                   |  |                  |          |   |                  |   |          |  
|                                  |  |                   |  | $                | 100,697  |   |                  | $ | 108,591  |  
|                                  |  |                   |  |                  |          |   |                  |   |          |  



Included in equipment
and other at December 31, 2004 and 2003 is $17.1 million and $15.0 million, respectively of equipment under capital leases, gross of accumulated amortization of $12.1 million and $10.3 million, respectively. Depreciation of property and equipment
was $44.7 million, $44.9 million, and $46.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.



|4. | Intangible Assets
|-- | -----------------



Unamortized intangible assets consist of the following (in thousands):



|         |  |                                  |         |                                  |   |        
|-------- |  | -------------------------------- | ------- | -------------------------------- | - | -------
|         |  | December 31, 2004Carrying Amount |         | December 31, 2003Carrying Amount
|Goodwill |  | $                                | 140,805 |                                  | $ | 140,805



F-9



---

Amortized intangible assets consist of the following (in thousands):



|                           |  |                    |  |                      |         |                         |                   |         |                      |  |                         |         |  |   |         |  
|-------------------------- |  | ------------------ |  | -------------------- | ------- | ----------------------- | ----------------- | ------- | -------------------- |  | ----------------------- | ------- |  | - | ------- | -
|                           |  |                    |  | December 31, 2004    |         |                         | December 31, 2003 |        
|                           |  | Useful Life(years) |  | Gross CarryingAmount |         | AccumulatedAmortization |                   |         | Gross CarryingAmount |  | AccumulatedAmortization |        
|Income producing contracts |  | 12                 |  | $                    | 153,900 |                         | $                 | (72,267 | )                    |  | $                       | 153,900 |  | $ | (59,442 | )
|License agreements         |  | 20                 |  |                      | 5,082   |                         |                   | (1,461  | )                    |  |                         | 5,082   |  |   | (1,207  | )
|Deferred production costs  |  | 10                 |  |                      |        |                         |                   |        |                      |  |                         | 7,354   |  |   | (1,901  | )
|Trademarks                 |  | 5                  |  |                      | 15,245  |                         |                   | (15,091 | )                    |  |                         | 15,184  |  |   | (14,274 | )
|Non-compete agreements     |  | 35                |  |                      | 275     |                         |                   | (271    | )                    |  |                         | 541     |  |   | (445    | )
|Other                      |  | 20                 |  |                      | 10,831  |                         |                   | (3,036  | )                    |  |                         | 10,831  |  |   | (2,494  | )
|                           |  |                    |  |                      |         |                         |                   |         |                      |  |                         |         |  |   |         |  
|                           |  |                    |  | $                    | 185,333 |                         | $                 | (92,126 | )                    |  | $                       | 192,892 |  | $ | (79,763 | )
|                           |  |                    |  |                      |         |                         |                   |         |                      |  |                         |         |  |   |         |  



The Company recorded a
$6.5 million impairment of its deferred production costs during the fourth quarter of 2004. Historically, deferred production costs were incurred to create master music programs for future distribution to the Companys clients. During the
fourth quarter of 2004, the Company achieved technological enhancements in the processes for creating and distributing many of its core music programs. As a result of these technological enhancements, the use of master recordings in the music
creation and delivery process has been substantially eliminated.



Aggregate amortization expense was $15.4 million, $18.5 million, and $23.2 million for the years ended December 31, 2004, 2003, and 2002, respectively.



The estimated future amortization expense based on intangible assets existing as of December 31, 2004 is as follows (in thousands):



|                   |  |   |       
|------------------ |  | - | ------
|Fiscal Year Ending |  |  
|2005               |  | $ | 14,603
|2006               |  |   | 14,552
|2007               |  |   | 14,526
|2008               |  |   | 14,518
|2009               |  |   | 14,429



|5. | Accrued Expenses
|-- | ----------------



Accrued expenses are summarized below (in thousands):



|                                  |  |                  |        |                  |   |       
|--------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                  |  | December 31,2004 |        | December 31,2003
|                                  |  |                  |        | Restated        
|Accrued interest                  |  | $                | 7,563  |                  | $ | 6,292 
|Accrued compensation and benefits |  |                  | 2,263  |                  |   | 2,347 
|Licensing royalties               |  |                  | 5,034  |                  |   | 3,818 
|Amounts payable to franchisees    |  |                  | 2,917  |                  |   | 1,872 
|Other                             |  |                  | 7,348  |                  |   | 6,107 
|                                  |  |                  |        |                  |   |       
|                                  |  | $                | 25,125 |                  | $ | 20,436
|                                  |  |                  |        |                  |   |       



Licensing royalties
include approximately $1.6 million of royalties due to Broadcast Music, Inc. (BMI) as a result of the new licensing agreement between the Company and BMI. Such additional royalties, which covered the period July 1, 2004 through December
31, 2004, were paid in January 2005. Amounts payable to franchisees are comprised of billings to national clients on behalf of our franchisees.



F-10



---

|6. | Debt
|-- | ----



Debt obligations consist of the following (in thousands):



|                                      |  |                  |         |   |                  |   |         |  
|------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                      |  | December 31,2004 |         |   | December 31,2003 |  
|Long term debt:                       |  |                  |         |   |                  |   |         |  
|Revolving loanSenior credit facility |  | $                | 34,000  |   |                  | $ | 20,000  |  
|Term Loan BSenior credit facility    |  |                  | 35,000  |   |                  |   |        |  
|Senior notes                          |  |                  | 219,125 |   |                  |   | 218,962 |  
|Senior subordinated notes             |  |                  | 115,000 |   |                  |   | 115,000 |  
|Senior discount notes                 |  |                  | 24,245  |   |                  |   | 55,496  |  
|Other                                 |  |                  | 1,967   |   |                  |   | 2,060   |  
|                                      |  |                  |         |   |                  |   |         |  
|Total debt obligations                |  |                  | 429,337 |   |                  |   | 411,518 |  
|Less: current maturities              |  |                  | (101    | ) |                  |   | (94     | )
|                                      |  |                  |         |   |                  |   |         |  
|                                      |  | $                | 429,236 |   |                  | $ | 411,424 |  
|                                      |  |                  |         |   |                  |   |         |  



May 2003 Senior Credit Facility



On November 9, 2004, the Company amended the following
aspects of its then existing Senior Credit Facility: (i) amended financial covenants for the third quarter of 2004 and prospectively to make such covenants less restrictive (ii) revised the maturity dates of the revolver and its $35.0 million term
loan facility (Term Loan B) to May 2007 and November 2007, respectively, (iii) increased Term Loan B margins to 4.25% in the case of Eurodollar loans and 3.25% in the case of Base Rate Loans (iv) amended the definition of consolidated
EBITDA to exclude up to $1.9 million in restructuring charges, and (v) reduced the revolving commitment from $60.0 million to $55.0 million. We incurred approximately $0.2 million in financing fees in connection with this amendment. The fees are
included in Deferred charges and other assets, net on the balance sheet. In addition, the Company recorded a loss on extinguishment of debt of $0.2 million, which was comprised of the write off of deferred financing fees associated with the
reduction in revolving commitment.



On May 10, 2004, the
Company amended its then existing Senior Credit Facility to include a Term Loan B in the amount of $35.0 million payable in quarterly installments beginning June 30, 2006 until final maturity on November 21, 2007, as amended. The proceeds of the
term loan were used to repurchase $32.7 million in aggregate outstanding principal amount of the Companys 13% Senior Discount Notes due 2010 and to pay associated interest and expenses. The Company recorded a loss on extinguishment of debt of
$1.7 million in connection with this transaction. The loss on extinguishment of debt is comprised of $1.0 million premium paid on the repurchase and $0.7 million write off of deferred financing fees. We incurred financing fees of $1.4 million in
connection with this transaction, $1.1 million of which were paid during the year ended December 31, 2004. The fees are included in Deferred charges and other assets, net, on the balance sheet. In conjunction with this transaction, on March 10,
2004, the Company received a consent from its Senior Credit Facility lenders to incur this additional indebtedness.



On March 9, 2004, the Company received a waiver of and amended certain of its financial covenants under the then existing Senior Credit Facility to
reflect the financial impact of the 2003 Telstar 4 satellite disruption as well as the disposition of the closed circuit television product line (CCTV) (See Note 13 for more disclosure on this disposition). In conjunction with the
amendment, the Company incurred $0.1 million in fees. These fees are included within Deferred charges and other assets, net on the balance sheet.



As of December 31, 2004, the Company had $34.0 million outstanding under its revolver and $2.6 million outstanding letters of credit.



The then existing Senior Credit facility, as amended, is guaranteed by
certain of our direct and indirect subsidiaries and is secured by a first priority security interest in (i) substantially all of our tangible and intangible assets and (ii) our capital stock and the capital stock of our subsidiaries. The
non-guarantor subsidiary is minor and the consolidated amounts in the Companys financial statements are representative of the combined guarantors financial statements. The Senior Credit Facility, as amended, contains restrictive
covenants including the maintenance of interest, total leverage, and fixed charge ratios and various other restrictive covenants, which are customary for such facilities. In addition, the Company is generally prohibited from incurring additional
indebtedness, incurring liens, paying dividends or making other restricted payments, consummating asset sales, entering into transactions with affiliates, merging or consolidating with any other person or selling, assigning, transferring, leasing,
conveying, or otherwise disposing of assets. The Company was in compliance with all covenants as of December 31, 2004.



Indebtedness under the revolver bears interest at a per annum rate equal to the Companys choice of (i) Base Rate (which is the highest of prime rate
and the Federal Funds Rate plus .5%) plus a margin ranging from 2.00% to 2.75% or (ii) the offered rates for



F-11



---

Eurodollar deposits (LIBOR) of one, two, three, six, nine, or twelve months, as selected by the Company, plus a margin ranging from 3.25% to
4.00%. The margins are subject to adjustment based on changes in the Companys ratio of consolidated total debt to EBITDA (i.e, earnings before interest, taxes, depreciation and amortization and certain other charges as defined in the
agreement). As of December 31, 2004, the average interest rate on the revolver was 6.34%. Indebtedness under the Term Loan B bears interest at a per annum rate equal to the Companys choice of (i) the Base Rate (as described above) plus a
margin of 3.25% or (ii) LIBOR of one, two, three, six, nine, or twelve months, as selected by the Company, plus a margin of 4.25%. As of December 31, 2004, the interest rate on the Term Loan B was 6.51%.



Senior Notes



On May 20, 2003, Muzak LLC together with its wholly owned subsidiary, Muzak Finance Corp., has $220.0 million in principal
amount of 10% Senior Notes which mature on February 15, 2009. Interest is payable semi-annually, in arrears, on May 15 and November 15 of each year. The Senior Notes are general unsecured obligations of Muzak LLC and Muzak Finance and are
subordinate to existing and future secured debt and are senior to Muzak LLCs existing Senior Subordinated Notes. The Senior Notes are guaranteed by the Company and certain of the Companys direct and indirect subsidiaries (See Note 15).
The indenture governing the Senior Notes prohibits the Company from making certain payments such as dividends and distributions of capital stock; repurchases or redemptions of capital stock, and investments (other than permitted investments) unless
certain conditions are met by the Company. After February 15, 2006, the Company may redeem all or part of the Senior Notes at a redemption price equal to 105.0% of the principal which redemption price declines to 100% of the principal amount in
2008.



Senior Subordinated Notes



Muzak LLC together with its wholly owned subsidiary, Muzak Finance Corp.,
has $115.0 million in principal amount of 97/8% Senior Subordinated Notes (Senior Subordinated Notes)
which mature on March 15, 2009. Interest is payable semi-annually, in arrears, on March 15 and September 15 of each year. The Senior Subordinated Notes are general unsecured obligations of the Muzak LLC and Muzak Finance and are subordinated in
right of payment to all existing and future Senior Indebtedness of the Muzak LLC and Muzak Finance. The Senior Subordinated Notes are guaranteed by the Company and certain of the Companys direct and indirect subsidiaries (See Note 15). The
indenture governing the Senior Subordinated Notes prohibits the Company from making certain payments such as dividends and distributions of capital stock; repurchases or redemptions of capital stock, and investments (other than permitted
investments) unless certain conditions are met by the Company. After March 15, 2004, the Company may redeem all or part of the Senior Subordinated Notes at a redemption price equal to 104.938% of the principal which redemption price declines to 100%
of the principal amount in 2007.



Senior Discount Notes



The Company together with its wholly owned subsidiary Muzak Holdings Finance
Corp. has $24.2 million in principal amount of 13% Senior Discount Notes (the Senior Discount Notes) due March 2010. The Senior Discount Notes were fully accreted as of March 15, 2004 and the first interest payment was made on September
15, 2004. From and after March 15, 2004, interest began accruing at a rate of 13% per annum. Interest is payable semi-annually in arrears on each March 15 and September 15 to holders of record of the Senior Discount Notes at the close of business on
the immediately preceding March 1 and September 1. Muzak Holdings LLC does not have any operations or assets other than its ownership of Muzak LLC. Accordingly, Muzak Holdings LLC is dependent upon distributions from Muzak LLC in order to pay
interest. Muzak LLCs senior credit facility, senior notes, and senior subordinated notes indentures impose restrictions on its ability to make distributions to Muzak Holdings LLC. The senior credit facility, the senior notes, and subordinated
notes indentures permit Muzak LLC to make payments and distributions to Muzak Holdings LLC on and after September 15, 2004 in an amount sufficient to permit Muzak Holdings LLC to make cash interest payments when due, however the senior credit
facility requires that certain financial covenant levels be met in order to make such distributions.



The proceeds of the term loan in May 2004 were used to repurchase $32.7 million in aggregate outstanding principal amount of the Companys 13% Senior
Discount Notes due 2010 and to pay associated interest and expenses. The Company recorded a loss on extinguishment of debt of $1.7 million in connection with this transaction. The loss on extinguishment of debt is comprised of $1.0 million premium
paid on the repurchase and $0.7 million write off of deferred financing fees.



Related Party Notes



In March 2002, Muzak LLC
borrowed an aggregate amount of $10.0 million from MEM Holdings LLC in the form of junior subordinated unsecured notes (the sponsor notes), the proceeds of which were used to repay outstanding revolving loan balances. MEM Holdings is a
company that owns 64.2% of the voting interests in the Company. ABRY Broadcast Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM Holdings.



The sponsor notes accrued interest at 15% per annum from March 2002 through May 20, 2003. These notes and accrued interest,
which collectively totaled $11.9 million as of May 20, 2003, were repaid in conjunction with the private placement of Senior Notes.



F-12



---

Other Debt



The Company assumed $2.4 million of promissory notes in connection with an acquisition in 1999. All of the notes, with the exception of one, aggregating
$1.8 million as of December 31, 2004, bear interest at 9.9% and mature in November 2016. The Company is required to make interest only payments on a monthly basis through October 2006, and principal and interest payments for the remainder of the
term. The note terms are the same for all but one of the notes, which has an outstanding balance of $0.2 million as of December 31, 2004 and bears interest at 8% with principal and interest payments due monthly until maturity in October 2006.



Annual Maturities



Annual maturities of long-term debt obligations are as follows (in
thousands):



|           |  |   |        
|---------- |  | - | -------
|2005       |  | $ | 101    
|2006       |  |   | 110    
|2007       |  |   | 69,118 
|2008       |  |   | 131    
|2009       |  |   | 335,144
|Thereafter |  |   | 25,608 



Total interest paid by
the Company on all indebtedness was $38.9 million, $27.5 million, and $29.0 million for the years ended December 31, 2004, 2003, and 2002, respectively. In addition, during 2003, the Company paid $1.9 million in interest in conjunction with the
repayment of the sponsor note.



Interest Rate Protection Programs



On January 28, 2000, the Company entered into an interest
rate swap agreement in which the Company effectively exchanged $100.0 million of floating rate debt at three month LIBOR for 7.042% fixed rate debt. The interest rate swap agreement terminated on April 19, 2002. The effect of this interest rate
protection agreement on the operating results of the Company was to increase interest expense by $1.6 million for the year ended December 31, 2002.



The Company entered into a three year interest rate cap on April 19, 2002, for which it paid a premium of $0.4 million. The interest rate cap protected
the Company against LIBOR increases above 7.25% and was designated as a hedge of interest rates. An interest rate protection agreement was required by the Companys previous Senior Credit Facility and this interest rate cap was terminated on
May 20, 2003, in conjunction with the repayment of the previous Senior Credit Facility. The Company received $4 thousand in proceeds for the sale of this interest rate cap, and reclassified $368 thousand from other comprehensive loss to earnings.
This charge has been recorded in loss on extinguishment of debt, net for the year ended December 31, 2003.



In August 2003, the Company entered into an interest rate swap agreement in which the Company effectively exchanged $220.0 million of fixed rate debt at
10.0% for six month LIBOR plus 7.95%. The swap agreement, entered into to mitigate its interest costs associated with its Senior Notes, covered an eighteen month period ending November 2004. The swap agreement was recorded at its fair value of $0.1
million in the consolidated balance sheet as of December 31, 2003 and included in prepaid expenses and other assets. Because the swap agreement was not designated as a hedge under Statement of Financial Accounting Standard No. 133, Accounting
for Derivative Instruments and Hedging Activities, (SFAS 133), changes in fair value of the swap were recorded as an adjustment to interest expense. The effect of this interest rate swap agreement was to reduce interest expense by
$0.4 million and $0.7 million during the years ended December 31, 2004 and 2003, respectively.



Fair Value of Financial Instruments



The estimated fair values of the Companys debt as of December 31, 2004 and December 31, 2003 were $ 369.9 million and $418.0 million, respectively. The fair value of the Senior Notes, Senior Subordinated Notes
and the Senior Discount Notes are based upon quoted market price. The fair value of the other long-term debt of the Company approximates the carrying value as it bears interest at variable rates.



The fair value of the interest rate swap was $0.1 million as of December 31,
2003 and the fair value of the interest rate cap was $0.1 million as of December 31, 2002. The fair values of interest rate protection agreements are obtained from dealer quotes, which represents the estimated amount the Company would receive or pay
to terminate agreements taking into consideration current interest rates and creditworthiness of the counter-parties.



F-13



---

|7. | Redeemable Preferred Units
|-- | --------------------------



On October 18, 2000, the Company completed a private placement of 85,000 series A preferred membership units (preferred units) and 5,489 Class
A common units (purchased Class A units) for a total of $85.0 million. The current liquidation value of the preferred units is $163.3 million as of December 31, 2004.



The $85.0 million in proceeds was allocated as follows: (i) $5.5 million to Class A units, and (ii) $77.1 million to the
preferred units, net of commitment fees and transaction costs of $2.4 million. The outstanding preferred units are entitled to receive a preferential return equal to 15% per annum, which accrues and is compounded quarterly, before any distributions
are made with respect to any other common units. The discount between the amount allocated to the preferred units of $77.1 million and the $85.0 million in capital value is being amortized over the period from the date of issuance to October 17,
2011. Due to the absence of retained earnings, the amortization of the discount and the preferential return on the preferred units is being recorded as an adjustment to Class A units.



The Company has the option to redeem the preferred units under the terms of the Securities Purchase Agreement, at any time
after a qualified initial public offering or change of control or after October 18, 2003, in whole or in part, at an amount equal to the unreturned capital contribution of $85.0 million plus accrued preferential returns plus a prepayment premium.
For redemptions upon a qualified initial public offering or change of control, the prepayment premium may be up to 5% of an amount based on the amount distributed in the redemption and for redemptions after October 18, 2003, the prepayment premium
may be up to 6% of such amount.



The holders of the preferred
units have the option to cause the Company to redeem their preferred units under the terms of the Securities Purchase Agreement at any time after October 17, 2011 or upon a change of control. In addition, upon a change of control, the holders of the
preferred units have the option to cause the Company to redeem all or any portion of the purchased Class A Units under the terms of the Securities Purchase Agreement. Pursuant to Statement on Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150), our preferred units and purchased Class A units do not meet the definition of a mandatorily redeemable financial instrument as
there is not an unconditional obligation to redeem the instrument at a specified or determinable date. Accordingly, our preferred units and purchased Class A units are outside the scope of SFAS No. 150 and are not classified as liabilities but are
classified as mezzanine (or temporary) members interest. All of the redemptions at the option of the holders of the preferred units are subject to a prepayment premium of up to 5% based on the amount distributed in the redemption.



For all of the foregoing redemptions, whether at the option of the Company
or the holders of the preferred units, the Company may only make such redemption if it does not violate the terms of any debt agreements of the Company or of which the Company is a guarantor, including the indenture governing the Senior Discount
Notes, the indenture governing the Senior Notes and the Senior Credit Agreement.



On March 8, 2002, the Company entered into the second amendment to the Securities Purchase Agreement which amended the consolidated capital expenditure covenant for 2001 and subsequent years and allowed for an
increase to consolidated operating cash flow for amounts designated by the Company with respect to license fees up to a certain amount. In connection with this amendment, the Company incurred $0.3 million in fees.



The Securities Purchase Agreement contains certain financial covenants
including maintenance of interest, total leverage, adjusted annualized operating cash flow, and maximum consolidated capital expenditures. In addition, the Company is generally prohibited from paying dividends or making other restrictive payments,
certain transactions with affiliates, entering into restrictive agreements, and from consolidating with any other person or selling, assigning, transferring, leasing, conveying or otherwise disposing of assets. These conditions were not satisfied as
of December 31, 2004 as the Company was in violation of unit coverage ratio, leverage ratio, and annualized operating cash flow. The Company has been in default of unit coverage ratio since June 2003, of leverage ratio since December 31, 2003, and
of annualized operating cash flow since June 2004.



As a result
of the default, the preferred units accrue at a preferential return of 17% per annum as long as the default is continuing. The Company is projecting to be out of compliance with the unit coverage ratio (the ratio of consolidated operating cash flow
to the sum of consolidated interest expense plus the aggregate Series A preferred return, as more specifically defined in the Securities Purchase Agreement) and the leverage ratio for the foreseeable future. As a result of non-compliance with unit
coverage ratio and leverage ratio for four consecutive quarters (a Class B and Class A default under the Securities Purchase Agreement, respectively), two of the three preferred unit holders were each entitled to be designated as either a Class B or
Class A Director, although neither party has elected to so designate a Class B or Class A Director. As such, the number of Class B Directors and Class A Directors remains unchanged at six and three directors, respectively. The same two preferred
unit holders will each be entitled to designate a Class A Director until such time as the Company complies with the leverage ratio. If the Company is still in default of the unit coverage ratio at the time that the Company complies with the leverage
coverage ratio, the same two preferred unit holders would each still be entitled to designate a Class B Director. The foregoing defaults do not result in a cross default under the Senior Credit Facility or the indentures governing the Senior Notes,
the Senior Subordinated Notes, and the Senior Discount Notes.



F-14



---

|8. | Restructuring Charges
|-- | ---------------------



Effective August 2004, the Company reorganized into five functional areas: Sales, Operations, Administration, Customer Service, and Product and Marketing.
In conjunction with this realignment, the Company centralized the administrative function and certain aspects of operations at its home office. As a result, the Company recorded $0.8 million of severance and related benefits, for the termination of
approximately 120 employees, in selling, general, and administrative expenses during the year ended December 31, 2004. Accordingly, the following table provides a summary of the accrued liability for severance charges (in thousands):



|                                           |  |                    |      |  
|------------------------------------------ |  | ------------------ | ---- | -
|                                           |  | Employee Severance |     
|Q2 2004 Charges                            |  | $                  | 694  |  
|Cash payments                              |  |                    | (156 | )
|                                           |  |                    |      |  
|Accrued liability as of June 30, 2004      |  | $                  | 538  |  
|                                           |  |                    |      |  
|Q3 2004 Charges                            |  | $                  | 107  |  
|Cash payments                              |  |                    | (461 | )
|                                           |  |                    |      |  
|Accrued liability as of September 30, 2004 |  | $                  | 184  |  
|                                           |  |                    |      |  
|Q4 2004 Charges                            |  |                    |     |  
|Cash payments                              |  |                    | (184 | )
|                                           |  |                    |      |  
|Accrued liability as of December 31, 2004  |  | $                  |     |  



Employee severance-related costs
include the elimination of administrative, sales, operations, and product fulfillment positions.



|9. | Lease Commitments
|-- | -----------------



The Company is the lessee under various long-term operating and capital leases for machinery, equipment, buildings, and vehicles. Capital leases are
recorded within other liabilities and current maturities of other liabilities on the balance sheet. The Company has also entered into various agreements to lease transponders to transmit music programs via direct broadcast satellite. These
agreements range from 2 to 17 years.



At December 31, 2004,
future minimum lease payments under operating and capital leases are as follows (in thousands):



|                      |  |         |       |   |           |   |       
|--------------------- |  | ------- | ----- | - | --------- | - | ------
|Fiscal Year Ending    |  | Capital |       |   | Operating
|2005                  |  | $       | 2,979 |   |           | $ | 9,022 
|2006                  |  |         | 1,619 |   |           |   | 8,372 
|2007                  |  |         | 936   |   |           |   | 7,945 
|2008                  |  |         | 31    |   |           |   | 7,402 
|2009                  |  |         | 3     |   |           |   | 7,045 
|Later Years           |  |         |      |   |           |   | 34,090
|Less Imputed Interest |  |         | (418  | ) |           |   |      
|Less Executory Cost   |  |         | (212  | ) |           |   |      
|                      |  |         |       |   |           |   |       
|                      |  | $       | 4,938 |   |           | $ | 73,876
|                      |  |         |       |   |           |   |       



Rental expense under
operating leases was $10.7 million, $10.4 million, and $10.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.



|10. | Closed Circuit Television Systems Disposition
|--- | ---------------------------------------------



On February 25, 2004, we obtained a Consent and Waiver for the disposition of our closed circuit television systems (CCTV) product line from
the existing lenders of the Senior Credit Facility and on March 1, 2004, sold the related inventory and recurring customer contracts to a third party for $2.0 million in notes receivable. In conjunction with the sale, the Company disposed of
inventory totaling $0.9 million, accounts receivable of $0.2 million, and other assets and liabilities relating to the CCTV product line of $0.9 million, net. The Company did not record a gain or loss on the transaction as the proceeds received
approximated the net assets displaced. Due to a default in payments totaling $1.0 million, the Company determined that the receivable was impaired and recorded a $0.6 million impairment charge to properly reflect the receivable at its estimated fair
market value as of September 30, 2004. On January 20, 2005, the Company received an amended and restated secured promissory note (revised note) from the purchaser of the Companys CCTV product line. The revised note is secured by
the inventory and recurring revenue contracts sold to the purchaser on March 1, 2004 as well as by all inventory and contracts acquired by the purchaser subsequent to the sale. The terms of the revised note of $1.9 million require principal payments
to commence on March 31, 2005 and are payable quarterly thereafter until the note is paid in full on March 31, 2007. Each quarterly principal payment increases in amount such that payments to be



F-15



---

received in 2005, 2006, and 2007 are $0.5 million, $1.1 million, and $0.3 million, respectively. The Company has received the principal payment due March 31,
2005. In addition, on January 20, 2005 the Company received an executed guaranty agreement from a third party of $0.5 million as further security for the note receivable from the purchaser of the CCTV assets. The guaranty will continue in full force
and effect until the purchasers obligations under the amended and restated promissory note are fully paid, performed, and discharged.



|11. | Employee Benefit Plans
|--- | ----------------------



The Company has a 401(k) profit sharing plan, which covers substantially all of its employees. The Company matches 60% of employees contributions to
the plan up to the first 6%. Plan expense was $1.4 million, $1.5 million, and $1.4 million, for the years ended December 31, 2004, 2003 and 2002, respectively.



|12. | Income Taxes
|--- | ------------



The provision (benefit) for income taxes for the Companys corporate subsidiaries is as follows (in thousands):



|                      |  |                            |      |   |                            |   |      |                            |  |   |        |  
|--------------------- |  | -------------------------- | ---- | - | -------------------------- | - | ---- | -------------------------- |  | - | ------ | -
|                      |  | Year EndedDecember 31,2004 |      |   | Year EndedDecember 31,2003 |   |      | Year EndedDecember 31,2002 | 
|Current tax:          |  |                            |      |   |                            |   |      |                            |  |   |        |  
|Federal               |  | $                          | 52   |   |                            | $ | 68   |                            |  | $ |       |  
|State                 |  |                            | 22   |   |                            |   | 266  |                            |  |   | 409    |  
|                      |  |                            |      |   |                            |   |      |                            |  |   |        |  
|                      |  |                            | 74   |   |                            |   | 334  |                            |  |   |       |  
|Deferred tax benefit: |  |                            |      |   |                            |   |      |                            |  |   |        |  
|Federal               |  |                            | (207 | ) |                            |   | (769 | )                          |  |   | (1,138 | )
|State                 |  |                            | (35  | ) |                            |   | (190 | )                          |  |   | (227   | )
|                      |  |                            |      |   |                            |   |      |                            |  |   |        |  
|                      |  |                            | (242 | ) |                            |   | (959 | )                          |  |   | (1,365 | )
|                      |  |                            |      |   |                            |   |      |                            |  |   |        |  
|                      |  | $                          | (168 | ) |                            | $ | (625 | )                          |  | $ | (956   | )



Taxes paid were $0.2
million, $0.3 million, and $0.2 million during the years ended December 31, 2004, 2003, and 2002, respectively. The Companys effective tax rate differs from the statutory federal tax rate for the following reasons:



|                                                                 |  |                            |         |   |                            |   |         |                            |  |   |         |  
|---------------------------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -------------------------- |  | - | ------- | -
|                                                                 |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |   |         | Year EndedDecember 31,2002 | 
|Federal tax benefit of statutory rates                           |  | $                          | (13,407 | ) |                            | $ | (11,982 | )                          |  | $ | (13,239 | )
|State income taxes                                               |  |                            | 78      |   |                            |   | 184     |                            |  |   | (561    | )
|Loss incurred by partnership not subject to corporate income tax |  |                            | 13,161  |   |                            |   | 11,173  |                            |  |   | 12,435  |  
|                                                                 |  |                            |         |   |                            |   |         |                            |  |   |         |  
|                                                                 |  | $                          | (168    | ) |                            | $ | (625    | )                          |  | $ | (1,365  | )
|                                                                 |  |                            |         |   |                            |   |         |                            |  |   |         |  



Deferred tax
liabilities primarily relate to the book tax difference related to income producing contracts acquired in purchase business combinations. Such deferred tax liabilities are reduced over the term of the related income producing contracts. The
components of the net deferred tax asset (liability) at December 31 are as follows (in thousands):



|                                                                     |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                     |  | 2004 |        |   | 2003 |  
|Property and equipment                                               |  | $    | (36    | ) |      | $ | (63    | )
|Intangible assets                                                    |  |      | (1,932 | ) |      |   | (2,344 | )
|Loss Carryforwards                                                   |  |      | 539    |   |      |   | 668    |  
|AMT Credit Carryforwards                                             |  |      | 10     |   |      |   |       |  
|Other                                                                |  |      | 442    |   |      |   | 457    |  
|Valuation allowance                                                  |  |      | (452   | ) |      |   | (389   | )
|                                                                     |  |      |        |   |      |   |        |  
|Net deferred tax liability (included in other long term liabilities) |  | $    | (1,429 | ) |      | $ | (1,671 | )
|                                                                     |  |      |        |   |      |   |        |  



The Company has gross
federal net operating loss carryforwards of $1,390 which will begin to expire in 2019.



F-16



---

|13. | Related Party Transactions
|--- | --------------------------



On May 20, 2003, the Company repaid $10.0 million of junior subordinated unsecured notes (sponsor notes) and related interest to MEM Holdings
with the proceeds from the issuance of 10% Senior Notes. The Company originally borrowed this $10.0 million in sponsor notes on March 15, 2002.



The Company has a Management and Consulting Services Agreement (Management Agreement) with ABRY Partners, which provides that Muzak will pay a
management fee as defined in the Management Agreement. During 2004, 2003 and 2002, Muzak incurred fees and expenses of $0.3 million, $0.4 million, and $0.4 million, respectively under this agreement. Either ABRY Partners or the Company, with the
approval of the Board of Directors of the Company, may terminate the Management Agreement by prior written notice to the other. In addition, during 2003, the Company incurred fees and expenses of $0.9 million payable to ABRY Partners for services
rendered in connection with the private placement of the Senior Notes and incurred fees of $0.1 million for services rendered for financing efforts during 2002.



|14. | Muzak Holdings Finance Corp.
|--- | ----------------------------



Muzak Holdings Finance Corp. is a co-issuer of the Senior Discount Notes and had no operating activities during 2004, 2003, and 2002.



|15. | Members Deficiency
|--- | -------------------



The Company has issued two classes of equity units: Class A units (Class A units) and Class B units (Class B units) (collectively,
the units). Each class of units represents a fractional part of the membership units of the Company.



Voting Units



The Company has authorized and issued Class A and Class A-1 units. The Company has authorized Class A-2 units, however no Class A-2 units are outstanding
as of December 31, 2004. The Class A-1 and Class A-2 units represent a Class of membership interests in the Company and have the rights and obligations specified in the Companys Fourth Amended and Restated Limited Liability Company Agreement.
Each Class A, A-1 and A-2 unit is entitled to voting rights equal to the percentage that such units represent of the aggregate number of outstanding Class A, Class A-1, and Class A-2 units. Each Class A, Class A-1 and Class A-2 unit accrues a
preferred return annually on the capital value of such unit at a rate of 15% per annum to be paid only upon a change of control. The Company cannot pay distributions (other than tax distributions or distributions related to the mandatorily
redeemable preferred stock) in respect of other classes of securities (including distributions made in connection with a liquidation) until the preferred return and capital values of the Class A, Class A-1, and Class A-2 units are paid to each
holder thereof. In the event any residual value exists after other classes of membership interests receive their respective priorities, holders of Class A, Class A-1, and Class A-2 units are entitled to participate pro rata with other holders of
common units in such residual value. As of December 31, 2004, the Company had 123,494 Class A units outstanding and 8,928 Class A-1 units outstanding.



Non Voting Units



The Class B units are non-voting equity interests in the Company which are divided into four subclasses, Class B-1 units, Class B-2 units, Class B-3
units, and Class B-4 units. Each holder of Class B units is entitled to participate in Last Priority Distributions, if any, provided that Priority Distributions on all voting interests have been paid in full. The Company is authorized to issue Class
B-5 units, however no B-5 units are outstanding as of December 31, 2004. The Class B-1 units, B-2 units, and B-3 units have a vesting period of five years, and the Class B-4 units vest immediately upon issuance. Upon a change in control, as defined,
all of these units become fully vested and exercisable. Class B unit activity is as follows:



|                           |  |           |   |  |           |   |  |           |   |  |           |  |        |  
|-------------------------- |  | --------- | - |  | --------- | - |  | --------- | - |  | --------- |  | ------ | -
|                           |  | Class B-1 |   |  | Class B-2 |   |  | Class B-3 |   |  | Class B-4 |  | Total  |  
|Balance, December 31, 2001 |  | 2,500     |   |  | 2,508     |   |  | 2,516     |   |  | 3,002     |  | 10,526 |  
|Issuances                  |  | 502       |   |  | 508       |   |  | 515       |   |  |          |  | 1,525  |  
|Repurchases                |  | (209      | ) |  | (211      | ) |  | (212      | ) |  |          |  | (632   | )
|                           |  |           |   |  |           |   |  |           |   |  |           |  |        |  
|Balance, December 31, 2002 |  | 2,793     |   |  | 2,805     |   |  | 2,819     |   |  | 3,002     |  | 11,419 |  
|Issuances                  |  | 1,085     |   |  | 1,086     |   |  | 1,086     |   |  |          |  | 3,257  |  
|Repurchases                |  | (46       | ) |  | (46       | ) |  | (47       | ) |  |          |  | (139   | )
|                           |  |           |   |  |           |   |  |           |   |  |           |  |        |  
|Balance, December 31, 2003 |  | 3,832     |   |  | 3,845     |   |  | 3,858     |   |  | 3,002     |  | 14,537 |  
|Issuances                  |  |          |   |  |          |   |  |          |   |  |          |  |       |  
|Repurchases                |  | (154      | ) |  | (154      | ) |  | (153      | ) |  |          |  | (461   | )
|                           |  |           |   |  |           |   |  |           |   |  |           |  |        |  
|Balance, December 31, 2004 |  | 3,678     |   |  | 3,691     |   |  | 3,705     |   |  | 3,002     |  | 14,076 |  
|                           |  |           |   |  |           |   |  |           |   |  |           |  |        |  



F-17



---

Pursuant to the terms of certain individual employment agreements, the Company has provided key employees
with equity units of the Company. In the event of employee termination, the Company retains the right to repurchase unvested units at the original purchase price. Units vest over five years.



|16. | Commitments and Contingencies
|--- | -----------------------------



Indemnification



Muzaks Limited Liability Company Agreement dated as of March 18, 1999, as amended, provides for indemnification of directors and officers, including
advancement of reasonable attorneys fees and other expenses, in connection with all claims, liabilities and expenses arising out of the management of Muzaks affairs. Such indemnification obligations are limited to the extent Muzaks
assets are sufficient to cover such obligations. Muzak carries directors and officers insurance that covers such exposure for indemnification up to certain limits. As of December 31, 2004 and 2003, we had accrued $50,000 to cover indemnification.



Litigation



The industry-wide agreement between business music providers and the
American Society of Composers, Authors, and Publishers (ASCAP) expired in May 1999. The Company has continued to pay ASCAP royalties at the 1999 rates for all periods through December 31, 2004. While the Company began negotiations with
ASCAP in June 1999, ASCAP commenced a rate court proceeding in 2003 to establish a new royalty rate. During the fourth quarter of 2004, the Company and ASCAP pursued further settlement negotiations and advanced their conversations toward reaching a
new five-year music license agreement. The culmination of such efforts has resulted in a recent agreement in principle that will result in more favorable license fees. The Company anticipates that a final license agreement will be executed prior to
the end of the second quarter of 2005. In the interim, payments will be made in accordance with the agreement in principle and the parties will postpone any further activities in the pending rate court proceeding. In addition, in January 2005, the
Company made a payment for settlement of all claims for open audit periods prior to January 1, 2005, and as a result, ASCAP no longer has the right to audit royalty payments made by the Company prior to January 1, 2005. As part of this audit
settlement, the interim license rates for all periods prior to January 1, 2005 are considered final and not subject to any retroactive adjustments.



The industry-wide agreement between business music providers and Broadcast Music, Inc. (BMI) expired in December 1993. Until recently, the
Company was operating under an interim agreement pursuant to which the Company continued to pay royalties at the 1993 rates. As previously disclosed, the Company and BMI reached an agreement in principle in August 2004 on the terms of a new,
five-year music license, and on December 31, 2004 the definitive license was executed. The term of the agreement extends from July 1, 2004 through June 30, 2009, and the agreement provides for an annual license fee of $6.0 million per annum for the
five year period. The fixed license fee of $6.0 million per annum is subject to an annual 8% cap on net subscriber growth. In the event that the Companys subscriber growth exceeds 8% per annum or in the event that the Company was to acquire a
franchisee or a competitor, the license fee would be subject to adjustment. Although the interim license rates for all periods prior to July 1, 2004 are considered final, and as a result, not subject to any retroactive adjustments, BMI has the right
to audit open periods from January 1, 2002 onward.



In the
years ended December 31, 2004 and 2003, the Company incurred expense of $13.6 million and $9.5 million, respectively, in royalties to ASCAP, BMI, SESAC, and the record companies. Although the Company began incurring the incremental royalties
associated with the new BMI agreement in July 2004, these incremental fees were not paid until January 2005. In addition, we reduced our reserve for prior period licensing royalties and related expenses by $1.5 million due to the resolution and
closure of certain audit periods during 2004.



Muzak and CVS
Pharmacy, Inc. are co-defendants in a lawsuit filed by DMX Music, Inc. in Los Angeles County Superior Court on July 25, 2003. DMX Music, Inc. is asserting claims against CVS Pharmacy, Inc. for breach of contract and breach of the covenant of good
faith and fair dealing while asserting claims against Muzak for predatory pricing, unfair business practices, intentional interference with contract, and intentional interference with prospective economic advantage. The case has arisen as a result
of a Request for Proposal prepared by CVS Pharmacy, Inc. in 2001 that solicited bids for music programming. DMX Music, Inc. contends that Muzak improperly entered into two contracts with CVS Pharmacy, Inc. subsequent to such Request for Proposal.
While damages have yet to be definitively alleged, DMX Music, Inc. is seeking an award of no less than $3.0 million for lost profits, treble damages and an injunction prohibiting Muzak from allegedly selling its services below cost. While it is
unable to predict the outcome of this case, Muzak contends that DMX Music. Inc.s assertions, claims, and allegations against Muzak are without merit and is vigorously contesting the same. While the parties participated in mediation in October
of 2004, they were unable to reach a settlement. A trial date is currently set for July 2005.



Muzak and the Company are co-defendants in a lawsuit filed in the U.S. District Court, Northern District of Illinois, Eastern Division, by Sound of Music, Ltd., a former franchisee of Muzak. Sound of Music, Ltd. is
asserting claims against Muzak and the



F-18



---

Company for violation of Federal securities laws, breach of contract and common law fraud. The case has arisen as a result of Sound of Music, Ltd.s
sale of substantially all of its MUZAK® related
assets to Muzak and the Company in 2001. Sound of Music, Ltd. commenced this lawsuit more than three years after the parties consummated the purchase and sale transaction and now contends that it did not receive the total consideration promised and
that the value of certain Class A units of the Company received in consideration for the assets was misrepresented. Sound of Music, Ltd. is seeking damages in excess of $1 million. While it is unable to predict the outcome of this case, the Company
contends that Sound of Music, Ltd.s assertions, claims, and allegations against Muzak and the Company are without merit and is vigorously contesting the same. While discovery in this case has yet to commence, preliminary motions have been
filed.



In March 2004, a jury found against Muzak and another
defendant in Bono vs. Muzak LLC et al and awarded the plaintiff approximately $0.4 million in damages for claims of sexual harassment and battery. In March 2005, the Company and Bono entered into a settlement agreement under which Muzak will pay
$0.7 million, which includes the amounts awarded for compensatory damages as well as the plaintiffs legal fees. The Company expects to pay such settlement during the second and third quarters of 2005.



The Company is subject to various other proceedings in the ordinary course of
its business. Management believes that such proceedings are routine in nature and incidental to the conduct of its business, and that none of such proceedings, if determined adversely to the Company, would have a material adverse effect on the
consolidated financial condition or results of operations of the Company.



Other Commitments



As
of December 31, 2004, the Company has approximately $26.7 million in outstanding capital expenditure commitments covering a four-year period. The Company, as discussed in Note 9 above, is the lessee under various operating and capital leases for
equipment, vehicles, satellite capacity, and buildings.



|17. | Guarantors
|--- | ----------



The following schedules, which reflect the impact of the revenue cut-off restatement which relates solely to Muzak LLC and the revision in classification
of Purchased Class A units which relates solely to Muzak Holdings LLC as described in Note 2, set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X for 2004, 2003 and
2002 for (1) Muzak Holdings, LLC, (2) Muzak LLC, a co-issuer of the Senior Notes and Senior Subordinated Notes, (3) Muzak Finance Corp., a co-issuer of the Senior Notes and the Senior Subordinated Notes and a wholly-owned subsidiary of Muzak LLC,
and (4) on a combined basis, the subsidiary guarantors of the Senior Notes and Senior Subordinated Notes which include MLP Environmental Music, LLC, Business Sound, Inc., BI Acquisition, LLC, Audio Environments, Inc, Background Music Broadcasters,
Inc., Muzak Capital Corporation, Telephone Audio Productions, Inc., Muzak Houston, Inc., Vortex Sound Communications Company, Inc., and Music Incorporated, and a subsidiary that is not a guarantor of the Senior Notes and Senior Subordinated Notes.
The guarantor subsidiaries are direct and indirect wholly-owned subsidiaries of Muzak Holdings, LLC and have fully and unconditionally, jointly and severally, guaranteed the Senior Notes and Senior Subordinated Notes of Muzak LLC and Muzak Finance
Corp. Muzak Holdings, LLC has also fully and unconditionally, jointly and severally, guaranteed the Senior Subordinated Notes. The subsidiary that does not guarantee the Senior Notes and Senior Subordinated Notes represents less than 3% of
consolidated total assets, members interest, revenues, loss before income taxes and cash flow from operating activities. Therefore, the non-guarantor subsidiary information is not separately presented in the tables below but rather is included
in the column labeled Guarantor Subsidiaries.



F-19



---

Condensed Consolidating Balance sheets as of December 31, 2004



(In thousands)



|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|----------------------------------------- |  | ------------------------ | -------- | - | --------------------- | - | ------- | ----------------------------- |  | - | ------------------------------ | - | ------------ | - | ------ | ------------ | - | -------- | - |  | - | -------- | -
|                                          |  | MuzakHoldingsLLC(Parent) |          |   | MuzakLLC (Co- issuer) |   |         | MuzakFinanceCorp (Co- issuer) |  |   | CombinedGuarantorSubsidiaries* |   | Eliminations |   |        | Consolidated |  
|ASSETS                                    |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Current assets:                           |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Cash                                      |  | $                        |         |   |                       | $ | 421     |                               |  | $ |                               |   |              | $ |       |              | $ |         |   |  | $ | 421      |  
|Accounts receivable, net                  |  |                          |         |   |                       |   | 27,575  |                               |  |   |                               |   |              |   | 718    |              |   |         |   |  |   | 28,293   |  
|Inventories                               |  |                          |         |   |                       |   | 17,425  |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 17,425   |  
|Prepaid expenses and other assets         |  |                          |         |   |                       |   | 4,612   |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 4,612    |  
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total current assets                      |  |                          |         |   |                       |   | 50,033  |                               |  |   |                               |   |              |   | 718    |              |   |         |   |  |   | 50,751   |  
|Property and equipment, net               |  |                          |         |   |                       |   | 100,457 |                               |  |   |                               |   |              |   | 240    |              |   |         |   |  |   | 100,697  |  
|Intangible assets, net                    |  |                          |         |   |                       |   | 211,614 |                               |  |   |                               |   |              |   | 22,398 |              |   |         |   |  |   | 234,012  |  
|Deferred charges and other assets, net    |  |                          | 450      |   |                       |   | 60,154  |                               |  |   | 6,819                          |   |              |   | 8      |              |   | (6,819   | ) |  |   | 60,612   |  
|Advances in/due from subsidiaries         |  |                          |         |   |                       |   |         |                               |  |   |                               |   |              |   | 2,665  |              |   | (2,665   | ) |  |   |         |  
|Investment in subsidiary                  |  |                          | (3,579   | ) |                       |   | 21,210  |                               |  |   |                               |   |              |   |       |              |   | (17,631  | ) |  |   |         |  
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total assets                              |  | $                        | (3,129   | ) |                       | $ | 443,468 |                               |  | $ | 6,819                          |   |              | $ | 26,029 |              | $ | (27,115  | ) |  | $ | 446,072  |  
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|                                          |  |                          |          |   |                       |  
|LIABILITIES AND MEMBERS DEFICIENCY       |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Current liabilities:                      |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Accounts payable                          |  | $                        |         |   |                       | $ | 5,937   |                               |  | $ |                               |   |              | $ | 225    |              | $ |         |   |  | $ | 6,162    |  
|Accrued expenses                          |  |                          | 919      |   |                       |   | 23,061  |                               |  |   | 6,062                          |   |              |   | 1,145  |              |   | (6,062   | ) |  |   | 25,125   |  
|Current portion of other liabilities      |  |                          |         |   |                       |   | 3,692   |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 3,692    |  
|Current maturities of long term debt      |  |                          |         |   |                       |   |        |                               |  |   |                               |   |              |   | 101    |              |   |         |   |  |   | 101      |  
|Advance billings                          |  |                          |         |   |                       |   | 966     |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 966      |  
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total current liabilities                 |  |                          | 919      |   |                       |   | 33,656  |                               |  |   | 6,062                          |   |              |   | 1,471  |              |   | (6,062   | ) |  |   | 36,046   |  
|Long-term debt                            |  |                          | 24,245   |   |                       |   | 403,128 |                               |  |   | 334,126                        |   |              |   | 1,863  |              |   | (334,126 | ) |  |   | 429,236  |  
|Other liabilities                         |  |                          |         |   |                       |   | 7,598   |                               |  |   |                               |   |              |   | 1,485  |              |   |         |   |  |   | 9,083    |  
|Advances in/due from subsidiaries         |  |                          |         |   |                       |   | 2,665   |                               |  |   |                               |   |              |   |        |              |   | (2,665   | ) |  |   |         |  
|Redeemable Preferred units                |  |                          | 155,316  |   |                       |   |        |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 155,316  |  
|Redeemable Class A units                  |  |                          | 7,788    |   |                       |   |        |                               |  |   |                               |   |              |   |       |              |   |         |   |  |   | 7,788    |  
|Members deficiency/Shareholder equity    |  |                          | (191,397 | ) |                       |   | (3,579  | )                             |  |   | (333,369                       | ) |              |   | 21,210 |              |   | 315,738  |   |  |   | (191,397 | )
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total liabilities and members deficiency |  | $                        | (3,129   | ) |                       | $ | 443,468 |                               |  | $ | 6,819                          |   |              | $ | 26,029 |              | $ | (27,115  | ) |  | $ | 446,072  |  
|                                          |  |                          |          |   |                       |   |         |                               |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  

---

|* | Also includes a non-guarantor which is considered to be minor as defined by Rule 3-10 of Regulation S-X. minor
|- | ------------------------------------------------------------------------------------------------------------------



F-20



---

Condensed Consolidating Statements of Operations for the Twelve months ended December 31, 2004



(In thousands)



|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | --------------------- | - | ------- | ---------------------------- |  | - | ------------------------------ | - |  | ------------ | ----- | ------------ |  | - | ------ |  | - | ------- | -
|                                                                                  |  | MuzakHoldingsLLC(Parent) |         |   | MuzakLLC (Co- issuer) |   |         | MuzakFinanceCorp (Co-issuer) |  |   | CombinedGuarantorSubsidiaries* |   |  | Eliminations |       | Consolidated | 
|Net Revenues:                                                                     |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Music and other business services                                                 |  | $                        |        |   |                       | $ | 179,074 |                              |  | $ |                               |   |  | $            | 5,323 |              |  | $ |       |  | $ | 184,397 |  
|Equipment and related services                                                    |  |                          |        |   |                       |   | 61,465  |                              |  |   |                               |   |  |              |      |              |  |   |       |  |   | 61,465  |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                       |   | 240,539 |                              |  |   |                               |   |  |              | 5,323 |              |  |   |       |  |   | 245,862 |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Cost of Revenues:                                                                 |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Music and other business services excluding depreciation and amortization expense |  |                          |        |   |                       |   | 33,024  |                              |  |   |                               |   |  |              | 1,834 |              |  |   |       |  |   | 34,858  |  
|Equipment and related services                                                    |  |                          |        |   |                       |   | 56,935  |                              |  |   |                               |   |  |              |      |              |  |   |       |  |   | 56,935  |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                       |   | 89,959  |                              |  |   |                               |   |  |              | 1,834 |              |  |   |       |  |   | 91,793  |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                       |   | 150,580 |                              |  |   |                               |   |  |              | 3,489 |              |  |   |       |  |   | 154,069 |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Selling, general and administrative expenses                                      |  |                          |        |   |                       |   | 87,029  |                              |  |   |                               |   |  |              | 979   |              |  |   |       |  |   | 88,008  |  
|Impairment of deferred production costs                                           |  |                          |        |   |                       |   | 6,578   |                              |  |   |                               |   |  |              |      |              |  |   |       |  |   | 6,578   |  
|Management fee                                                                    |  |                          |        |   |                       |   | (1,065  | )                            |  |   |                               |   |  |              | 1,065 |              |  |   |       |  |   |        |  
|Depreciation and amortization expense                                             |  |                          |        |   |                       |   | 58,064  |                              |  |   |                               |   |  |              | 1,979 |              |  |   |       |  |   | 60,043  |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Loss from operations                                                              |  |                          |        |   |                       |   | (26     | )                            |  |   |                               |   |  |              | (534  | )            |  |   |       |  |   | (560    | )
|Other income (expense):                                                           |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Interest expense                                                                  |  |                          | (4,760  | ) |                       |   | (39,193 | )                            |  |   | (33,356                        | ) |  |              | (195  | )            |  |   | 33,356 |  |   | (44,148 | )
|Other, net                                                                        |  |                          |        |   |                       |   | 256     |                              |  |   |                               |   |  |              | 1     |              |  |   |       |  |   | 257     |  
|Loss from extinguishment of debt, net                                             |  |                          | (1,846  | ) |                       |   |        |                              |  |   |                               |   |  |              |      |              |  |   |       |  |   | (1,846  | )
|Equity in earnings of subsidiary                                                  |  |                          | (39,523 | ) |                       |   | (560    | )                            |  |   |                               |   |  |              |      |              |  |   | 40,083 |  |   |        |  
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Loss before income taxes                                                          |  |                          | (46,129 | ) |                       |   | (39,523 | )                            |  |   | (33,356                        | ) |  |              | (728  | )            |  |   | 73,439 |  |   | (46,297 | )
|Income tax benefit                                                                |  |                          |        |   |                       |   |        |                              |  |   |                               |   |  |              | (168  | )            |  |   |       |  |   | (168    | )
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  
|Net loss                                                                          |  | $                        | (46,129 | ) |                       | $ | (39,523 | )                            |  | $ | (33,356                        | ) |  | $            | (560  | )            |  | $ | 73,439 |  | $ | (46,129 | )
|                                                                                  |  |                          |         |   |                       |   |         |                              |  |   |                                |   |  |              |       |              |  |   |        |  |   |         |  

---

|* | Also includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ---------------------------------------------------------------------------------------------------------------------



|** | Amount excludes the net loss of Muzak Finance Corp (which is a wholly-owned subsidiary of Muzak LLC) as the interest expense recorded by Muzak Finance Corp, which relates solely to
the Senior Notes and Senior Subordinated Notes, is also reflected in Muzak LLCs results of operations due to both of these entities being co-issuers of the Senior Notes and Senior Subordinated Notes. Muzak Finance Corp has no results of
operations other than the interest expense on the Senior Notes and Senior Subordinated Notes.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-21



---

Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2004



(In thousands)



|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------ | ------- | - | -------------------- | - | ------- | --------------------------- |  | ------------------------------ | - |  | ------------ | ------ | ------------ |  | - | - |  | - | ------- | -
|                                                                |  | MuzakHoldingsLLC(Parent) |         |   | MuzakLLC (Co-issuer) |   |         | MuzakFinanceCorp(Co-issuer) |  | CombinedGuarantorSubsidiaries* |   |  | Eliminations |        | Consolidated | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|Net cash provided by operating activities                       |  | $                        | 1,078   |   |                      | $ | 22,116  |                             |  | $                              |  |  | $            | 1,397  |              |  |   |  |  | $ | 24,591  |  
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                           |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|Proceeds from sale of fixed assets                              |  |                          |        |   |                      |   | 126     |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 126     |  
|Capital expenditures for property and equipment and intangibles |  |                          |        |   |                      |   | (38,073 | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (38,073 | )
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|Net cash used in investing activities                           |  |                          |        |   |                      |   | (37,947 | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (37,947 | )
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|Change in book overdraft                                        |  |                          |        |   |                      |   | 317     |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 317     |  
|Repurchase of senior discount notes                             |  |                          | (33,670 | ) |                      |   |        |                             |  |                                |  |  |              |       |              |  |   |  |  |   | (33,670 | )
|Repayments under revolver                                       |  |                          |        |   |                      |   | (4,000  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (4,000  | )
|Borrowings under revolver                                       |  |                          |        |   |                      |   | 18,000  |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 18,000  |  
|Proceeds from issuance of Term Loan B                           |  |                          |        |   |                      |   | 35,000  |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 35,000  |  
|Repayments of capital lease obligations and other debt          |  |                          |        |   |                      |   | (2,754  | )                           |  |                                |  |  |              | (94    | )            |  |   |  |  |   | (2,848  | )
|Payment financing fees                                          |  |                          |        |   |                      |   | (1,306  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (1,306  | )
|Advance to/from subsidiaries                                    |  |                          | 32,592  |   |                      |   | (31,289 | )                           |  |                                |  |  |              | (1,303 | )            |  |   |  |  |   |        |  
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|Net cash provided /(used) in financing activities               |  |                          | (1,078  | ) |                      |   | 13,968  |                             |  |                                |  |  |              | (1,397 | )            |  |   |  |  |   | 11,493  |  
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|NET DECREASE IN CASH                                            |  |                          |        |   |                      |   | (1,863  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (1,863  | )
|CASH, BEGINNING OF PERIOD                                       |  |                          |        |   |                      |   | 2,284   |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 2,284   |  
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  
|CASH, END OF PERIOD                                             |  | $                        |        |   |                      | $ | 421     |                             |  | $                              |  |  | $            |       |              |  | $ |  |  | $ | 421     |  
|                                                                |  |                          |         |   |                      |   |         |                             |  |                                |   |  |              |        |              |  |   |   |  |   |         |  



|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



F-22



---

Condensed Consolidating Balance Sheets as of December 31, 2003 (Restated)



(In thousands)



|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|----------------------------------------------------------- |  | ------------------------ | -------- | - | -------------------- | - | ---------------------------- |  | - | ------------------------------ | - | ------------ | - | ------ | ------------ | - | -------- | - |  | - | -------- | -
|                                                            |  | MuzakHoldingsLLC(Parent) |          |   | MuzakLLC (Co-issuer) |   | MuzakFinanceCorp (Co-issuer) |  |   | CombinedGuarantorSubsidiaries* |   | Eliminations |   |        | Consolidated |  
|ASSETS                                                      |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Current assets:                                             |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Cash                                                        |  | $                        |         |   |                      | $ | 2,284                        |  | $ |                               |   |              | $ |       |              | $ |         |   |  | $ | 2,284    |  
|Accounts receivable, net                                    |  |                          |         |   |                      |   | 24,185                       |  |   |                               |   |              |   | 1,011  |              |   |         |   |  |   | 25,196   |  
|Inventories                                                 |  |                          |         |   |                      |   | 14,741                       |  |   |                               |   |              |   |       |              |   |         |   |  |   | 14,741   |  
|Prepaid expenses and other assets                           |  |                          |         |   |                      |   | 3,974                        |  |   |                               |   |              |   |       |              |   |         |   |  |   | 3,974    |  
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total current assets                                        |  |                          |         |   |                      |   | 45,184                       |  |   |                               |   |              |   | 1,011  |              |   |         |   |  |   | 46,195   |  
|Property and equipment, net                                 |  |                          |         |   |                      |   | 107,876                      |  |   |                               |   |              |   | 715    |              |   |         |   |  |   | 108,591  |  
|Intangible assets, net                                      |  |                          |         |   |                      |   | 230,032                      |  |   |                               |   |              |   | 23,902 |              |   |         |   |  |   | 253,934  |  
|Deferred subscriber acquisition costs and other assets, net |  |                          | 1,306    |   |                      |   | 60,539                       |  |   | 8,485                          |   |              |   | 9      |              |   | (8,485   | ) |  |   | 61,854   |  
|Advances to/from subsidiaries                               |  |                          |         |   |                      |   |                              |  |   |                               |   |              |   | 1,259  |              |   | (1,259   | ) |  |   |         |  
|Investment in subsidiaries                                  |  |                          | 72,026   |   |                      |   | 21,770                       |  |   |                               |   |              |   |       |              |   | (93,796  | ) |  |   |         |  
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total assets                                                |  | $                        | 73,332   |   |                      | $ | 465,401                      |  | $ | 8,485                          |   |              | $ | 26,896 |              | $ | (103,540 | ) |  | $ | 470,574  |  
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|LIABILITIES AND MEMBERS DEFICIENCY                         |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Current liabilities:                                        |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Accounts payable                                            |  | $                        |         |   |                      | $ | 6,281                        |  | $ |                               |   |              | $ | 247    |              | $ |         |   |  | $ | 6,528    |  
|Accrued expenses                                            |  |                          |         |   |                      |   | 19,365                       |  |   | 6,062                          |   |              |   | 1,071  |              |   | (6,062   | ) |  |   | 20,436   |  
|Current maturity of other liabilities                       |  |                          |         |   |                      |   | 3,711                        |  |   |                               |   |              |   |       |              |   |         |   |  |   | 3,711    |  
|Current maturities of long term debt                        |  |                          |         |   |                      |   |                              |  |   |                               |   |              |   | 94     |              |   |         |   |  |   | 94       |  
|Advance billings                                            |  |                          |         |   |                      |   | 1,084                        |  |   |                               |   |              |   |       |              |   |         |   |  |   | 1,084    |  
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total current liabilities                                   |  |                          |         |   |                      |   | 30,441                       |  |   | 6,062                          |   |              |   | 1,412  |              |   | (6,062   | ) |  |   | 31,853   |  
|Long-term debt                                              |  |                          | 55,496   |   |                      |   | 353,962                      |  |   | 333,962                        |   |              |   | 1,966  |              |   | (333,962 | ) |  |   | 411,424  |  
|Other liabilities                                           |  |                          |         |   |                      |   | 7,713                        |  |   |                               |   |              |   | 1,748  |              |   |         |   |  |   | 9,461    |  
|Advances to/from subsidiaries                               |  |                          |         |   |                      |   | 1,259                        |  |   |                               |   |              |   |        |              |   | (1,259   | ) |  |   |         |  
|Redeemable preferred units                                  |  |                          | 129,691  |   |                      |   |                             |  |   |                               |   |              |   |       |              |   |         |   |  |   | 129,691  |  
|Redeemable Class A units                                    |  |                          | 7,788    |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   | 7,788    |  
|Members deficiency /Shareholder equity                     |  |                          | (119,643 | ) |                      |   | 72,026                       |  |   | (331,539                       | ) |              |   | 21,770 |              |   | 237,743  |   |  |   | (119,643 | )
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  
|Total liabilities and members deficiency                   |  | $                        | 73,332   |   |                      | $ | 465,401                      |  | $ | 8,485                          |   |              | $ | 26,896 |              | $ | (103,540 | ) |  | $ | 470,574  |  
|                                                            |  |                          |          |   |                      |   |                              |  |   |                                |   |              |   |        |              |   |          |   |  |   |          |  

---

|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



F-23



---

Condensed Consolidating Statements of Operations for the Year Ended December 31, 2003 (Restated)



(In thousands)



|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | -------------------- | - | ------- | ---------------------------- |  | - | ------------------------------ | - |  | ------------ | ------ | ------------ |  | - | ------ |  | - | ------- | -
|                                                                                  |  | MuzakHoldingsLLC(Parent) |         |   | MuzakLLC (Co-issuer) |   |         | MuzakFinanceCorp (Co-issuer) |  |   | CombinedGuarantorSubsidiaries* |   |  | Eliminations |        | Consolidated | 
|Net Revenues:                                                                     |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Music and other business services                                                 |  | $                        |        |   |                      | $ | 168,930 |                              |  | $ |                               |   |  | $            | 6,015  |              |  | $ |       |  | $ | 174,945 |  
|Equipment and related services                                                    |  |                          |        |   |                      |   | 60,069  |                              |  |   |                               |   |  |              |       |              |  |   |       |  |   | 60,069  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 228,999 |                              |  |   |                               |   |  |              | 6,015  |              |  |   |       |  |   | 235,014 |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Cost of Revenues:                                                                 |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Music and other business services excluding depreciation and amortization expense |  |                          |        |   |                      |   | 30,228  |                              |  |   |                               |   |  |              | 2,057  |              |  |   |       |  |   | 32,285  |  
|Equipment and related services                                                    |  |                          |        |   |                      |   | 50,082  |                              |  |   |                               |   |  |              |       |              |  |   |       |  |   | 50,082  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 80,310  |                              |  |   |                               |   |  |              | 2,057  |              |  |   |       |  |   | 82,367  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 148,689 |                              |  |   |                               |   |  |              | 3,958  |              |  |   |       |  |   | 152,647 |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Selling, general and administrative expenses                                      |  |                          |        |   |                      |   | 79,305  |                              |  |   |                               |   |  |              | 1,312  |              |  |   |       |  |   | 80,617  |  
|Depreciation and amortization expense                                             |  |                          |        |   |                      |   | 61,305  |                              |  |   |                               |   |  |              | 2,416  |              |  |   |       |  |   | 63,721  |  
|Management fee                                                                    |  |                          |        |   |                      |   | (1,203  | )                            |  |   |                               |   |  |              | 1,203  |              |  |   |       |  |   |        |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Income (loss) from operations                                                     |  |                          |        |   |                      |   | 9,282   |                              |  |   |                               |   |  |              | (973   | )            |  |   |       |  |   | 8,309   |  
|Other income (expense):                                                           |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Interest expense                                                                  |  |                          | (7,581  | ) |                      |   | (32,469 | )                            |  |   | (24,893                        | ) |  |              | (203   | )            |  |   | 24,893 |  |   | (40,253 | )
|Other, net                                                                        |  |                          |        |   |                      |   | 213     |                              |  |   |                               |   |  |              | (12    | )            |  |   |       |  |   | 201     |  
|Gain (loss) on extinguishment of debt                                             |  |                          | 1,384   |   |                      |   | (5,078  | )                            |  |   |                               |   |  |              |       |              |  |   |       |  |   | (3,694  | )
|Equity in earnings of subsidiaries**                                              |  |                          | (28,615 | ) |                      |   | (563    | )                            |  |   |                               |   |  |              |       |              |  |   | 29,178 |  |   |        |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Loss before income taxes                                                          |  |                          | (34,812 | ) |                      |   | (28,615 | )                            |  |   | (24,893                        | ) |  |              | (1,188 | )            |  |   | 54,071 |  |   | (35,437 | )
|Income tax benefit                                                                |  |                          |        |   |                      |   |        |                              |  |   |                               |   |  |              | (625   | )            |  |   |       |  |   | (625    | )
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Net loss                                                                          |  | $                        | (34,812 | ) |                      | $ | (28,615 | )                            |  | $ | (24,893                        | ) |  | $            | (563   | )            |  | $ | 54,071 |  | $ | (34,812 | )
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  

---

|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



|** | Amount excludes the net loss of Muzak Finance Corp (which is a wholly-owned subsidiary of Muzak LLC) as the interest expense recorded by Muzak Finance Corp, which relates solely to
the Senior Notes and Senior Subordinated Notes, is also reflected in Muzak LLCs results of operations due to both of these entities being co-issuers of the Senior Notes and Senior Subordinated Notes. Muzak Finance Corp has no results of
operations other than the interest expense on the Senior Notes and Senior Subordinated Notes.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-24



---

Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2003 (Restated)

(In thousands)



|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|--------------------------------------------------------------- |  | ------------------------ | ------- | - | -------------------- | - | -------- | --------------------------- |  | ------------------------------ | - |  | ------------ | ------ | ------------ |  | - | - |  | - | -------- | -
|                                                                |  | MuzakHoldingsLLC(Parent) |         |   | MuzakLLC (Co-issuer) |   |          | MuzakFinanceCorp(Co-issuer) |  | CombinedGuarantorSubsidiaries* |   |  | Eliminations |        | Consolidated | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|Net cash provided by operating activities                       |  | $                        |        |   |                      | $ | 26,049   |                             |  | $                              |  |  | $            | 1,816  |              |  | $ |  |  | $ | 27,865   |  
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                           |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|Proceeds from sale of fixed assets                              |  |                          |        |   |                      |   | 67       |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 67       |  
|Capital expenditures for property and equipment and intangibles |  |                          |        |   |                      |   | (41,556  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (41,556  | )
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|Net cash used in investing activities                           |  |                          |        |   |                      |   | (41,489  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (41,489  | )
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|Change in book overdraft                                        |  |                          |        |   |                      |   | (2,929   | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (2,929   | )
|Borrowings under revolver                                       |  |                          |        |   |                      |   | 24,700   |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 24,700   |  
|Repayment under revolver                                        |  |                          |        |   |                      |   | (31,000  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (31,000  | )
|Repayments of senior credit facility                            |  |                          |        |   |                      |   | (159,514 | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (159,514 | )
|Proceeds from issuance of senior notes                          |  |                          |        |   |                      |   | 218,869  |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 218,869  |  
|Repurchase of senior discount notes                             |  |                          | (14,440 | ) |                      |   |         |                             |  |                                |  |  |              |       |              |  |   |  |  |   | (14,440  | )
|Repayment of note payable to related party                      |  |                          |        |   |                      |   | (10,000  | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (10,000  | )
|Termination of interest rate protection agreement               |  |                          |        |   |                      |   | 4        |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 4        |  
|Repayments of capital lease obligations and other debt          |  |                          |        |   |                      |   | (2,391   | )                           |  |                                |  |  |              | (86    | )            |  |   |  |  |   | (2,477   | )
|Payment of fees associated with financing                       |  |                          |        |   |                      |   | (9,086   | )                           |  |                                |  |  |              |       |              |  |   |  |  |   | (9,086   | )
|Advances to/from subsidiaries                                   |  |                          | 14,440  |   |                      |   | (12,710  | )                           |  |                                |  |  |              | (1,730 | )            |  |   |  |  |   |         |  
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|Net cash provided by/(used in) financing activities             |  |                          |        |   |                      |   | 15,943   |                             |  |                                |  |  |              | (1,816 | )            |  |   |  |  |   | 14,127   |  
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|INCREASE IN CASH                                                |  |                          |        |   |                      |   | 503      |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 503      |  
|CASH, BEGINNING OF PERIOD                                       |  |                          |        |   |                      |   | 1,781    |                             |  |                                |  |  |              |       |              |  |   |  |  |   | 1,781    |  
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  
|CASH, END OF PERIOD                                             |  | $                        |        |   |                      | $ | 2,284    |                             |  | $                              |  |  | $            |       |              |  | $ |  |  | $ | 2,284    |  
|                                                                |  |                          |         |   |                      |   |          |                             |  |                                |   |  |              |        |              |  |   |   |  |   |          |  

---

|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



F-25



---

Condensed Consolidating Statements of Operations for the Year Ended December 31, 2002 (Restated)

(In thousands)



|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | -------------------- | - | ------- | ---------------------------- |  | - | ------------------------------ | - |  | ------------ | ------ | ------------ |  | - | ------ |  | - | ------- | -
|                                                                                  |  | MuzakHoldingsLLC(Parent) |         |   | MuzakLLC (Co-issuer) |   |         | MuzakFinanceCorp.(Co-issuer) |  |   | CombinedGuarantorSubsidiaries* |   |  | Eliminations |        | Consolidated | 
|Net Revenues:                                                                     |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Music and other business services                                                 |  | $                        |        |   |                      | $ | 155,896 |                              |  | $ |                               |   |  | $            | 7,089  |              |  | $ |       |  | $ | 162,985 |  
|Equipment and related services                                                    |  |                          |        |   |                      |   | 54,732  |                              |  |   |                               |   |  |              |       |              |  |   |       |  |   | 54,732  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 210,628 |                              |  |   |                               |   |  |              | 7,089  |              |  |   |       |  |   | 217,717 |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Cost of Revenues:                                                                 |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Music and other business services excluding depreciation and amortization expense |  |                          |        |   |                      |   | 32,090  |                              |  |   |                               |   |  |              | 2,377  |              |  |   |       |  |   | 34,467  |  
|Equipment and related services                                                    |  |                          |        |   |                      |   | 43,754  |                              |  |   |                               |   |  |              |       |              |  |   |       |  |   | 43,754  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 75,844  |                              |  |   |                               |   |  |              | 2,377  |              |  |   |       |  |   | 78,221  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|                                                                                  |  |                          |        |   |                      |   | 134,784 |                              |  |   |                               |   |  |              | 4,712  |              |  |   |       |  |   | 139,496 |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Selling, general and administrative expenses                                      |  |                          |        |   |                      |   | 70,259  |                              |  |   |                               |   |  |              | 1,764  |              |  |   |       |  |   | 72,023  |  
|Management fee                                                                    |  |                          |        |   |                      |   | (1,418  | )                            |  |   |                               |   |  |              | 1,418  |              |  |   |       |  |   |        |  
|Depreciation and amortization expense                                             |  |                          |        |   |                      |   | 65,829  |                              |  |   |                               |   |  |              | 4,280  |              |  |   |       |  |   | 70,109  |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Income (loss) from operations                                                     |  |                          |        |   |                      |   | 114     |                              |  |   |                               |   |  |              | (2,750 | )            |  |   |       |  |   | (2,636  | )
|Other income (expense):                                                           |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Interest expense                                                                  |  |                          | (7,953  | ) |                      |   | (28,370 | )                            |  |   | (11,774                        | ) |  |              | (210   | )            |  |   | 11,774 |  |   | (36,533 | )
|Other, net                                                                        |  |                          |        |   |                      |   | 208     |                              |  |   |                               |   |  |              | (16    | )            |  |   |       |  |   | 192     |  
|Equity in earnings of subsidiaries**                                              |  |                          | (30,068 | ) |                      |   | (2,020  | )                            |  |   |                               |   |  |              |       |              |  |   | 32,088 |  |   |        |  
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Loss before income taxes                                                          |  |                          | (38,021 | ) |                      |   | (30,068 | )                            |  |   | (11,774                        | ) |  |              | (2,976 | )            |  |   | 43,862 |  |   | (38,977 | )
|Income tax benefit                                                                |  |                          |        |   |                      |   |        |                              |  |   |                               |   |  |              | (956   | )            |  |   |       |  |   | (956    | )
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  
|Net loss                                                                          |  | $                        | (38,021 | ) |                      | $ | (30,068 | )                            |  | $ | (11,774                        | ) |  | $            | (2,020 | )            |  | $ | 43,862 |  | $ | (38,021 | )
|                                                                                  |  |                          |         |   |                      |   |         |                              |  |   |                                |   |  |              |        |              |  |   |        |  |   |         |  

---

|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



|** | Amount excludes the net loss of Muzak Finance Corp (which is a wholly-owned subsidiary of Muzak LLC) as the interest expense recorded by Muzak Finance Corp, which relates solely to
the Senior Subordinated Notes, is also reflected in Muzak LLCs results of operations due to both of these entities being co-issuers of the Senior Subordinated Notes. Muzak Finance Corp has no results of operations other than the interest
expense on the Senior Subordinated Notes.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-26



---

Condensed Consolidating Statements of Cash Flows for the Year Ended December 31, 2002 (Restated)

(In thousands)



|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------ | - | -------------------- | - | ------- | --------------------------- |  | ------------------------------ | - |  | ------------ | ---- | ------------------------------------ |  | - | - |  | - | ------- | -
|                                                                |  | MuzakHoldingsLLC(Parent) |   | MuzakLLC (Co-issuer) |   |         | MuzakFinanceCorp(Co-issuer) |  | CombinedGuarantorSubsidiaries* |   |  | Eliminations |      | MuzakHoldingsLLCConsolidated(Parent) | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|Net cash provided by operating activities                       |  | $                        |  |                      | $ | 30,757  |                             |  | $                              |  |  | $            | 832  |                                      |  | $ |  |  | $ | 31,589  |  
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                           |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|Proceeds from sale of fixed assets                              |  |                          |  |                      |   | 41      |                             |  |                                |  |  |              |     |                                      |  |   |  |  |   | 41      |  
|Capital expenditures for property and equipment and intangibles |  |                          |  |                      |   | (38,830 | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (38,830 | )
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|Net cash used in investing activities                           |  |                          |  |                      |   | (38,789 | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (38,789 | )
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|Change in book overdraft                                        |  |                          |  |                      |   | 2,987   |                             |  |                                |  |  |              |     |                                      |  |   |  |  |   | 2,987   |  
|Borrowings under revolver                                       |  |                          |  |                      |   | 15,000  |                             |  |                                |  |  |              |     |                                      |  |   |  |  |   | 15,000  |  
|Repayment under revolver                                        |  |                          |  |                      |   | (10,000 | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (10,000 | )
|Repayments of senior credit facility                            |  |                          |  |                      |   | (6,693  | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (6,693  | )
|Proceeds from issuance of note payable to related party         |  |                          |  |                      |   | 10,000  |                             |  |                                |  |  |              |     |                                      |  |   |  |  |   | 10,000  |  
|Purchase of interest rate protection agreement                  |  |                          |  |                      |   | (372    | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (372    | )
|Repayments of capital lease obligations and other debt          |  |                          |  |                      |   | (2,520  | )                           |  |                                |  |  |              | (80  | )                                    |  |   |  |  |   | (2,600  | )
|Payment of fees associated with financing                       |  |                          |  |                      |   | (1,924  | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (1,924  | )
|Advances to/from subsidiaries                                   |  |                          |  |                      |   | 752     |                             |  |                                |  |  |              | (752 | )                                    |  |   |  |  |   |        |  
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|Net cash provided by/(used in) financing activities             |  |                          |  |                      |   | 7,230   |                             |  |                                |  |  |              | (832 | )                                    |  |   |  |  |   | 6,398   |  
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|DECREASE IN CASH                                                |  |                          |  |                      |   | (802    | )                           |  |                                |  |  |              |     |                                      |  |   |  |  |   | (802    | )
|CASH, BEGINNING OF PERIOD                                       |  |                          |  |                      |   | 2,583   |                             |  |                                |  |  |              |     |                                      |  |   |  |  |   | 2,583   |  
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  
|CASH, END OF PERIOD                                             |  | $                        |  |                      | $ | 1,781   |                             |  | $                              |  |  | $            |     |                                      |  | $ |  |  | $ | 1,781   |  
|                                                                |  |                          |   |                      |   |         |                             |  |                                |   |  |              |      |                                      |  |   |   |  |   |         |  

---

|* | Includes a non-guarantor subsidiary which is considered to be minor as defined by Rule 3-10 of Regulation S-X.
|- | ----------------------------------------------------------------------------------------------------------------



F-27



---

|18. | Quarterly Financial Data (Unaudited): (In Thousands)
|--- | ----------------------------------------------------



As discussed in Note 2, while preparing the 2004 year-end financial statements and supporting schedules, an error was discovered pertaining to revenue and accounts
receivable cutoff procedures. The tables below reflect the correction of this error. Additionally, the Company has restated its 2004 quarterly information to reflect adjustments identified during the year end closing process primarily as a result of
refinement of the methodologies for the capitalization of subscriber acquisition costs and labor associated with the installation of equipment provided to subscribers.



The quarterly data below is based on the Companys fiscal periods.



|                                                              |  |              |        |   |               |   |         |              |  |   |               |   |  |   |         |  
|------------------------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|                                                              |  | Fiscal 2004  |       
|                                                              |  | FirstQuarter |        |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|                                                              |  | Restated     |        |   | Restated      |   |         | Restated     |  |   |               |  
|Net revenue                                                   |  | $            | 59,790 |   |               | $ | 59,955  |              |  | $ | 62,515        |   |  | $ | 63,602  |  
|Cost of revenues, excluding depreciation and amortization (a) |  |              | 21,833 |   |               |   | 21,272  |              |  |   | 24,290        |   |  |   | 24,398  |  
|Income (loss) from operations (b) (c)                         |  |              | 1,187  |   |               |   | 2,115   |              |  |   | 1,095         |   |  |   | (4,957  | )
|Net loss (d)                                                  |  |              | (9,393 | ) |               |   | (10,839 | )            |  |   | (9,785        | ) |  |   | (16,112 | )



|                                                              |  |                      |        |   |               |   |         |              |  |   |               |   |  |   |        |  
|------------------------------------------------------------- |  | -------------------- | ------ | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------ | -
|                                                              |  | Fiscal 2003 Restated |       
|                                                              |  | FirstQuarter         |        |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|Net revenue                                                   |  | $                    | 56,403 |   |               | $ | 57,596  |              |  | $ | 59,333        |   |  | $ | 61,682 |  
|Cost of revenues, excluding depreciation and amortization (a) |  |                      | 19,019 |   |               |   | 19,895  |              |  |   | 20,255        |   |  |   | 23,198 |  
|Income (loss) from operations (b) (c)                         |  |                      | (101   | ) |               |   | 2,828   |              |  |   | 3,702         |   |  |   | 1,880  |  
|Net loss (d)                                                  |  |                      | (8,479 | ) |               |   | (10,810 | )            |  |   | (6,557        | ) |  |   | (8,966 | )



|(a) | The third and fourth quarters of 2004 include incremental expenses of $0.8 million relating to the new BMI agreement. Additionally, the fourth quarter of 2004 includes a $1.5
million reduction in reserves for prior period licensing royalties due to resolution and closure of certain audit periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The second, third, and fourth quarters of 2004 include $0.8, $0.9 million, and $0.1 million, respectively, of charges associated with severance and other termination benefits,
relocation costs, duplicate salaries, and temporary facility requirements relating to the Companys centralization of administrative and certain aspects of operational functions. The third quarter of 2004 includes $0.6 million impairment of a
receivable from the purchaser of the Companys CCTV inventory and recurring contracts.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | The fourth quarter of 2004 includes a $6.5 million impairment of deferred production costs.
|--- | -------------------------------------------------------------------------------------------



|(d) | The second and fourth quarters of 2004 include $1.7 million and $0.2 million, respectively, of losses on extinguishment of debt related to the repurchase of a portion of the Senior
Discount notes and the $5.0 million reduction in revolver commitment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | The fourth quarter of 2003 includes the financial impact of the lost revenues and additional costs related to the satellite disruption of approximately $0.9 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) | The second quarter of 2003 includes $3.7 million loss on extinguishment of debt related to the write-off of financing fees associated with the Companys refinanced Senior
Credit Facility offset by a gain on the repurchase of a portion of Senior Discount Notes.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-28



---

The tables below reconcile the reported amount by quarter for the impact of the restatement described in Note 2.



|                       |  |                             |        |   |                              |   |      |             |  |   |             |   |  |            |         |   |             |   |      |   |  |   |         |  
|---------------------- |  | --------------------------- | ------ | - | ---------------------------- | - | ---- | ----------- |  | - | ----------- | - |  | ---------- | ------- | - | ----------- | - | ---- | - |  | - | ------- | -
|                       |  | Fiscal 2003  First Quarter |        |   | Fiscal 2003  Second Quarter |  
|                       |  | As reported                 |        |   | Adjustment                   |   |      | As Restated |  |   | As reported |   |  | Adjustment |         |   | As Restated |  
|Net revenue            |  | $                           | 56,690 |   |                              | $ | (287 | )           |  | $ | 56,403      |   |  | $          | 57,583  |   |             | $ | 13   |   |  | $ | 57,596  |  
|Cost of revenues       |  |                             | 19,073 |   |                              |   | (54  | )           |  |   | 19,019      |   |  |            | 19,902  |   |             |   | (7   | ) |  |   | 19,895  |  
|Income from operations |  |                             | 132    |   |                              |   | (233 | )           |  |   | (101        | ) |  |            | 2,808   |   |             |   | 20   |   |  |   | 2,828   |  
|Net Loss               |  |                             | (8,246 | ) |                              |   | (233 | )           |  |   | (8,479      | ) |  |            | (10,830 | ) |             |   | 20   |   |  |   | (10,810 | )
|                       |  |                            
|                       |  | Fiscal 2003  Third Quarter |        |   | Fiscal 2003  Fourth Quarter |  
|                       |  | As reported                 |        |   | Adjustment                   |   |      | As Restated |  |   | As reported |   |  | Adjustment |         |   | As Restated |  
|Net revenue            |  | $                           | 59,349 |   |                              | $ | (16  | )           |  | $ | 59,333      |   |  | $          | 61,614  |   |             | $ | 68   |   |  | $ | 61,682  |  
|Cost of revenues       |  |                             | 20,273 |   |                              |   | (18  | )           |  |   | 20,255      |   |  |            | 23,146  |   |             |   | 52   |   |  |   | 23,198  |  
|Income from operations |  |                             | 3,700  |   |                              |   | 2    |             |  |   | 3,702       |   |  |            | 1,864   |   |             |   | 16   |   |  |   | 1,880   |  
|Net Loss               |  |                             | (6,559 | ) |                              |   | 2    |             |  |   | (6,557      | ) |  |            | (8,982  | ) |             |   | 16   |   |  |   | (8,966  | )
|                       |  |                            
|                       |  | Fiscal 2004  First Quarter |        |   | Fiscal 2004  Second Quarter |  
|                       |  | As reported                 |        |   | Adjustment                   |   |      | As Restated |  |   | As reported |   |  | Adjustment |         |   | As Restated |  
|Net revenue            |  | $                           | 60,073 |   |                              | $ | (283 | )           |  | $ | 59,790      |   |  | $          | 60,170  |   |             | $ | (215 | ) |  | $ | 59,955  |  
|Cost of revenues       |  |                             | 21,054 |   |                              |   | 779  |             |  |   | 21,833      |   |  |            | 21,463  |   |             |   | (191 | ) |  |   | 21,272  |  
|Income from operations |  |                             | 1,779  |   |                              |   | (592 | )           |  |   | 1,187       |   |  |            | 2,195   |   |             |   | (80  | ) |  |   | 2,115   |  
|Net Loss               |  |                             | (8,801 | ) |                              |   | (592 | )           |  |   | (9,393      | ) |  |            | (10,759 | ) |             |   | (80  | ) |  |   | (10,839 | )



|                       |  |                             |         |   |            |   |             |  |   |        |  
|---------------------- |  | --------------------------- | ------- | - | ---------- | - | ----------- |  | - | ------ | -
|                       |  | Fiscal 2004  Third Quarter |        
|                       |  | As reported                 |         |   | Adjustment |   | As Restated | 
|Net revenue            |  | $                           | 61,706  |   |            | $ | 809         |  | $ | 62,515 |  
|Cost of revenues       |  |                             | 23,844  |   |            |   | 446         |  |   | 24,290 |  
|Income from operations |  |                             | 562     |   |            |   | 533         |  |   | 1,095  |  
|Net Loss               |  |                             | (10,318 | ) |            |   | 533         |  |   | (9,785 | )



|19. | Subsequent Events
|--- | -----------------



On April 15, 2005, the Company refinanced its then existing Senior Credit Facility with a new $105.0 million senior secured term loan facility (New
Senior Credit Facility). A portion of the proceeds were used to repay the existing outstanding term and revolving loans and associated interest and collateralize outstanding letters of credit under the previous Senior Credit facility, and fees
and expenses. The revolving commitments were also terminated in connection with this transaction. Total cash available, after giving effect to this refinancing and to existing cash balances as of April 15, 2005, was approximately $27.2 million.



F-29