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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A



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



For the fiscal year ended December 31, 2002



Or



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



Commission File Number: 333-78571

333-78571-01



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MUZAK LLC

MUZAK FINANCE CORP

(Exact Name of Registrants as Specified in their charter)

|DELAWARE                                                       |  | 04-3433729                          
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 56-2187963                          
|(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 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



Muzak 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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EXPLANATORY
NOTE



On March 4, 2003, Muzak LLC (the
Company) filed with the Securities and Exchange Commission (the SEC) its Annual Report on Form 10-K for the year ended December 31, 2002 (the Initial 10-K). This Annual Report on Form 10-K/A amends Item 15 of the
Initial 10-K to set forth in Muzak Holdings LLCs NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the condensed consolidating financial information as required by Rule 3-10 of SEC Regulation S-X for the years ended 2002, 2001, and 2000
for certain of the Companys subsidiaries. In addition, this Annual Report on Form 10-K/A reclassifies an extraordinary loss on extinguishment of debt in 2000 to loss from extinguishment on debt for both Muzak LLC and
Muzak Holdings LLC in accordance with the adoption of Statement of Financial Accounting Standards No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.



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PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)(1) Financial Statements:



|                                                                                                                                          |  | Page Number
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|MUZAK LLC                                                                                                                                 |  |            
|Report of Independent Accountants                                                                                                         |  | F-1        
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                                                 |  | F-2        
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000                                                |  | F-3        
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000                                                |  | F-4        
|Consolidated Statements of Changes in Members Interest and Comprehensive Loss for
the years ended December 31, 2002, 2001 and 2000       |  | F-5        
|Notes to Consolidated Financial Statements                                                                                                |  | F-6        
|                                                                                                                                         
|MUZAK HOLDINGS, LLC                                                                                                                       |  |            
|Report of Independent Accountants                                                                                                         |  | F-19       
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                                                 |  | F-20       
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000                                                |  | F-21       
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000                                                |  | F-22       
|Consolidated Statement of Changes in Members Interest and Comprehensive Loss for
the fiscal years ended December 31, 2002, 2001 and 2000 |  | F-23       
|Notes to Consolidated Financial Statements                                                                                                |  | F-24       
|                                                                                                                                         
|(a)(2) Financial Statement Schedules:                                                                                                     |  |            
|Schedule IIValuation and Qualifying Accounts for each of the three years in the period ending
December 31, 2002                          |  | S-1        



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)(3)
Exhibits:



|Exhibit Number |  | 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)                                                                                                                                                                       



29



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|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|3.3            |  | Certificate of Merger merging Muzak Limited Partnership into Audio CommunicationsNetwork,
LLC.(1)                                                                                                                                                                                               
|              
|3.4            |  | Certificate of Incorporation of Muzak Finance Corp.(1)                                                                                                                                                                                                                                          
|              
|3.5            |  | Certificate of Incorporation of Muzak, Inc.(1)                                                                                                                                                                                                                                                  
|              
|3.6            |  | First Amendment to Certificate of Incorporation of Muzak, Inc.(1)                                                                                                                                                                                                                               
|              
|3.7            |  | Certificate of Formation of MLP Environmental Music, LLC.(1)                                                                                                                                                                                                                                    
|              
|3.8            |  | Articles of Incorporation of Music Acquisition, Inc.(1)                                                                                                                                                                                                                                         
|              
|3.9            |  | Certificate of Amendment by Shareholders of Music Acquisition, Inc. to the Articles of Incorporation of Music
Acquisition, Inc.(1)                                                                                                                                                              
|              
|3.10           |  | Certificate of Amendment by Shareholders to the Articles of Incorporation of Ohio Sound and Music,
Inc.(1)                                                                                                                                                                                      
|              
|3.11           |  | Certificate of Formation of ACN Holdings, LLC.(1)                                                                                                                                                                                                                                               
|              
|3.12           |  | Certificate of Amendment to the Certificate of Formation of ACN Holdings, LLC.(1)                                                                                                                                                                                                               
|              
|3.13           |  | By-laws of Muzak Finance Corp.(1)                                                                                                                                                                                                                                                               
|              
|3.14           |  | By-laws of Muzak, Inc.(1)                                                                                                                                                                                                                                                                       
|              
|3.15           |  | Amended and Restated Limited Liability Agreement of MLP Environmental Music, LLC, dated as of March 18,
1999.(1)                                                                                                                                                                                
|              
|3.16           |  | Code of Regulations of Business Sound, Inc.(1)                                                                                                                                                                                                                                                  
|              
|3.17           |  | Certificate of Formation of BI Acquisition, LLC.(1)                                                                                                                                                                                                                                             
|              
|3.18           |  | Limited Liability Agreement of BI Acquisition, LLC dated as of August 18, 1999.(1)                                                                                                                                                                                                              
|              
|3.19           |  | Certificate of Incorporation of ACN Holdings, Inc.(2)                                                                                                                                                                                                                                           
|              
|3.20           |  | Certificate of Amendment of Certificate of Incorporation of ACN Holdings, Inc.(2)                                                                                                                                                                                                               
|              
|3.21           |  | By-laws of ACN Holdings, Inc.(2)                                                                                                                                                                                                                                                                
|              
|3.22           |  | Fourth Amended and Restated Limited Liability Agreement of Muzak Holdings LLC dated as of March 15,
2002.(11)                                                                                                                                                                                   
|              
|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            |  | Registration Rights Agreement, dated as of March 18, 1999 by and among Muzak LLC and Muzak Finance Corp., the
Guarantors named therein and CIBC Oppenheimer Corp. and Goldman, Sachs & Co., as Initial Purchasers.(1)                                                                           
|              
|4.4            |  | Purchase Agreement, dated March 12, 1999 by and among Audio Communications Network, LLC and Muzak Finance Corp., the
Guarantors named therein and CIBC Oppenheimer Corp. and Goldman, Sachs & Co., as Initial Purchasers.(1)                                                                    
|              
|4.5            |  | 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)
|              
|4.6            |  | 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)                                                                                                                      



30



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|Exhibit Number |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|4.7            |   |  | Form of Series A 13% Senior Discount Notes due 2010 (included in Exhibit 4.1 above asExhibit
A).(2)                                                                                                                                                                                                                                                                                                                                               
|              
|4.8            |   |  | Registration Rights Agreement, dated as of March 18, 1999, Muzak Holdings, LLC and Muzak Holdings Finance Corp., and
Issuers and CIBC Oppenheimer Corp. and Goldman, Sachs & Co . as Initial Purchasers.(2)                                                                                                                                                                                                                                       
|              
|4.9            |   |  | Purchase Agreement, dated as of March 12, 1999, by and among ACN Holdings, LLC and Muzak Holdings Finance Corp., as
Issuers and CIBC Oppenheimer Corp. and Goldman, Sachs & Co. as Initial Purchasers.(2)                                                                                                                                                                                                                                         
|              
|4.10           |   |  | Supplemental Indenture, dated as of February 24, 2000 by and among Telephone Audio Productions, Inc., Muzak LLC, and
subsidiaries, as Guarantors and State Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).(5)                                                                                                                                                                                                              
|              
|4.11           |   |  | Supplemental Indenture, dated as of March 24, 2000 by and among Vortex Sound Communications Company, Inc., Muzak LLC,
and subsidiaries, as Guarantors and State Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).(5)                                                                                                                                                                                                         
|              
|4.12           |   |  | Supplemental Indenture, dated as of March 31, 2000 by and among Music Incorporated, Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).(5)                                                                                                                                                                                                                                
|              
|4.13           |   |  | Supplemental Indenture, dated as of March 31, 2000 by and among Muzak Houston, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).(5)                                                                                                                                                                                                                               
|              
|4.14           |   |  | Muzak LLC 15% Junior Unsecured Promissory Note due 2007.(11)                                                                                                                                                                                                                                                                                                                                                                                      
|              
|10.1           |   |  | Credit and Guaranty Agreement, dated as of March 18, 1999 among Audio Communications Network, LLC, as Borrower, Muzak
Holdings LLC and certain subsidiaries of Audio Communications Network, LLC, as Guarantors, various lenders, Goldman Sachs Credit Partners L.P., as Syndication Agent, Canadian Imperial Bank of Commerce, as Administrative Agent and Goldman Sachs
Credit Partners L.P. and CIBC Oppenheimer Corp. as Co-Lead Arrangers.(1)
|              
|10.2           |   |  | 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)                                                                                       
|              
|10.3           | * |  | 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)                                                                                                                                                                                                                               
|              
|10.4           | * |  | Management and Consulting Services Agreement dated as of October 6, 1998 by and between ABRY Partners, Inc. and ACN
Operating, LLC.(1)                                                                                                                                                                                                                                                                                                            
|              
|10.5           | * |  | 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)                                                                                                                                                                                                                                                                                                  
|              
|10.6           | * |  | Amended and Restated Executive Employment Agreement, dated as of March 16, 2001, among Muzak Holdings LLC, Muzak LLC,
and William A. Boyd.(10)                                                                                                                                                                                                                                                                                                    
|              
|10.10          |   |  | 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)                                                                                                                                                                                                                                                                                                  
|              
|10.11          |   |  | Amended and Restated Securityholders Agreement dated as of October 18, 2000 by and among Muzak Holdings LLC and the
various parties named therein.(7)                                                                                                                                                                                                                                                                                             



31



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|Exhibit Number |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|10.12          |   |  | 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.(7)                                                                                                                                                                                                                                                                                      
|              
|10.13          |   |  | First Amendment, Consent and Waiver, dated as of July 1, 1999 to the Credit and Guaranty Agreement, dated as of March
18, 1999 among Muzak LLC, as Borrower, Muzak Holdings LLC and certain Subsidiaries of Muzak LLC, as Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., as Syndication Agent, Canadian Imperial Bank of Commerce, as Administrative Agent
and Goldman Sachs Credit Partners L.P. and CIBC Oppenheimer Corp. as Co-Lead Arrangers.(1)
|              
|10.14          |   |  | Second Amendment Consent and Waiver dated October 26, 1999 to the Credit and Guaranty Agreement dated as of March 18,
1999 with Muzak LLC as borrower.(3)                                                                                                                                                                                                                                                                                                              
|              
|10.15          |   |  | Third Amendment Consent and Waiver dated January 14, 2000 to the Credit and Guaranty Agreement dated as of March 18,
1999 with Muzak LLC as Borrower.(4)                                                                                                                                                                                                                                                                                                               
|              
|10.16          |   |  | Fourth Amendment and Waiver dated August 2, 2000 to the Credit and Guaranty Agreement dated as of March 18, 1999 with
Muzak LLC as Borrower.(6)                                                                                                                                                                                                                                                                                                                        
|              
|10.17          |   |  | Investor Securities Purchase Agreement dated as of October 6, 1998 by and among ACN Holdings, LLC and the investors
named therein.(2)                                                                                                                                                                                                                                                                                                                                  
|              
|10.18          |   |  | Form of Incentive Unit Agreement by and among Muzak Holdings LLC, each of the Name Executives and ABRY Broadcast
Partners III, L.P.(2)                                                                                                                                                                                                                                                                                                                                 
|              
|10.19          |   |  | Waiver dated as of February 26, 2001, to the Credit and Guaranty Agreement dated as of March 18, 1999 with Muzak LLC
as borrower.(9)                                                                                                                                                                                                                                                                                                                                   
|              
|10.20          |   |  | Fifth Amendment dated as of May 15, 2001 to the Credit and Guaranty Agreement, dated as of March 18, 1999 with Muzak
LLC as borrower.(10)                                                                                                                                                                                                                                                                                                                              
|              
|10.21          |   |  | Sixth Amendment dated as of March 8, 2002, to the Credit and Guaranty Agreement dated as of March 18, 1999 with Muzak
LLC as borrower.(11)                                                                                                                                                                                                                                                                                                                             
|              
|10.22          |   |  | 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.(11)                                                                                                                                                                                                                                      
|              
|10.23          |   |  | 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.(11)                                                                                                                                                                                                                                   
|              
|10.24          |   |  | Amended and Restated Securityholders Agreement dated as of March 15, 2002 by and among Muzak Holdings LLC and the
various parties named therein (12)                                                                                                                                                                                                                                                                                                                   
|              
|10.25          | * |  | Executive Employment Agreement dated as of November 5, 2002, among Muzak Holdings LLC, Muzak LLC, and Stephen P. Villa(13)                                                                                                                                                                                                                                                                                                                                             
|              
|21.1           |   |  | Subsidiaries of Muzak LLC and Muzak Finance Corp.(1)                                                                                                                                                                                                                                                                                                                                                                                                                   

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

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

|(2) |  | Incorporated by reference to the Parent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, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Companys Report on Form 10-K/A for the year ended December 31, 1999.
|--- |  | ------------------------------------------------------------------------------------------------------



32



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|(5) |  | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended March 31, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference to the Parents Report on Form 10-Q for the fiscal quarter ended September 30, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended March 31, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------

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

|(11) |  | Incorporated by reference to the Companys Report on Form 10-K for the year ended December 31, 2002.
|---- |  | ----------------------------------------------------------------------------------------------------

|(12) |  | Incorporated by reference to the Parents Report on Form 10-Q for the fiscal quarter ended March 31, 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------

|(13) |  | Incorporated by reference to the Companys Report on Form 10-Q for the fiscal quarter ended September 30, 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



(c) During the last quarter of the fiscal year for which this
report on Form 10-K was filed, the Company did not file any reports on Form 8-K.



33



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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 23rd day of May 2003.

MUZAK LLC MUZAK FINANCE CORP.By:

/s/    WILLIAM A.
BOYDWilliam A. Boyd Chief 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 23rd day of May 2003.



|Signature                               |  | Title                                                                                 
|--------------------------------------- |  | --------------------------------------------------------------------------------------
|                                       
|/s/    WILLIAM A .
BOYDWilliam A. Boyd  |  | Chief Executive Officer (Principal Executive Officer)                                 
|                                       
|/s/    STEPHEN P.
VILLAStephen P. Villa |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting
Officer)



34



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Muzak LLC

Section 302 Certifications



Certification of the Chief Financial Officer



I, Stephen P. Villa, Chief Financial Officer of Muzak LLC certify that:



1. I have reviewed this annual report on Form 10-K of Muzak LLC;



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



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



4. The registrants other certifying officers and I, are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | (a) |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



5. The registrants other
certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):



| | (a) |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



6. The registrants other
certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



May 23, 2003



/s/    Stephen P. Villa

Stephen P. Villa

Chief Financial Officer



35



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Muzak LLC

Section 302 Certifications



Certification of the Chief Executive Officer



I, William A. Boyd, Chief Executive Officer of Muzak LLC certify that:



1. I have reviewed this annual report on Form 10-K of Muzak LLC;



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



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



4. The registrants other certifying officers and I, are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | (a) |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



5. The registrants other
certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):



| | (a) |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



6. The registrants other
certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



May 23, 2003



/s/    William A. Boyd

William A. Boyd

Chief Executive Officer





36



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Report of
Independent Accountants



To the Board of Directors

of Muzak Holdings LLC:



In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 29 present fairly, in all
material respects, the financial position of Muzak LLC (the Company) and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December
31, 2002 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) on page 29 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 auditing standards generally accepted in the United States of America, which 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 1 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets on January 1, 2002 and Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments
and Hedging Activities on January 1, 2001.



/s/    PricewaterhouseCoopers LLP



Charlotte, North Carolina

February 21, 2003





F-1



---



ITEM
1.    FINANCIAL STATEMENTS



MUZAK LLC



CONSOLIDATED
BALANCE SHEETS

(In thousands, except for units)



|                                                             |  | December 31, 2002 |          |   | December 31, 2001 |  
|------------------------------------------------------------ |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                       |  |                   |          |   |                   |  
|Current Assets:                                              |  |                   |          |   |                   |  
|Cash                                                         |  | $                 | 1,781    |   |                   | $
|Accounts receivable, net of allowances of $1,708 and $ 1,943 |  |                   | 26,531   |   |                   |  
|Inventories                                                  |  |                   | 11,401   |   |                   |  
|Prepaid expenses and other assets                            |  |                   | 1,719    |   |                   |  
|                                                             |  |                   |          |   |                   |  
|Total current assets                                         |  |                   | 41,432   |   |                   |  
|Property and equipment, net                                  |  |                   | 110,889  |   |                   |  
|Intangible assets, net                                       |  |                   | 270,756  |   |                   |  
|Deferred subscriber acquisition costs, net                   |  |                   | 41,410   |   |                   |  
|Other assets, net                                            |  |                   | 9,708    |   |                   |  
|                                                             |  |                   |          |   |                   |  
|Total assets                                                 |  | $                 | 474,195  |   |                   | $
|                                                             |  |                   |          |   |                   |  
|                                                            
|LIABILITIES AND MEMBERS INTEREST                            |  |                   |          |   |                   |  
|Current liabilities:                                         |  |                   |          |   |                   |  
|Accounts payable                                             |  | $                 | 10,049   |   |                   | $
|Accrued expenses                                             |  |                   | 18,304   |   |                   |  
|Current maturities of other liabilities                      |  |                   | 2,924    |   |                   |  
|Current maturities of long term debt                         |  |                   | 7,855    |   |                   |  
|Advance billings                                             |  |                   | 1,040    |   |                   |  
|                                                             |  |                   |          |   |                   |  
|Total current liabilities                                    |  |                   | 40,172   |   |                   |  
|Long-term debt                                               |  |                   | 295,430  |   |                   |  
|Related party notes                                          |  |                   | 10,000   |   |                   |  
|Other liabilities                                            |  |                   | 10,215   |   |                   |  
|Commitments and Contingencies (See Note 12)                  |  |                   |          |   |                   |  
|Members Interest:                                           |  |                   |          |   |                   |  
|Common units (100 issued and outstanding)                    |  |                   | 260,082  |   |                   |  
|Accumulated other comprehensive loss                         |  |                   | (290     | ) |                   |  
|Accumulated deficit                                          |  |                   | (141,414 | ) |                   |  
|                                                             |  |                   |          |   |                   |  
|Total members interest                                      |  |                   | 118,378  |   |                   |  
|                                                             |  |                   |          |   |                   |  
|Total liabilities and members interest                      |  | $                 | 474,195  |   |                   | $
|                                                             |  |                   |          |   |                   |  













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



F-2



---

MUZAK LLC



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)





|                                                                                                                     |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|Revenues:                                                                                                            |  |                              |         |   |                              |   |         |                              | 
|Music and other business services                                                                                    |  | $                            | 162,999 |   |                              | $ | 150,472 |                              | 
|Equipment and related services                                                                                       |  |                              | 54,757  |   |                              |   | 52,889  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 217,756 |   |                              |   | 203,361 |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Cost of revenues:                                                                                                    |  |                              |         |   |                              |   |         |                              | 
|Music and other business services (excluding $44,581, $37,189, and $30,526 of
depreciation and amortization expense) |  |                              | 34,467  |   |                              |   | 31,172  |                              | 
|Equipment and related services                                                                                       |  |                              | 43,754  |   |                              |   | 40,335  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 78,221  |   |                              |   | 71,507  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 139,535 |   |                              |   | 131,854 |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Selling, general and administrative expenses                                                                         |  |                              | 72,023  |   |                              |   | 68,107  |                              | 
|Depreciation and amortization expense                                                                                |  |                              | 70,109  |   |                              |   | 75,668  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Loss from operations                                                                                                 |  |                              | (2,597  | ) |                              |   | (11,921 | )                            | 
|Other income (expense):                                                                                              |  |                              |         |   |                              |   |         |                              | 
|Interest expense                                                                                                     |  |                              | (28,580 | ) |                              |   | (32,339 | )                            | 
|Other, net                                                                                                           |  |                              | 192     |   |                              |   | (481    | )                            | 
|Loss from extinguishment of debt                                                                                     |  |                              |        |   |                              |   |        |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Loss before income taxes                                                                                             |  |                              | (30,985 | ) |                              |   | (44,741 | )                            | 
|Income tax benefit                                                                                                   |  |                              | (956    | ) |                              |   | (595    | )                            | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Net loss                                                                                                             |  | $                            | (30,029 | ) |                              | $ | (44,146 | )                            | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 





















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



F-3



---

MUZAK LLC



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)





|                                                                        |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|----------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |  |                              |         |   |                              |   |         |                              | 
|Net loss                                                                |  | $                            | (30,029 | ) |                              | $ | (44,146 | )                            | 
|Adjustments to derive cash flow from operating activities:              |  |                              |         |   |                              |   |         |                              | 
|(Gain) loss on disposal of fixed assets                                 |  |                              | (27     | ) |                              |   | 109     |                              | 
|Loss from extinguishment of debt                                        |  |                              |        |   |                              |   |        |                              | 
|Deferred income tax benefit                                             |  |                              | (1,365  | ) |                              |   | (628    | )                            | 
|Depreciation and amortization                                           |  |                              | 70,109  |   |                              |   | 75,668  |                              | 
|Amortization of deferred financing fees                                 |  |                              | 1,978   |   |                              |   | 1,581   |                              | 
|Amortization of deferred subscriber acquisition costs                   |  |                              | 12,387  |   |                              |   | 9,516   |                              | 
|Deferred subscriber acquisition costs                                   |  |                              | (16,355 | ) |                              |   | (16,404 | )                            | 
|Unearned installment income                                             |  |                              | (1,384  | ) |                              |   | (659    | )                            | 
|Change in certain assets and liabilities, net of business acquisitions: |  |                              |         |   |                              |   |         |                              | 
|(Increase) decrease in accounts receivable                              |  |                              | (2,218  | ) |                              |   | 13,753  |                              | 
|(Increase) decrease in inventory                                        |  |                              | (1,999  | ) |                              |   | 1,685   |                              | 
|(Decrease) increase in accrued expenses                                 |  |                              | (2,375  | ) |                              |   | 1,770   |                              | 
|(Decrease) increase in accounts payable                                 |  |                              | 1,442   |   |                              |   | (3,984  | )                            | 
|(Decrease) increase in advance billings                                 |  |                              | 170     |   |                              |   | (1,240  | )                            | 
|Other, net                                                              |  |                              | 1,255   |   |                              |   | 1,014   |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|Net cash provided by (used in) operating activities                     |  |                              | 31,589  |   |                              |   | 38,035  |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |  |                              |         |   |                              |   |         |                              | 
|Acquisitions, net of cash                                               |  |                              |        |   |                              |   | (979    | )                            | 
|Proceeds from the sale of fixed assets                                  |  |                              | 41      |   |                              |   | 313     |                              | 
|Capital expenditures for property and equipment and intangible assets   |  |                              | (38,830 | ) |                              |   | (42,242 | )                            | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|Net cash used in investing activities                                   |  |                              | (38,789 | ) |                              |   | (42,908 | )                            | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |  |                              |         |   |                              |   |         |                              | 
|Increase (decrease) in book overdrafts                                  |  |                              | 2,987   |   |                              |   | (5,322  | )                            | 
|Borrowings under senior credit facility                                 |  |                              |        |   |                              |   |        |                              | 
|Repayments of senior credit facility                                    |  |                              | (6,693  | ) |                              |   | (5,193  | )                            | 
|Borrowings under revolving loan                                         |  |                              | 15,000  |   |                              |   | 19,800  |                              | 
|Repayments under revolving loan                                         |  |                              | (10,000 | ) |                              |   | (2,500  | )                            | 
|Proceeds from contributions by Parent                                   |  |                              |        |   |                              |   |        |                              | 
|Repayment of notes payable to related parties                           |  |                              |        |   |                              |   |        |                              | 
|Proceeds from issuance of notes payable to related party                |  |                              | 10,000  |   |                              |   |        |                              | 
|Payment of interest rate protection agreement                           |  |                              | (372    | ) |                              |   |        |                              | 
|Borrowing of floating rate notes                                        |  |                              |        |   |                              |   |        |                              | 
|Repayment of floating rate notes                                        |  |                              |        |   |                              |   |        |                              | 
|Proceeds from sale of interest swap                                     |  |                              |        |   |                              |   |        |                              | 
|Repayments of other debt                                                |  |                              | (2,600  | ) |                              |   | (2,341  | )                            | 
|Financing fees paid on behalf of member                                 |  |                              | (70     | ) |                              |   |        |                              | 
|Payment of fees associated with financing                               |  |                              | (1,854  | ) |                              |   |        |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|Net cash provided by financing activities                               |  |                              | 6,398   |   |                              |   | 4,444   |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|INCREASE (DECREASE) IN CASH                                             |  |                              | (802    | ) |                              |   | (429    | )                            | 
|CASH, BEGINNING OF PERIOD                                               |  |                              | 2,583   |   |                              |   | 3,012   |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|CASH, END OF PERIOD                                                     |  | $                            | 1,781   |   |                              | $ | 2,583   |                              | 
|                                                                        |  |                              |         |   |                              |   |         |                              | 
|Significant non-cash activities:                                        |  |                              |         |   |                              |   |         |                              | 
|Equity contribution from parent                                         |  | $                            |        |   |                              | $ | 33,707  |                              | 
|Capital lease obligations                                               |  |                              | 2,030   |   |                              |   | 1,691   |                              | 



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



F-4



---

MUZAK LLC



CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS INTEREST

AND COMPREHENSIVE LOSS

(In thousands, except for units)





|                                                    |  | Common Units |  |         | Accumulated Deficit |   |  | Accumulated Other Comprehensive Loss |          |   | Total Members Interest |  
|--------------------------------------------------- |  | ------------ |  | ------- | ------------------- | - |  | ------------------------------------ | -------- | - | ----------------------- | -
|                                                    |  | Units        |  | Dollars |                     |   |  |                                     
|Balance at December 31, 1999                        |  | 100          |  | $       | 107,124             |   |  | $                                    | (22,883  | ) |                         | $
|Net loss                                            |  |              |  |         |                     |   |  |                                      | (44,356  | ) |                         |  
|Additional capital contributed                      |  |              |  |         | 119,542             |   |  |                                      |          |   |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Balance at December 31, 2000                        |  | 100          |  | $       | 226,666             |   |  | $                                    | (67,239  | ) |                         | $
|Comprehensive loss:                                 |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Net loss                                            |  |              |  |         |                     |   |  |                                      | (44,146  | ) |                         |  
|Cumulative effect of change in accounting principle |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Change in unrealized losses on derivative           |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Total comprehensive loss                            |  |              |  |         |                     |   |  |                                      | (44,146  | ) |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Additional capital contributed                      |  |              |  |         | 33,707              |   |  |                                      |          |   |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Balance at December 31, 2001                        |  | 100          |  | $       | 260,373             |   |  | $                                    | (111,385 | ) |                         | $
|Comprehensive loss:                                 |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Net loss                                            |  |              |  |         |                     |   |  |                                      | (30,029  | ) |                         |  
|Change in unrealized losses on derivative           |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Total comprehensive loss                            |  |              |  |         |                     |   |  |                                      | (30,029  | ) |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Additional capital contributed                      |  |              |  |         | 29                  |   |  |                                      |          |   |                         |  
|Financing fees incurred on behalf of member         |  |              |  |         | (320                | ) |  |                                      |          |   |                         |  
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  
|Balance at December 31, 2002                        |  | 100          |  | $       | 260,082             |   |  | $                                    | (141,414 | ) |                         | $
|                                                    |  |              |  |         |                     |   |  |                                      |          |   |                         |  





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





F-5



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.    Summary of Significant Accounting Policies



OrganizationMuzak LLC (the Company), a Delaware limited liability company, is a wholly owned subsidiary of Muzak Holdings LLC (the Parent), previously known as ACN
Holdings, LLC. 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.



As of December 31, 2002, ABRY Partners, LLC and
its respective affiliates, collectively own approximately 64.2% of the beneficial interests in the Parents voting interests.



Basis of PresentationThe consolidated financial statements include the accounts of the Company and its subsidiaries: 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.



Book overdraftBook overdraft of $3.0 million and $5.3 million as of December 31, 2002 and December 31, 2000, respectively is
included in accounts payable. There was no book overdraft as of December 31, 2001.



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. The Company transmits 84% of its music programs via broadcast satellite. 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.



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. Impairment losses are recognized if recorded values exceed undiscounted future cash flows, by reducing them to estimated fair value. No impairment losses were recognized by the Company for the periods presented.



F-6



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 changes 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. Note 4 provides additional information concerning goodwill and
other identifiable intangible assets.



In
connection with the adoption of SFAS No. 142, the Company evaluated the useful lives of its existing intangible assets and concluded that, with the exception of goodwill, all of its intangible assets have definite lives and that the existing useful
lives are reasonable. The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30, 2002. As the fair value of goodwill exceeds the carrying amount of goodwill, the Company did not record an
impairment charge.



In June 2001, Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141), which requires the purchase method of accounting be used for all business combinations initiated
after June 30, 2001. All of the Companys acquisitions have been accounted for under the purchase method of accounting.



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, which are amortized as a component of selling, general, and administrative expenses over the life of the client contract or five years, whichever is shorter, on a straight-line basis. Accumulated
amortization totaled $30.3 million and $17.9 million as of December 31, 2002 and 2001, respectively. If a client contract terminates early, the unamortized subscriber acquisition cost is typically recovered from the salesperson.



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 and related installation are recognized upon delivery or installation. 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 2002, 2001, and 2000, 4%, 3%, and 4%, respectively of our
revenues were generated from fees from our franchisees. As of December 31, 2002, 2001 and 2000 the Company had 58, 59, and 61 franchise owners, respectively.



Derivative Financial InstrumentsThe Company uses derivative financial instruments to convert variable interest rate debt to
fixed interest rate debt to reduce its exposure to fluctuations in interest rates as dictated by the senior credit facility.



F-7



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001. In accordance with SFAS 133, the Companys derivative is recognized on the balance sheet at its fair value
since it is designated as a cash flow hedging instrument. The hedge is 100% effective for exposures to interest rate fluctuations. As a result of the 100% effectiveness of the hedge, changes in the fair value of the derivative are recorded each
period in other comprehensive loss. The Company paid a premium of $0.4 million for its interest rate cap in April 2002. The interest rate cap protects the Company against LIBOR increases above 7.25%. The Company is amortizing the premium paid for
the cap over the life of the agreement using the caplets approach and any amounts received under the cap will be recorded as a reduction to interest expense. The fair market value of the interest rate cap was $0.1 million as of December 31, 2002.



2.    Acquisitions



The Company did not make any acquisitions during the year
ended December 31, 2002.



On May 31, 2001, the
Company acquired Sound of Music, LTD (Sound of Music), the Companys independent franchisee operating in Wisconsin for a cash purchase price of $1.0 million. In connection with this acquisition, the Parent issued $0.1 million in
common membership units, which has been reflected as a non-cash equity contribution from the Parent to the Company.



The estimated fair value of assets acquired and liabilities assumed relating to the 2001 acquisition, is summarized below (in thousands):



|                                                  |  |  
|------------------------------------------------- |  | -
|Property, plant and equipment                     |  | $
|Other Intangibles                                 |  |  
|Goodwill                                          |  |  
|                                                  |  |  
|Total purchase price, including transaction costs |  | $
|                                                  |  |  



The
Company made ten acquisitions during the year ended December 31, 2000. These acquisitions were comprised of four in market competitors, one business music provider and three marketing on-hold/or in-store messaging providers, and six franchises, for
an aggregate cash purchase price of $34.7 million, excluding transaction costs. During 2000, the Company paid the remaining purchase price of $10.3 million for the 1999 acquisition of MountainWest Audio Inc. The consolidated statement of cash flows
for the year ended December 31, 2000 includes this remaining purchase price.



The results of operations of the acquired companies are included in the Companys consolidated statement of operations for the periods in which they were owned by the Company.



The following presents the unaudited pro forma results
assuming that the acquisitions discussed above had occurred as of the beginning of fiscal 2001 and 2000. These pro forma results are not necessarily indicative of the results that will occur in future periods (in thousands).



|                     |  | Fiscal Year Ended |        
|-------------------- |  | ----------------- | -------
|                     |  | December 31, 2001 |        
|                     |  | (unaudited)       |        
|Revenues             |  | $                 | 203,615
|Loss from operations |  |                   | (11,849
|Net loss             |  |                   | (44,074



F-8



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





3.    Property and Equipment



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



|                                  |  | Useful Life (Years) |  | December 31, 2002 |          |   | December 31, 2001 |  
|--------------------------------- |  | ------------------- |  | ----------------- | -------- | - | ----------------- | -
|Equipment provided to subscribers |  | 4-6                 |  | $                 | 140,604  |   |                   | $
|Capitalized installation labor    |  | 5                   |  |                   | 62,007   |   |                   |  
|Equipment                         |  | 4-7                 |  |                   | 25,716   |   |                   |  
|Other                             |  | 3-30                |  |                   | 18,321   |   |                   |  
|                                  |  |                     |  |                   |          |   |                   |  
|                                  |  |                     |  |                   | 246,648  |   |                   |  
|Less accumulated depreciation     |  |                     |  |                   | (135,759 | ) |                   |  
|                                  |  |                     |  |                   |          |   |                   |  
|                                  |  |                     |  | $                 | 110,889  |   |                   | $
|                                  |  |                     |  |                   |          |   |                   |  



Included
in equipment and other at December 31, 2002 and 2001 is $13.8 million and $11.6 million, respectively of equipment under capital leases, gross of accumulated amortization of $9.5 million and $6.6 million, respectively. Depreciation of property and
equipment was $46.9 million, $40.8 million, and $30.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.



4.    Intangible Assets



The Company adopted SFAS No. 142 on January 1, 2002. In connection with the adoption of SFAS No. 142, the Company reclassified other
intangibles of $6.4 million, gross of accumulated amortization of $3.5 million, related to trained workforce to goodwill and ceased amortization of goodwill. During the first quarter, the Company evaluated the useful lives of its existing intangible
assets and concluded that, with the exception of goodwill, all of its intangible assets have definite lives and that the existing useful lives are reasonable.



The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30, 2002. As the fair value of
goodwill exceeds the carrying amount of goodwill, the Company did not record an impairment charge.



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



|                  |  | December 31, 2002 Carrying Amount |         | December 31, 2001 Carrying Amount
|----------------- |  | --------------------------------- | ------- | ---------------------------------
|Goodwill          |  | $                                 | 140,805 |                                  
|Trained workforce |  |                                   |        |                                  



The
following presents net loss exclusive of amortization of goodwill and trained workforce (in thousands):



|                                            |  | For the Year Ended December 31, |        
|------------------------------------------- |  | ------------------------------- | -------
|                                            |  | 2002                            |        
|Net Loss                                    |  | $                               | (30,029
|Goodwill amortization                       |  |                                 |       
|Trained workforce amortization              |  |                                 |       
|                                            |  |                                 |        
|Net Loss excluding amortization of goodwill |  | $                               | (30,029
|                                            |  |                                 |        



F-9



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                           |  | Useful Life (years) |                       | December 31, 2002 |                          |  | December 31, 2001 |                      
|-------------------------- |  | ------------------- | --------------------- | ----------------- | ------------------------ |  | ----------------- | ---------------------
|                           |  |                     | Gross Carrying Amount |                   | Accumulated Amortization |  |                   | Gross Carrying Amount
|Income producing contracts |  | 12                  |                       | $                 | 153,956                  |  | $                 | (46,617              
|License agreements         |  | 20                  |                       |                   | 5,082                    |  |                   | (953                 
|Deferred production costs  |  | 10                  |                       |                   | 5,780                    |  |                   | (1,232               
|Trademarks                 |  | 5                   |                       |                   | 15,136                   |  |                   | (11,242              
|Non-compete agreements     |  | 3-5                 |                       |                   | 7,468                    |  |                   | (6,211               
|Other                      |  | 20                  |                       |                   | 10,741                   |  |                   | (1,957               
|                           |  |                     |                       |                   |                          |  |                   |                      
|                           |  |                     |                       | $                 | 198,163                  |  | $                 | (68,212              
|                           |  |                     |                       |                   |                          |  |                   |                      



Aggregate amortization expense was $23.2 million, $34.9 million, and $32.3 million for the years ended December 31, 2002, 2001, and 2000, respectively.



The estimated future aggregate amortization expense is as follows (in thousands):



|Fiscal year ending |  |  
|------------------ |  | -
|2003               |  | $
|2004               |  |  
|2005               |  |  
|2006               |  |  
|2007               |  |  



5. Accrued Expenses



Accrued expenses are summarized below (in
thousands):



|                                  |  | December 31, 2002 |        | December 31, 2001
|--------------------------------- |  | ----------------- | ------ | -----------------
|Accrued interest                  |  | $                 | 3,427  |                  
|Accrued compensation and benefits |  |                   | 3,178  |                  
|Licensing royalties               |  |                   | 3,472  |                  
|Other                             |  |                   | 8,227  |                  
|                                  |  |                   |        |                  
|                                  |  | $                 | 18,304 |                  
|                                  |  |                   |        |                  



6. Debt



Debt obligations consist of the following
(in thousands):



|                                      |  | December 31, 2002 |         |   | December 31, 2001 |  
|------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Related party notes                   |  | $                 | 10,000  |   |                   | $
|                                      |  |                   |         |   |                   |  
|Long term debt:                       |  |                   |         |   |                   |  
|Revolving loanSenior credit facility |  | $                 | 26,300  |   |                   | $
|Senior credit facility                |  |                   | 159,514 |   |                   |  
|Senior subordinated notes             |  |                   | 115,000 |   |                   |  
|Other                                 |  |                   | 2,471   |   |                   |  
|                                      |  |                   |         |   |                   |  
|Total debt obligations                |  |                   | 303,285 |   |                   |  
|Less current maturities               |  |                   | (7,855  | ) |                   |  
|                                      |  |                   |         |   |                   |  
|                                      |  | $                 | 295,430 |   |                   | $
|                                      |  |                   |         |   |                   |  



F-10



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Senior Credit Facility



The Company has a senior credit facility
(Senior Credit Facility) consisting of: (i) a term loan facility in the amount of $30.0 million payable in semi-annual installments until final maturity on December 31, 2005 (Term Loan A); (ii) a term loan facility in the
amount of $145.0 million payable in semi-annual installments until final maturity on December 31, 2006 (Term Loan B) (together with Term Loan A, the Term Loans); and (iii) a revolving loan (the Revolving Loan) in
an aggregate principal amount of up to $55.0 million terminating on December 31, 2005. The Company had $17.9 million of borrowing availability under its revolving loan as of December 31, 2002, with an additional $10.0 million of availability subject
to the Company meeting certain financial covenants. Availability under the revolving loan has been reduced by outstanding letters of credit of $0.8 million.



The Senior Credit Facility is guaranteed by the Parent, the Company and certain 100% owned subsidiaries. The non-guarantor subsidiary is
considered minor and the consolidated amounts in the Companys financial statements are representative of the combined guarantors financial statements. The Amended Senior Credit Facility contains restrictive covenants including
maintenance of interest, senior and 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. These conditions were satisfied as of December 31, 2002. The Company believes it will be in compliance with these financial covenants and restrictions during 2003.



Indebtedness under the Term Loan A and the Revolving Loans
bear interest at a per annum rate equal to the Companys choice of (i) the Alternate Base Rate (which is the highest of prime rate and the Federal Funds Rate plus .5%) plus a margin ranging from 2.00% to 3.00% or (ii) the offered rates for
Eurodollar deposits (LIBOR) of one, two, three, or six months, as selected by the Company, plus a margin ranging from 3.00% to 4.00%. Margins, which are subject to adjustment, based on the changes in the Companys ratio of
consolidated total debt to EBITDA (i.e., earnings before interest, taxes, interest, depreciation, amortization and other non cash charges as defined by the agreement) were 2.25% in the case of Alternate Base Rate and 3.25% in the case of LIBOR as of
December 31, 2002. Indebtedness under the Term Loan B bears interest at a per annum rate equal to the Companys choice of (i) the Alternate Base Rate (as described above) plus a margin of 3.5% or (ii) LIBOR of one, two, three, or six months, as
selected by the Company plus a margin of 4.5%. The weighted average rate of interest on the Senior Credit Facility, including the effects of the interest rate swap, if any, was 5.6% and 8.7% at December 31, 2002 and 2001, respectively.



In March 2002, the Company entered into the sixth amendment
under the Senior Credit Facility, which increased its aggregate revolving loan commitment under the Senior Credit Facility by $20.0 million, for a total commitment of $55.0 million, and amended certain financial covenants and applicable margins.



F-11



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Senior Subordinated
Notes



The Company together with its wholly
owned subsidiary, Muzak Finance Corp., has $115.0 million in principal amount of 9 7/8% 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 Company
and Muzak Finance and are subordinated in right of payment to all existing and future Senior Indebtedness of the Company and Muzak Finance. The Senior Subordinated Notes are guaranteed by the Parent, 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. The Companys
non-guarantor subsidiary is minor and the consolidated amounts in the Companys financial statements are representative of the combined guarantors. The indenture governing the Senior Subordinated Notes prohibits the Company from making certain
payments such as dividends and distributions of their capital stock; repurchases or redemptions of their capital stock, and investments (other than permitted investments) unless certain conditions are met by the Company. After March 15, 2004, the
issuers may redeem all or part of the Notes at a redemption price equal to 104.938% of the principal which redemption price declines to 100% of the principal amount in 2007.



Related Party Notes



In March 2002, the Company 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 Parent. ABRY Broadcast Partners III and ABRY
Broadcast Partners II are the beneficial owners of MEM Holdings.



The sponsor notes accrue interest at 15% per annum; any accrued interest not paid as of March 31, June 30, September 30 or December 31 will bear interest at 15% per annum until such interest is paid or extinguished. The sponsor notes
are junior and subordinate to payments for the Senior Credit Facility, and the Senior Subordinated Notes. At any time, the sponsor notes may be converted into Class A-2 units of the Parent at the direction of MEM Holdings. If the sponsor notes have
not been repaid in full as of September 2003, the sponsor notes will automatically be converted into Class A-2 units of the Parent.



From July 1, 1999 through November 24, 1999, the Company borrowed an aggregate amount of $30.0 million of sponsor notes from MEM Holdings
LLC. The Company repaid $3.0 million of sponsor notes with the proceeds from an equity contribution from the Parent following its 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 Parent in May 2001. Accordingly, the Company recorded a non-cash contribution from the Parent during the second quarter of 2001 totaling $33.7 million.



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, 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. This note bears interest at 8% with principal and interest payments due monthly until maturity in October 2006.



F-12



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Liquidity



During 2003, we expect that our primary
source of funds will be cash flows from operations and expect funding from borrowings under the senior credit facility to be minimal. As of December 31, 2002, we had outstanding debt of $185.8 million under our senior credit facility, with
additional available borrowings of up to $27.9 million. Based upon current and anticipated levels of operations, we believe that our cash flows from operations, combined with availability under the senior credit facility, will be adequate to meet
our liquidity needs for at least the next eighteen months. The Company strives to fund both investments in new client locations and interest and principal payments primarily through cash generated from operations rather than through borrowings under
the Senior Credit Facility. Currently, the Company is funding investments in new client locations through cash generated from operations and is borrowing under its Senior Credit Facility for partial interest and principal payments. 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.



Annual Maturities



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



|2003       |  | $ | 7,855  
|---------- |  | - | -------
|2004       |  |   | 27,742 
|2005       |  |   | 69,233 
|2006       |  |   | 81,700 
|2007       |  |   | 118    
|Thereafter |  |   | 126,637



Total
interest paid by the Company on all indebtedness was $29.0 million, $28.9 million, and $36.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Interest expense also includes finance charges on past due amounts.



Interest Rate Protection Programs



During April 1999, the Company entered into a four year
interest rate swap agreement in which the Company effectively exchanged $100.0 million of floating rate debt at three month LIBOR for 5.59% fixed rate debt. The Company terminated this agreement on January 28, 2000 and received approximately $4.4
million for this agreement. The proceeds were recorded an as adjustment to interest expense over the term of the new interest rate swap agreement.



On January 28, 2000, the Company entered into a new 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 and $2.7 million for the years ended December 31, 2002 and 2001, respectively.



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 protects the Company against LIBOR increases above 7.25% and is designated as a hedge of interest rates. Accordingly, the derivative is recognized on the balance sheet at its fair value. The hedge is considered 100% effective for exposures to
interest rate fluctuations. As a result of the 100%



F-13



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



effectiveness of the hedge, changes in the fair value of the derivative are recorded in other comprehensive loss. The Company is amortizing
the premium paid for the cap over the life of the agreement using the caplets approach and any amounts received under the cap will be recorded as a reduction to interest expense.



Fair Value of Financial Instruments



The estimated fair values of the Companys debt as of December 31, 2002 and December 31, 2001 were
$293.2 million and $291.3 million, respectively. The fair value of the Senior Notes is 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 cap was $0.1
million as of December 31, 2002 and the fair value of the interest rate swap agreement was a loss of approximately $2.5 million as of December 31, 2001. 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.



Pursuant to the adoption of FASB Statement No. 145, Recession of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, the Company reclassified $1.4 million from extraordinary loss on extinguishment of debt to loss from extinguishment of debt for the year ended December 31, 2000. The
loss resulted from the early extinguishment of $36.0 million Senior Subordinated Floating Rate Notes (the Floating Rate Notes) at 101.50% on October 19, 2000. The loss also included the write off of deferred financing fees associated
with the Floating Rate Notes.



7.    Lease
Commitments



The Company is the lessee under
various long-term operating and capital leases for machinery, equipment, buildings, and vehicles. The Company has also entered into various agreements to lease transponders to transmit music programs via direct broadcast satellite. These agreements
range range from 2 to 17 years. The majority of these leases contain renewal provisions.



At December 31, 2002, future minimum lease payments under operating and capital leases are as follows (in thousands):



|Fiscal Year Ending    |  | Capital |       |   | Operating
|--------------------- |  | ------- | ----- | - | ---------
|2003                  |  | $       | 2,188 |   |          
|2004                  |  |         | 1,588 |   |          
|2005                  |  |         | 1,081 |   |          
|2006                  |  |         | 195   |   |          
|2007                  |  |         | 3     |   |          
|Later Years           |  |         |      |   |          
|Less Imputed Interest |  |         | (448  | ) |          
|Less Executory Cost   |  |         | (383  | ) |          
|                      |  |         |       |   |          
|                      |  | $       | 4,224 |   |          
|                      |  |         |       |   |          



Rental
expense under operating leases was $10.5 million, $9.8 million, and $9.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.



8.    Employee Benefit Plans



The Company maintains a defined contribution plan. Substantially all employees are covered under a plan whereby eligible employees may
contribute up to 14% of their compensation per year, subject to certain tax law restrictions. The Company makes matching contributions of 60% of the first 6% of the total base salary contributed by the employee each year. Participants are
immediately vested in their contributions as well as the employers contributions.



F-14



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Plan
expense was $1.4 million, $1.5 million, and $1.4 million, for the years ended December 31, 2002, 2001 and 2000, respectively.



9.    Income Taxes



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



|                      |  | Year Ended December 31, 2002 |        |   | Year Ended December 31, 2001 |   |      | Year Ended December 31, 2000 | 
|--------------------- |  | ---------------------------- | ------ | - | ---------------------------- | - | ---- | ---------------------------- | 
|Current tax:          |  |                              |        |   |                              |   |      |                              | 
|Federal               |  | $                            |       |   |                              | $ |     |                              | 
|State                 |  |                              | 409    |   |                              |   | 33   |                              | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  |                              | 409    |   |                              |   | 33   |                              | 
|Deferred tax benefit: |  |                              |        |   |                              |   |      |                              | 
|Federal               |  |                              | (1,138 | ) |                              |   | (550 | )                            | 
|State                 |  |                              | (227   | ) |                              |   | (78  | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  |                              | (1,365 | ) |                              |   | (628 | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  | $                            | (956   | ) |                              | $ | (595 | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 



The
Companys effective tax rate differs from the statutory federal tax rate for the following reasons:



|                                                               |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|-------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|Federal tax benefit of statutory rates                         |  | $                            | (10,535 | ) |                              | $ | (15,692 | )                            | 
|State income taxes                                             |  |                              | (152    | ) |                              |   | (89     | )                            | 
|Goodwill and nondeductible expenses                            |  |                              |        |   |                              |   | 138     |                              | 
|Loss earned by partnership not subject to corporate income tax |  |                              | (9,731  | ) |                              |   | 15,048  |                              | 
|                                                               |  |                              |         |   |                              |   |         |                              | 
|                                                               |  | $                            | (956    | ) |                              | $ | (595    | )                            | 
|                                                               |  |                              |         |   |                              |   |         |                              | 



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
(liability) at December 31 are as follows (in thousands):



|                                                                     |  | 2002 |        |   | 2001 |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | -
|Property and equipment                                               |  | $    | (90    | ) |      | $
|Intangible assets                                                    |  |      | (2,929 | ) |      |  
|Other                                                                |  |      | 389    |   |      |  
|                                                                     |  |      |        |   |      |  
|Net deferred tax liability (included in other long term liabilities) |  | $    | (2,630 | ) |      | $
|                                                                     |  |      |        |   |      |  



F-15



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





10.    Related Party Transactions



The Company has a Management and Consulting Services Agreement (Management Agreement) with ABRY Partners, which provides that the Company will pay a management fee as defined in the
Management Agreement. During 2002, 2001, and 2000, the Company incurred fees of $0.4 million, $0.3 million, and $0.3 million, respectively under this agreement. Either the Company or ABRY Partners, with the approval of the Board of Directors of the
Parent, may terminate the Management Agreement by prior written notice to the other.



During fiscal 2002 and 1999, the Company borrowed $10.0 million and $30.0 million, respectively, from MEM Holdings under junior subordinated notes. The Company repaid the $3.0 million Sponsor Note
during 2000. The remaining $27.0 million, plus $6.7 million of accrued interest, was converted into Class A units of the Parent in May 2001. As of December 31, 2002, $10.0 million of Sponsor Notes remained outstanding.



As of December 31, 2002, the Parent has obligations of $64.5
million of senior discount notes and manditorily redeemable preferred units (preferred units) of $109.1 million. These obligations are not reflected in the Companys accompanying balance sheets or income statements as the Company
has no pledge of assets nor guarantee that provides security for the Parents obligations. Cash interest on the senior discount notes does not accrue until March 15, 2004. Thereafter, cash interest on the senior discount notes will accrue at a
rate of 13% per annum and will be payable in arrears on March 15 and September 15 of each year, commencing on September 15, 2004. The preferred units accrue a preferential return of 15% per annum, which is compounded quarterly. The preferential
return is payable in kind through October 2005, and thereafter the 15% preferential return will be payable in cash or in kind at the Parents option. The Parent does not have any operations or assets other than its ownership of Muzak.
Accordingly, the Parent is dependent on distributions from the Company in order to pay interest beginning in 2004 as discussed above. The Companys senior credit facility and senior subordinated notes indenture impose restrictions on its
ability to make distributions to the Parent. The senior credit facility and the senior subordinated notes indenture permit the Company to make payments and distributions to the Parent after September 15, 2004 in an amount sufficient to permit the
Parent 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.



11.    Muzak Finance Corp.



Muzak Finance Corp. is a co-issuer of the Senior Subordinated Notes and had no operating activities during
2002, 2001, and 2000.



12.    Commitments
and Contingencies



Litigation



The Company is involved in various claims
and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of these legal proceedings cannot be predicted with certainty, the management of the Company believes that the resulting liability, if any, will not have a
material effect upon the Companys consolidated financial statements or liquidity.



The industry-wide agreement between business music providers and BMI expired in December 1993. Since this time we have been operating under an interim agreement pursuant to which we have continued to
pay royalties at the 1993 rates. Business music providers and BMI have been negotiating the terms of a new agreement. We are involved in a rate court proceeding, initiated by BMI in Federal Court in New York. At issue are the music license fees
payable to BMI. The period from which such reasonable license fees are payable



F-16



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



covers the period January 1, 1994 to December 31, 2002, and likely several years thereafter. BMI contends that those fee levels understate
reasonable fee levels by as much as 100%. We are vigorously contesting BMIs assessment. We believe the eventual court ruling setting final fees for the period covered will require retroactive adjustment, upward or downward, likely back to
January 1, 1994, and possibly will also entail payment of pre-judgment interest. Discovery in the proceeding has commenced and is not yet completed. As of February 28, 2003, a trial date had not been set.



The industry-wide agreement between business music providers
and ASCAP expired in May 1999. We began negotiations with ASCAP in June 1999, and we have continued to pay ASCAP royalties at the 1999 rates. The agreement between business music providers and ASCAP allowed either party to pursue a rate court
proceeding in federal court in New York to seek a court determined reasonable rate if a mutually acceptable rate was not obtained by November 29, 2002. ASCAP notified the Company that it would pursue such rate court proceeding and on January 29,
2003 made an application to the court to commence such a proceeding.



We cannot predict what the terms of the new BMI or ASCAP agreements with business music providers will be or when agreements will be reached, although BMI and ASCAP have indicated that they are seeking royalty rate increases
and a retroactive royalty rate increase.



In
2002, we paid approximately $8.5.million in royalties to ASCAP, BMI and to SESAC. Increases in the fees we must pay under these agreements could adversely affect our operating margin, and, therefore, our results of operations.



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. The Digital Millennium Copyright Act did not specify the rate and terms of the license. As a result, the United States Copyright Office convened a Copyright Arbitration Royalty Panel to recommend an
ephemeral royalty rate. In February 2002, the Panel recommended an ephemeral royalty rate of ten percent (10%) of gross proceeds applicable to the use of ephemeral copies. That recommendation was subject to review by the Librarian of Congress, who
could have modified or adopted such recommendation.



In June 2002, the Librarian of Congress published his final decision to adopt the Copyright Arbitration Royalty Panels recommendation of a ten percent (10%) ephemeral royalty rate, which covers the period from October 1998
through December 31, 2002. As required by such determination, we remitted payment on October 20, 2002 for royalties payable for the period from October 28, 1998 through August 31, 2002. We believe that the United States Copyright Office will once
again convene a Copyright Arbitration Royalty Panel, sometime in 2003, to recommend an ephemeral royalty rate for the period from January 1, 2003 through December 31, 2007.



With respect to future revenue subject to such ephemeral royalty rate, we believe our exposure is minimal, as
we believe our 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.



Other Commitments



As of
December 31, 2002, the Company has approximately $33.6 million in outstanding capital expenditure commitments covering a five-year period. The Company, as discussed in Note 7 above, is the lessee under various operating and capital leases for
equipment, vehicles, satellite capacity, and buildings.



F-17



---

MUZAK LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





13.    Quarterly Financial Data (Unaudited): (In Thousands)



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



|                                                             |  | Fiscal 2002   |       
|------------------------------------------------------------ |  | ------------- | ------
|                                                             |  | First Quarter |       
|Net Revenue                                                  |  | $             | 50,963
|Cost of revenues, excluding depreciation and amortization(a) |  |               | 17,318
|Income (loss) from operations(b)                             |  |               | (2,276
|Net Loss                                                     |  |               | (9,701



|                                                             |  | Fiscal 2001   |        
|------------------------------------------------------------ |  | ------------- | -------
|                                                             |  | First Quarter |        
|Net Revenue                                                  |  | $             | 49,968 
|Cost of revenues, excluding depreciation and amortization(c) |  |               | 16,647 
|Loss from operations(d)                                      |  |               | (2,988 
|Net Loss                                                     |  |               | (11,838



|                                                          |  | Fiscal 2000   |       
|--------------------------------------------------------- |  | ------------- | ------
|                                                          |  | First Quarter |       
|Net Revenue                                               |  | $             | 43,695
|Cost of revenues, excluding depreciation and amortization |  |               | 15,704
|Loss from operations                                      |  |               | (145  
|Net Loss                                                  |  |               | (9,788

---

|(a) |  | The second quarter of 2002 includes a $3.1 million charge to increase reserves for estimated prior period licensing royalties and related expenses.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | The first quarter of 2002 includes a $0.5 million charge in connection with exploring various financing alternatives.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(c) |  | The fourth quarter of 2001 includes a $1.2 million charge related to a license fee audit.
|--- |  | -----------------------------------------------------------------------------------------

|(d) |  | The first quarter of 2001 includes a charge of $0.7 million related to the postponed private placement of Senior Subordinated Notes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



Historically, Muzak has experienced slight seasonality in its
equipment and related services revenues and costs of revenues resulting primarily from a significant retail client base which constructs and opens new retail stores in time for the fourth quarter holiday season. Accordingly, Muzak experiences higher
equipment and related services revenues and costs of goods in the third and fourth quarters, as opposed to the first half of the year, as a result of the installation and servicing of these new retail locations. However, this seasonality was less of
a factor during 2002 due to less capital spending associated with a reduction in new location store build outs among national clients, particularly within the retail sector.



F-18



---

Report of Independent Accountants



To the Board of Directors

of Muzak Holdings LLC:



In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 29 present fairly, in all
material respects, the financial position of Muzak Holdings LLC (the Company) and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which 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 15 to the consolidated financial statements, the Company has revised its financial
statements to include the information that is required by Rule 3-10 of Securities Exchange Commission Regulation S-X regarding the guarantees of the Companys Senior Subordinated Notes.



As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets on January 1, 2002 and Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments
and Hedging Activities on January 1, 2001.



/s/    PricewaterhouseCoopers LLP



Charlotte, North Carolina

February 21, 2003,
except for Note 15,  for which the date is May 1, 2003



F-19



---

ITEM 1.    FINANCIAL STATEMENTS



MUZAK HOLDINGS LLC



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                            |  | December 31, 2002 |          |   | December 31, 2001 |  
|----------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                      |  |                   |          |   |                   |  
|Current Assets:                                             |  |                   |          |   |                   |  
|Cash                                                        |  | $                 | 1,781    |   |                   | $
|Accounts receivable, net of allowances of $1,708 and $1,943 |  |                   | 26,531   |   |                   |  
|Inventories                                                 |  |                   | 11,401   |   |                   |  
|Prepaid expenses and other assets                           |  |                   | 1,719    |   |                   |  
|                                                            |  |                   |          |   |                   |  
|Total current assets                                        |  |                   | 41,432   |   |                   |  
|Property and equipment, net                                 |  |                   | 110,889  |   |                   |  
|Intangible assets, net                                      |  |                   | 270,756  |   |                   |  
|Deferred subscriber acquisition costs, net                  |  |                   | 41,410   |   |                   |  
|Other assets, net                                           |  |                   | 11,759   |   |                   |  
|                                                            |  |                   |          |   |                   |  
|Total assets                                                |  | $                 | 476,246  |   |                   | $
|                                                            |  |                   |          |   |                   |  
|LIABILITIES AND MEMBERS INTEREST                           |  |                   |          |   |                   |  
|Current Liabilities:                                        |  |                   |          |   |                   |  
|Accounts payable                                            |  | $                 | 10,049   |   |                   | $
|Accrued expenses                                            |  |                   | 18,304   |   |                   |  
|Current maturities of other liabilities                     |  |                   | 2,924    |   |                   |  
|Current maturities of long term debt                        |  |                   | 7,855    |   |                   |  
|Advance billings                                            |  |                   | 1,040    |   |                   |  
|                                                            |  |                   |          |   |                   |  
|Total current liabilities                                   |  |                   | 40,172   |   |                   |  
|Long-term debt                                              |  |                   | 359,914  |   |                   |  
|Related party notes                                         |  |                   | 10,000   |   |                   |  
|Other liabilities                                           |  |                   | 10,215   |   |                   |  
|Commitments and Contingencies (See Note 14)                 |  |                   |          |   |                   |  
|Mandatorily redeemable preferred units                      |  |                   | 109,114  |   |                   |  
|Members Interest:                                          |  |                   |          |   |                   |  
|Class A units                                               |  |                   | 117,167  |   |                   |  
|Class B units                                               |  |                   | 97       |   |                   |  
|Accumulated other comprehensive loss                        |  |                   | (290     | ) |                   |  
|Accumulated deficit                                         |  |                   | (170,143 | ) |                   |  
|                                                            |  |                   |          |   |                   |  
|Total members interest                                     |  |                   | (53,169  | ) |                   |  
|                                                            |  |                   |          |   |                   |  
|Total liabilities and members interest                     |  | $                 | 476,246  |   |                   | $
|                                                            |  |                   |          |   |                   |  









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



F-20



---

MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)





|                                                                                                                     |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|Revenues:                                                                                                            |  |                              |         |   |                              |   |         |                              | 
|Music and other business services                                                                                    |  | $                            | 162,999 |   |                              | $ | 150,472 |                              | 
|Equipment and related services                                                                                       |  |                              | 54,757  |   |                              |   | 52,889  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 217,756 |   |                              |   | 203,361 |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Cost of revenues:                                                                                                    |  |                              |         |   |                              |   |         |                              | 
|Music and other business services (excluding $44,581, $37,189, and $30,526 of
depreciation and amortization expense) |  |                              | 34,467  |   |                              |   | 31,172  |                              | 
|Equipment and related services                                                                                       |  |                              | 43,754  |   |                              |   | 40,335  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 78,221  |   |                              |   | 71,507  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|                                                                                                                     |  |                              | 139,535 |   |                              |   | 131,854 |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Selling, general and administrative expenses                                                                         |  |                              | 72,023  |   |                              |   | 68,107  |                              | 
|Depreciation and amortization expense                                                                                |  |                              | 70,109  |   |                              |   | 75,668  |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Loss from operations                                                                                                 |  |                              | (2,597  | ) |                              |   | (11,921 | )                            | 
|Other income (expense):                                                                                              |  |                              |         |   |                              |   |         |                              | 
|Interest expense                                                                                                     |  |                              | (36,533 | ) |                              |   | (39,390 | )                            | 
|Other, net                                                                                                           |  |                              | 192     |   |                              |   | (481    | )                            | 
|Loss from extinguishment of debt                                                                                     |  |                              |        |   |                              |   |        |                              | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Loss before income taxes                                                                                             |  |                              | (38,938 | ) |                              |   | (51,792 | )                            | 
|Income tax benefit                                                                                                   |  |                              | (956    | ) |                              |   | (595    | )                            | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 
|Net loss                                                                                                             |  | $                            | (37,982 | ) |                              | $ | (51,197 | )                            | 
|                                                                                                                     |  |                              |         |   |                              |   |         |                              | 







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



F-21



---

MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                         |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                    |  |                              |         |   |                              |   |         |                              | 
|Net loss                                                                 |  | $                            | (37,982 | ) |                              | $ | (51,197 | )                            | 
|Adjustments to derive cash flow from operating activities:               |  |                              |         |   |                              |   |         |                              | 
|Loss from extinguishment of debt                                         |  |                              |        |   |                              |   |        |                              | 
|(Gain) Loss on disposal of fixed assets                                  |  |                              | (27     | ) |                              |   | 109     |                              | 
|Deferred income tax benefit                                              |  |                              | (1,365  | ) |                              |   | (628    | )                            | 
|Depreciation and amortization                                            |  |                              | 70,109  |   |                              |   | 75,668  |                              | 
|Amortization of senior discount notes                                    |  |                              | 7,623   |   |                              |   | 6,722   |                              | 
|Amortization of deferred financing fees                                  |  |                              | 2,308   |   |                              |   | 1,910   |                              | 
|Amortization of deferred subscriber acquisition costs                    |  |                              | 12,387  |   |                              |   | 9,516   |                              | 
|Deferred subscriber acquisition costs                                    |  |                              | (16,355 | ) |                              |   | (16,404 | )                            | 
|Unearned installment income                                              |  |                              | (1,384  | ) |                              |   | (659    | )                            | 
|Change in certain assets and liabilities, net of business acquisitions:  |  |                              |         |   |                              |   |         |                              | 
|(Increase) decrease in accounts receivable                               |  |                              | (2,218  | ) |                              |   | 13,753  |                              | 
|(Increase) decrease in inventory                                         |  |                              | (1,999  | ) |                              |   | 1,685   |                              | 
|(Decrease) increase in accrued expenses                                  |  |                              | (2,375  | ) |                              |   | 1,770   |                              | 
|Increase (decrease) in accounts payable                                  |  |                              | 1,442   |   |                              |   | (3,984  | )                            | 
|(Decrease) increase in advance billings                                  |  |                              | 170     |   |                              |   | (1,240  | )                            | 
|Other, net                                                               |  |                              | 1,255   |   |                              |   | 1,014   |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|Net cash provided by (used in) operating activities                      |  |                              | 31,589  |   |                              |   | 38,035  |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|                                                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                    |  |                              |         |   |                              |   |         |                              | 
|Acquisitions, net of cash                                                |  |                              |        |   |                              |   | (979    | )                            | 
|Proceeds from the sale of fixed assets                                   |  |                              | 41      |   |                              |   | 313     |                              | 
|Capital expenditures for property and equipment and intangibles          |  |                              | (38,830 | ) |                              |   | (42,242 | )                            | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|Net cash used in investing activities                                    |  |                              | (38,789 | ) |                              |   | (42,908 | )                            | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|                                                                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |  |                              |         |   |                              |   |         |                              | 
|Change in book overdrafts                                                |  |                              | 2,987   |   |                              |   | (5,322  | )                            | 
|Borrowings under revolver                                                |  |                              | 15,000  |   |                              |   | 19,800  |                              | 
|Repayment of revolver                                                    |  |                              | (10,000 | ) |                              |   | (2,500  | )                            | 
|Borrowings from senior credit facility                                   |  |                              |        |   |                              |   |        |                              | 
|Repayments of senior credit facility                                     |  |                              | (6,693  | ) |                              |   | (5,193  | )                            | 
|Proceeds from sale of interest rate swap                                 |  |                              |        |   |                              |   |        |                              | 
|Proceeds from issuance of preferred stock, net of fees                   |  |                              |        |   |                              |   |        |                              | 
|Proceeds from issuance of membership units                               |  |                              |        |   |                              |   |        |                              | 
|Repayment of floating rate notes                                         |  |                              |        |   |                              |   |        |                              | 
|Borrowing of floating rate notes                                         |  |                              |        |   |                              |   |        |                              | 
|Repayment of notes payable to related parties                            |  |                              |        |   |                              |   |        |                              | 
|Proceeds from issuance of notes payable to related party                 |  |                              | 10,000  |   |                              |   |        |                              | 
|Payment of interest rate protection agreement                            |  |                              | (372    | ) |                              |   |        |                              | 
|Repayments of other debt                                                 |  |                              | (2,600  | ) |                              |   | (2,341  | )                            | 
|Payment of fees associated with the financing                            |  |                              | (1,924  | ) |                              |   |        |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|Net cash provided by financing activities                                |  |                              | 6,398   |   |                              |   | 4,444   |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|INCREASE (DECREASE) IN CASH                                              |  |                              | (802    | ) |                              |   | (429    | )                            | 
|CASH, BEGINNING OF PERIOD                                                |  |                              | 2,583   |   |                              |   | 3,012   |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|                                                                        
|CASH, END OF PERIOD                                                      |  | $                            | 1,781   |   |                              | $ | 2,583   |                              | 
|                                                                         |  |                              |         |   |                              |   |         |                              | 
|Significant non-cash activities:                                         |  |                              |         |   |                              |   |         |                              | 
|Issuances of common stock in connection with acquisitions                |  |                              |        |   |                              |   | 143     |                              | 
|Issuances of common stock in connection with conversion of sponsor notes |  |                              |        |   |                              |   | 35,435  |                              | 
|Capital lease obligations                                                |  |                              | 2,030   |   |                              |   | 1,691   |                              | 



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



F-22



---

MUZAK HOLDINGS LLC



CONSOLIDATED STATEMENTS OF CHANGES IN

MEMBERS INTEREST AND COMPREHENSIVE LOSS

(In thousands, except for units)



|                                                    |  | Class A |  |         | Class B |   |       | Accumulated Deficit |   |         | Accumulated Other Comprehensive Loss |        |   | Total Members Interest |  
|--------------------------------------------------- |  | ------- |  | ------- | ------- | - | ----- | ------------------- | - | ------- | ------------------------------------ | ------ | - | ----------------------- | -
|                                                    |  | Units   |  | Dollars |         |   | Units |                     |   | Dollars |                                      |        |   |                        
|Balance, December 31, 1999                          |  | 70,599  |  | $       | 70,599  |   |       | 10,281              |   |         | $                                    | 2,822  |   |                         | $
|Net loss                                            |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Net Issuance of units                               |  | 26,311  |  |         | 42,383  |   |       | 2,529               |   |         |                                      |        |   |                         |  
|Vesting of Class B units                            |  |         |  |         |         |   |       |                     |   |         |                                      | 4      |   |                         |  
|Preferred return on preferred units                 |  |         |  |         | (2,302  | ) |       |                     |   |         |                                      | (304   | ) |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Balance, December 31, 2000                          |  | 96,910  |  | $       | 110,680 |   |       | 12,810              |   |         | $                                    | 2,522  |   |                         | $
|Comprehensive loss:                                 |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Net loss                                            |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Cumulative effect of change in accounting principle |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Change in unrealized losses on derivative           |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Total comprehensive loss                            |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Net Issuance (repurchase) of units                  |  | 35,512  |  |         | 35,512  |   |       | (2,284              | ) |         |                                      |        |   |                         |  
|Vesting of Class B units                            |  |         |  |         |         |   |       |                     |   |         |                                      | 23     |   |                         |  
|Preferred return on preferred units                 |  |         |  |         | (13,051 | ) |       |                     |   |         |                                      | (1,282 | ) |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Balance, December 31, 2001                          |  | 132,422 |  | $       | 133,141 |   |       | 10,526              |   |         | $                                    | 1,263  |   |                         | $
|Comprehensive loss:                                 |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Net loss                                            |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Change in unrealized losses on derivative           |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Total comprehensive loss                            |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Net Issuance  of units                              |  |         |  |         |         |   |       | 893                 |   |         |                                      |        |   |                         |  
|Vesting of Class B Units                            |  |         |  |         |         |   |       |                     |   |         |                                      | 29     |   |                         |  
|Preferred return on preferred units                 |  |         |  |         | (15,974 | ) |       |                     |   |         |                                      | (1,195 | ) |                         |  
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  
|Balance, December 31, 2002                          |  | 132,422 |  | $       | 117,167 |   |       | 11,419              |   |         | $                                    | 97     |   |                         | $
|                                                    |  |         |  |         |         |   |       |                     |   |         |                                      |        |   |                         |  





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



F-23



---

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.



As of December 31, 2002, 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.



Book overdraft Book overdraft of $3.0 million and $5.3 million as of December 31, 2002 and December 31, 2000, respectively is
included in accounts payable. There was no book overdraft as of December 31, 2001.



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. The Company transmits 84% of its music programs via broadcast satellite. 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.



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. Impairment losses are recognized if recorded values exceed undiscounted future cash flows, by reducing them to estimated fair value. No impairment losses were recognized by the Company for the periods presented.



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 changes the



F-24



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. Note 4 provides additional information concerning goodwill and other identifiable intangible assets.



In connection with the adoption of SFAS No. 142, the Company evaluated the useful lives of its existing intangible assets and concluded
that, with the exception of goodwill, all of its intangible assets have definite lives and that the existing useful lives are reasonable. The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30,
2002. As the fair value of goodwill exceeds the carrying amount of goodwill, the Company did not record an impairment charge.



In June 2001, Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS No. 141), which requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001. All of the Companys acquisitions have been accounted for under the purchase
method of accounting.



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, which are amortized as a component of selling, general, and administrative expenses over the life of the client contract or
five years, whichever is shorter, on a straight-line basis. Accumulated amortization totaled $30.3 million and $17.9 million as of December 31, 2002, and 2001, respectively. If a client contract terminates early, the unamortized subscriber
acquisition cost is typically recovered from the salesperson.



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 and related installation are
recognized upon delivery or installation. 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 2002, 2001, and 2000, 4%, 3%, and 4%, respectively, of our revenues were generated from fees from our franchisees. As of December 31, 2002, 2001, and 2000, the Company had 58, 59, and 61 franchisee owners, respectively.



Derivative Financial InstrumentsThe
Company uses derivative financial instruments to convert variable interest rate debt to fixed interest rate debt to reduce its exposure to fluctuations in interest rates as dictated by the senior credit facility.



F-25



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001. In accordance with SFAS 133, the Companys derivative is recognized on the balance sheet at its fair value
since it is designated as a cash flow hedging instrument. The hedge is 100% effective for exposures to interest rate fluctuations. As a result of the 100% effectiveness of the hedge, changes in the fair value of the derivative are recorded each
period in other comprehensive loss. The Company paid a premium of $0.4 million for its interest rate cap in April 2002. The interest rate cap protects the Company against LIBOR increases above 7.25%. The Company is amortizing the premium paid for
the cap over the life of the agreement using the caplets approach and any amounts received under the cap will be recorded as a reduction to interest expense. The fair market value of the interest rate cap was $0.1 million as of December 31, 2002.



2.    Acquisitions



The Company did not make any acquisitions during the year
ended December 31, 2002.



On May 31, 2001, the
Company acquired Sound of Music, LTD (Sound of Music), the Companys independent franchisee operating in Wisconsin for a cash purchase price of $1.0 million. In connection with this acquisition, the Parent issued $0.1 million in
common membership units, which has been reflected as a non-cash equity contribution from the Parent to the Company.



The estimated fair value of assets acquired and liabilities assumed relating to the 2001 acquisition, is summarized below (in thousands):



|Property, plant and equipment                     |  | $ | 235  
|------------------------------------------------- |  | - | -----
|Other Intangibles                                 |  |   | 581  
|Goodwill                                          |  |   | 284  
|                                                  |  |   |      
|Total purchase price, including transaction costs |  | $ | 1,100
|                                                  |  |   |      



The
Company made ten acquisitions during the year ended December 31, 2000. These acquisitions were comprised of four in market competitors, one business music provider and three marketing on-hold/or in-store messaging providers, and six franchises, for
an aggregate cash purchase price of $34.7 million, excluding transaction costs. During 2000, the Company paid the remaining purchase price of $10.3 million for the 1999 acquisition of MountainWest Audio Inc. The consolidated statement of cash flows
for the year ended December 31, 2000 includes this remaining purchase price.



The results of operations of the acquired companies are included in the Companys consolidated statement of operations for the periods in which they were owned by the Company.



The following presents the unaudited pro forma results
assuming that the acquisitions discussed above had occurred as of the beginning of fiscal 2001 and 2000. These pro forma results are not necessarily indicative of the results that will occur in future periods (in thousands).



|                     |  | Fiscal Year Ended |        
|-------------------- |  | ----------------- | -------
|                     |  | December 31, 2001 |        
|                     |  | (unaudited)       |        
|Revenues             |  | $                 | 203,615
|Loss from operations |  |                   | (11,849
|Net loss             |  |                   | (51,125



F-26



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





3.    Property and Equipment



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



|                                  |  | Useful Life (Years) |  | December 31, 2002 |          |   | December 31, 2001 |  
|--------------------------------- |  | ------------------- |  | ----------------- | -------- | - | ----------------- | -
|Equipment provided to subscribers |  | 46                 |  | $                 | 140,604  |   |                   | $
|Capitalized installation labor    |  | 5                   |  |                   | 62,007   |   |                   |  
|Equipment                         |  | 47                 |  |                   | 25,716   |   |                   |  
|Other                             |  | 330                |  |                   | 18,321   |   |                   |  
|                                  |  |                     |  |                   |          |   |                   |  
|                                  |  |                     |  |                   | 246,648  |   |                   |  
|Less accumulated depreciation     |  |                     |  |                   | (135,759 | ) |                   |  
|                                  |  |                     |  |                   |          |   |                   |  
|                                  |  |                     |  | $                 | 110,889  |   |                   | $
|                                  |  |                     |  |                   |          |   |                   |  



Included
in equipment and other at December 31, 2002 and 2001 is $13.8 million and $11.6 million, respectively of equipment under capital leases, gross of accumulated amortization of $9.5 million and $6.6 million, respectively. Depreciation of property and
equipment was $46.9 million, $40.8 million, and $30.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.



4.    Intangible Assets



The Company adopted SFAS No. 142 on January 1, 2002. In connection with the adoption of SFAS No. 142, the Company reclassified other
intangibles of $6.4 million, gross of accumulated amortization of $3.5 million, related to trained workforce to goodwill and ceased amortization of goodwill. During the first quarter, the Company evaluated the useful lives of its existing intangible
assets and concluded that, with the exception of goodwill, all of its intangible assets have definite lives and that the existing useful lives are reasonable.



The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30, 2002. As the fair value of
goodwill exceeds the carrying amount of goodwill, the Company did not record an impairment charge.



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



|                  |  | December 31, 2002 Carrying Amount |         | December 31, 2001 Carrying Amount
|----------------- |  | --------------------------------- | ------- | ---------------------------------
|Goodwill          |  | $                                 | 140,805 |                                  
|Trained workforce |  |                                   |        |                                  



The
following presents net loss exclusive of amortization of goodwill and trained workforce (in thousands):



|                                            |  | For the Year Ended December 31, |        
|------------------------------------------- |  | ------------------------------- | -------
|                                            |  | 2002                            |        
|Net Loss                                    |  | $                               | (37,982
|Goodwill amortization                       |  |                                 |       
|Trained workforce amortization              |  |                                 |       
|                                            |  |                                 |        
|Net Loss excluding amortization of goodwill |  | $                               | (37,982
|                                            |  |                                 |        



F-27



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                           |  |                     |  | December 31, 2002     |         |                          | December 31, 2001 |        
|-------------------------- |  | ------------------- |  | --------------------- | ------- | ------------------------ | ----------------- | -------
|                           |  | Useful Life (years) |  | Gross Carrying Amount |         | Accumulated Amortization |                   |        
|Income producing contracts |  | 12                  |  | $                     | 153,956 |                          | $                 | (46,617
|License agreements         |  | 20                  |  |                       | 5,082   |                          |                   | (953   
|Deferred production costs  |  | 10                  |  |                       | 5,780   |                          |                   | (1,232 
|Trademarks                 |  | 5                   |  |                       | 15,136  |                          |                   | (11,242
|Non-compete agreements     |  | 3-5                 |  |                       | 7,468   |                          |                   | (6,211 
|Other                      |  | 20                  |  |                       | 10,741  |                          |                   | (1,957 
|                           |  |                     |  |                       |         |                          |                   |        
|                           |  |                     |  | $                     | 198,163 |                          | $                 | (68,212
|                           |  |                     |  |                       |         |                          |                   |        



Aggregate amortization expense was $23.2 million, $34.9 million, and $32.3 million for the years ended December 31, 2002, 2001, and 2000, respectively.



The estimated future aggregate amortization expense is as follows (in thousands):



|Fiscal Year Ending |  |  
|------------------ |  | -
|2003               |  | $
|2004               |  |  
|2005               |  |  
|2006               |  |  
|2007               |  |  



5.    Accrued Expenses



Accrued expenses are summarized below (in thousands):



|                                  |  | December 31, 2002 |        | December 31, 2001
|--------------------------------- |  | ----------------- | ------ | -----------------
|Accrued interest                  |  | $                 | 3,427  |                  
|Accrued compensation and benefits |  |                   | 3,178  |                  
|Licensing royalties               |  |                   | 3,472  |                  
|Other                             |  |                   | 8,227  |                  
|                                  |  |                   |        |                  
|                                  |  | $                 | 18,304 |                  
|                                  |  |                   |        |                  



6.    Debt



Debt obligations consist of the following (in thousands):



|                                      |  | December 31, 2002 |         |   | December 31, 2001 |  
|------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Related party notes                   |  | $                 | 10,000  |   |                   | $
|                                      |  |                   |         |   |                   |  
|Long term debt:                       |  |                   |         |   |                   |  
|Revolving loanSenior credit facility |  | $                 | 26,300  |   |                   | $
|Senior credit facility                |  |                   | 159,514 |   |                   |  
|Senior subordinated notes             |  |                   | 115,000 |   |                   |  
|Senior discount notes                 |  |                   | 64,484  |   |                   |  
|Other                                 |  |                   | 2,471   |   |                   |  
|                                      |  |                   |         |   |                   |  
|Total debt obligations                |  |                   | 367,769 |   |                   |  
|Less current maturities               |  |                   | (7,855  | ) |                   |  
|                                      |  |                   |         |   |                   |  
|                                      |  | $                 | 359,914 |   |                   | $
|                                      |  |                   |         |   |                   |  



F-28



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Senior Credit Facility



The Company has a senior credit facility (Senior Credit Facility) consisting of: (i) a term loan
facility in the amount of $30.0 million payable in semi-annual installments until final maturity on December 31, 2005 (Term Loan A); (ii) a term loan facility in the amount of $145.0 million payable in semi-annual installments until
final maturity on December 31, 2006 (Term Loan B) (together with Term Loan A, the Term Loans); and (iii) a revolving loan (the Revolving Loan) in an aggregate principal amount of up to $55.0 million terminating on
December 31, 2005. The Company had $17.9 million of borrowing availability under its revolving loan as of December 31, 2002, with an additional $10.0 million of availability subject to the Company meeting certain financial covenants. Availability
under the revolving loan has been reduced by outstanding letters of credit of $0.8 million.



The Senior Credit Facility is guaranteed by the Company and certain 100% owned subsidiaries. The non-guarantor subsidiary is considered minor and the consolidated amounts in the Companys
financial statements are representative of the combined guarantors financial statements. The Amended Senior Credit Facility contains restrictive covenants including maintenance of interest, senior and 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. These conditions were satisfied as of
December 31, 2002. The Company believes it will be in compliance with these financial covenants and restrictions during 2003.



Indebtedness under the Term Loan A and the Revolving Loans bear interest at a per annum rate equal to the Companys choice of (i) the
Alternate Base Rate (which is the highest of prime rate and the Federal Funds Rate plus .5%) plus a margin ranging from 2.00% to 3.00% or (ii) the offered rates for Eurodollar deposits (LIBOR) of one, two, three, or six months, as
selected by the Company, plus a margin ranging from 3.00% to 4.00%. Margins, which are subject to adjustment, based on the changes in the Companys ratio of consolidated total debt to EBITDA (i.e., earnings before interest, taxes, interest,
depreciation, amortization and other non cash charges as defined by the agreement) were 2.25% in the case of Alternate Base Rate and 3.25% in the case of LIBOR as of December 31, 2002. Indebtedness under the Term Loan B bears interest at a per annum
rate equal to the Companys choice of (i) the Alternate Base Rate (as described above) plus a margin of 3.5% or (ii) LIBOR of one, two, three, or six months, as selected by the Company plus a margin of 4.5%. The weighted average rate of
interest on the Senior Credit Facility, including the effects of the interest rate swap, if any, was 5.6% and 8.7% at December 31, 2002 and 2001, respectively.



In March 2002, the Company entered into the sixth amendment under the Senior Credit Facility, which increased its aggregate revolving loan
commitment under the Senior Credit Facility by $20.0 million, for a total commitment of $55.0 million, and amended certain financial covenants and applicable margins.



F-29



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 and Muzak
Finance and are subordinated in right of payment to all existing and future Senior Indebtedness of Muzak and Muzak Finance. The Senior Subordinated Notes are guaranteed by 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. The Companys non-guarantor subsidiary is
minor and the consolidated amounts in the Companys financial statements are representative of the combined guarantors. The indenture governing the Senior Subordinated Notes prohibits the Company from making certain payments such as dividends
and distributions of their capital stock; repurchases or redemptions of their capital stock, and investments (other than permitted investments) unless certain conditions are met by the Company. After March 15, 2004, the issuers may redeem all or
part of the 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 $75.0 million in principal amount at maturity, or
$39.9 million in accreted value on the issue date, of 13% Senior Discount Notes (the Senior Discount Notes) due March 2010. Accreted value on the Senior Discount Notes was $64.5 million and $56.9 million as of December 31, 2002 and 2001,
respectively. Cash interest on the Senior Discount Notes does not accrue and is not payable prior to March 15, 2004. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity. Until March 15, 2004, the
Senior Discount Notes will accrete in value such that the accreted value on March 15, 2004 will equal the principal amount at maturity of the Senior Discount Notes. From and after March 15, 2004, interest on the Senior Discount Notes will accrue at
a rate of 13% per annum. Interest will be payable semi-annually in arrears on each March 15 and September 15, commencing September 15, 2004, to holders of record of the Senior Discount Notes at the close of business on the immediately preceding
March 1 and September 1.



Related Party Notes



In March 2002, the Company 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 accrue interest at 15% per annum; any accrued interest not paid as of March 31, June 30, September 30 or December 31
will bear interest at 15% per annum until such interest is paid or extinguished. The sponsor notes are junior and subordinate to payments for the Senior Credit Facility, and the Senior Subordinated Notes. At any time, the sponsor notes may be
converted into Class A-2 units of the Company at the direction of MEM Holdings. If the sponsor notes have not been repaid in full as of September 2003, the sponsor notes will automatically be converted into Class A-2 units of the Company.



From July 1, 1999 through November 24, 1999, the
Company borrowed an aggregate amount of $30.0 million of sponsor notes from MEM Holdings LLC. The Company repaid $3.0 million of sponsor notes with the proceeds from its 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.



F-30



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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, 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. This note bears interest at 8% with principal and interest payments due monthly until maturity in October 2006.



Liquidity



During 2003, we expect that our primary source of funds will
be cash flows from operations and expect funding from borrowings under the senior credit facility to be minimal. As of December 31, 2002, we had outstanding debt of $185.8 million under our senior credit facility, with additional available
borrowings of up to $27.9 million. Based upon current and anticipated levels of operations, we believe that our cash flows from operations, combined with availability under the senior credit facility, will be adequate to meet our liquidity needs for
at least the next eighteen months. The Company strives to fund both investments in new client locations and interest and principal payments primarily through cash generated from operations rather than through borrowings under the Senior Credit
Facility. Currently, the Company is funding investments in new client locations through cash generated from operations and is borrowing under its Senior Credit Facility for partial interest and principal payments 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.



Annual Maturities



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



|2003       |  | $ | 7,855  
|---------- |  | - | -------
|2004       |  |   | 27,742 
|2005       |  |   | 69,233 
|2006       |  |   | 81,700 
|2007       |  |   | 118    
|Thereafter |  |   | 191,121



Total
interest paid by the Company on all indebtedness was $29.0 million, $28.9 million, and $36.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Interest expense also includes finance charges on past due amounts.



Interest Rate Protection Programs



During April 1999, the Company entered into a four year
interest rate swap agreement in which the Company effectively exchanged $100.0 million of floating rate debt at three month LIBOR for 5.59% fixed rate debt. The Company terminated this agreement on January 28, 2000 and received approximately $4.4
million for this agreement. The proceeds were recorded an as adjustment to interest expense over the term of the new interest rate swap agreement.



F-31



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





On January
28, 2000, the Company entered into a new 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 and $2.7 million for the years ended December 31, 2002 and 2001, respectively.



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 protects the Company against LIBOR increases above 7.25% and is designated as a hedge of interest rates. Accordingly, the derivative is recognized on the
balance sheet at its fair value. The hedge is considered 100% effective for exposures to interest rate fluctuations. As a result of the 100% effectiveness of the hedge, changes in the fair value of the derivative are recorded in other comprehensive
loss. The Company is amortizing the premium paid for the cap over the life of the agreement using the caplets approach and any amounts received under the cap will be recorded as a reduction to interest expense.



Pursuant to the adoption of FASB Statement No. 145,
Recession of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, the Company reclassified $1.4 million from extraordinary loss on extinguishment of debt to loss from extinguishment of
debt for the year ended December 31, 2000. The loss resulted from the early extinguishment of $36.0 million Senior Subordinated Floating Rate Notes (the Floating Rate Notes) at 101.50% on October 19, 2000. The loss also included
the write off of deferred financing fees associated with the Floating Rate Notes.



Fair Value of Financial Instruments



The estimated fair values of the Companys debt as of December 31, 2002 and December 31, 2001 were $329.9 million and $331.8 million, respectively. The fair value of the Senior 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 cap was $0.1 million as of December 31, 2002 and the fair value of the
interest rate swap agreement was a loss of approximately $2.5 million as of December 31, 2001. 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.



7.    Mandatorily 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 for a total of $85.0 million.



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. The amortization of the discount and the preferential return on the
preferred units is being recorded as an adjustment to members interest.



F-32



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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. 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 May 8, 2001, the Company entered into the first amendment to the Securities Purchase Agreement which entitled the holders of the preferred units to receive additional Class A units for anti-dilution
purposes upon the conversion of any sponsor notes that were outstanding as of October 18, 2000. In connection with this conversion of $27.0 million sponsor notes plus accrued interest into Class A units in May 2001, the Company issued 1,769 Class A
units to the holders of the preferred units.



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 satisfied as of December 31, 2002.



The Company was in violation of unit coverage
and total leverage ratio under the Securities Purchase Agreement as of June 30, 2002. As a result of the default, the preferred units accrued at a preferential return of 17% per annum during the quarter ended September 30, 2002. The Company was in
compliance as of September 30, 2002, and therefore, the preferred units began accruing at 15% per annum beginning on October 1, 2002.



8.    Lease Commitments



The Company is the lessee under various long-term operating and capital leases for machinery, equipment, buildings, and vehicles. The
Company has also entered into various agreements to lease transponders to transmit music programs via direct broadcast satellite. These agreements range range from 2 to 17 years. The majority of these leases contain renewal provisions.



F-33



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





At
December 31, 2002, future minimum lease payments under operating and capital leases are as follows (in thousands):



|Fiscal Year Ending    |  | Capital |       |   | Operating
|--------------------- |  | ------- | ----- | - | ---------
|2003                  |  | $       | 2,188 |   |          
|2004                  |  |         | 1,588 |   |          
|2005                  |  |         | 1,081 |   |          
|2006                  |  |         | 195   |   |          
|2007                  |  |         | 3     |   |          
|Later Years           |  |         |      |   |          
|Less Imputed Interest |  |         | (448  | ) |          
|Less Executory Cost   |  |         | (383  | ) |          
|                      |  |         |       |   |          
|                      |  | $       | 4,224 |   |          
|                      |  |         |       |   |          



Rental
expense under operating leases was $10.5 million, $9.8 million, and $9.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.



9.    Employee Benefit Plans



Plan expense was $1.4 million, $1.5 million, and $1.4 million, for the years ended December 31, 2002, 2001 and 2000, respectively.



10.    Income Taxes



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



|                      |  | Year Ended December 31, 2002 |        |   | Year Ended December 31, 2001 |   |      | Year Ended December 31, 2000 | 
|--------------------- |  | ---------------------------- | ------ | - | ---------------------------- | - | ---- | ---------------------------- | 
|Current tax:          |  |                              |        |   |                              |   |      |                              | 
|Federal               |  | $                            |       |   |                              | $ |     |                              | 
|State                 |  |                              | 409    |   |                              |   | 33   |                              | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  |                              | 409    |   |                              |   | 33   |                              | 
|Deferred tax benefit: |  |                              |        |   |                              |   |      |                              | 
|Federal               |  |                              | (1,138 | ) |                              |   | (550 | )                            | 
|State                 |  |                              | (227   | ) |                              |   | (78  | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  |                              | (1,365 | ) |                              |   | (628 | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 
|                      |  | $                            | (956   | ) |                              | $ | (595 | )                            | 
|                      |  |                              |        |   |                              |   |      |                              | 



The
Companys effective tax rate differs from the statutory federal tax rate for the following reasons:



|                                                               |  | Year Ended December 31, 2002 |         |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2000 | 
|-------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|Federal tax benefit of statutory rates                         |  | $                            | (13,239 | ) |                              | $ | (15,692 | )                            | 
|State income taxes                                             |  |                              | (152    | ) |                              |   | (89     | )                            | 
|Goodwill and nondeductible expenses                            |  |                              |        |   |                              |   | 138     |                              | 
|Loss earned by partnership not subject to corporate income tax |  |                              | 12,435  |   |                              |   | 15,048  |                              | 
|                                                               |  |                              |         |   |                              |   |         |                              | 
|                                                               |  | $                            | (956    | ) |                              | $ | (595    | )                            | 
|                                                               |  |                              |         |   |                              |   |         |                              | 



F-34



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 (liability) at December 31 are as follows (in thousands):



|                                                                     |  | 2002 |        |   | 2001 |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | -
|Property and equipment                                               |  | $    | (90    | ) |      | $
|Intangible assets                                                    |  |      | (2,929 | ) |      |  
|Other                                                                |  |      | 389    |   |      |  
|                                                                     |  |      |        |   |      |  
|Net deferred tax liability (included in other long term liabilities) |  | $    | (2,630 | ) |      | $
|                                                                     |  |      |        |   |      |  



11.    Related Party Transactions



The Company has a Management and Consulting Services Agreement (Management Agreement) with ABRY Partners, which provides that the Company will pay a management fee as defined in the
Management Agreement. During 2002, 2001, and 2000 the Company incurred fees of $0.4 million, $0.3 million, and $0.3 million, respectively, under this agreement. Either the Company 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.



During fiscal 2002 and 1999, the Company borrowed $10.0 million and $30.0 million, respectively, from MEM Holdings under junior subordinated notes. The Company repaid the $3.0 million Sponsor Note
during 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. As of December 31, 2002, $10.0 million of Sponsor Notes remained outstanding.



12.    Muzak Holdings Finance Corp.



Muzak Holdings Finance Corp. is a co-issuer of the Senior
Discount Notes and had no operating activities during 2002, 2001, and 2000.



13.    Members Interest



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, Class A-1, and Class A-2 units. 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. 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 value 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



F-35



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2002, the Company had 123,494 Class A units outstanding and 8,928 Class A-1 units outstanding. There were no outstanding Class A-2 units as of December 31, 2002.



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, 2002. 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. As of December 31, 2002 and 2001, the Company had 2,793 and 2,500 B-1 units
outstanding, respectively. As of December 31, 2002 and 2001, the Company had 2,805 and 2,508 B-2 units outstanding, respectively. As of December 31, 2002 and 2001 the Company had 2,819 and 2,516 B-3 units outstanding, respectively. As of December
31, 2002 and 2001, the Company had 3,002 B-4 units outstanding. 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.



14.    Commitments and Contingencies



Litigation



The Company is involved in various claims and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of
these legal proceedings cannot be predicted with certainty, the management of the Company believes that the resulting liability, if any, will not have a material effect upon the Companys consolidated financial statements or liquidity.



The industry-wide agreement between business
music providers and BMI expired in December 1993. Since this time we have been operating under an interim agreement pursuant to which we have continued to pay royalties at the 1993 rates. Business music providers and BMI have been negotiating the
terms of a new agreement. We are involved in a rate court proceeding, initiated by BMI in Federal Court in New York. At issue are the music license fees payable to BMI. The period from which such reasonable license fees are payable
covers the period January 1, 1994 to December 31, 2002, and likely several years thereafter. BMI contends that those fee levels understate reasonable fee levels by as much as 100%. We are vigorously contesting BMIs assessment. We believe the
eventual court ruling setting final fees for the period covered will require retroactive adjustment, upward or downward, likely back to January 1, 1994, and possibly will also entail payment of pre-judgment interest. Discovery in the proceeding has
commenced and is not yet completed. As of February 28, 2003, a trial date had not been set.



The industry-wide agreement between business music providers and ASCAP expired in May 1999. We began negotiations with ASCAP in June 1999, and we have continued to pay ASCAP royalties at the 1999
rates. The agreement between business music providers and ASCAP allowed either party to pursue a rate court proceeding in federal court in New York to seek a court determined reasonable rate if a mutually acceptable rate was not obtained by November
29, 2002. ASCAP notified the Company that it would pursue such rate court proceeding and on January 29, 2003 made an application to the court to commence such a proceeding.



F-36



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





We cannot
predict what the terms of the new BMI or ASCAP agreements with business music providers will be or when agreements will be reached, although BMI and ASCAP have indicated that they are seeking royalty rate increases and a retroactive royalty rate
increase.



In 2002, we paid approximately $8.5
million in royalties to ASCAP, BMI and to SESAC. Increases in the fees we must pay under these agreements could adversely affect our operating margin, and, therefore, our results of operations.



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. The Digital Millennium Copyright Act did not specify the rate and terms of the license. As a result, the United States Copyright Office convened a Copyright Arbitration Royalty Panel to recommend an
ephemeral royalty rate. In February 2002, the Panel recommended an ephemeral royalty rate of ten percent (10%) of gross proceeds applicable to the use of ephemeral copies. That recommendation was subject to review by the Librarian of Congress, who
could have modified or adopted such recommendation.



In June 2002, the Librarian of Congress published his final decision to adopt the Copyright Arbitration Royalty Panels recommendation of a ten percent (10%) ephemeral royalty rate, which covers the period from October 1998
through December 31, 2002. As required by such determination, we remitted payment on October 20, 2002 for royalties payable for the period from October 28, 1998 through August 31, 2002. We believe that the United States Copyright Office will once
again convene a Copyright Arbitration Royalty Panel, sometime in 2003, to recommend an ephemeral royalty rate for the period from January 1, 2003 through December 31, 2007.



With respect to future revenue subject to such ephemeral royalty rate, we believe our exposure is minimal, as
we believe our 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.



Other Commitments



As of
December 31, 2002, the Company has approximately $33.6 million in outstanding capital expenditure commitments covering a five-year period. The Company, as discussed in Note 7 above, is the lessee under various operating and capital leases for
equipment, vehicles, satellite capacity, and buildings.



15.    Guarantors



The following schedules set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X for 2002, 2001 and 2000 for (1) Muzak Holdings, LLC, (2) Muzak LLC, a
co-issuer of the Senior Subordinated Notes, (3) Muzak Finance Corp., a co-issuer of the Senior Subordinated Notes and a wholly-owned subsidiary of Muzak LLC, and (4) on a combined basis, the subsidiary guarantors of the 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 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 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 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-37



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Condensed Consolidating
Balance Sheets as of December 31, 2002(In thousands)

|                                                            |  | Muzak Holdings LLC (Parent) |         |   | Muzak LLC (Co-issuer) |   | Muzak Finance Corp (Co-issuer) |  |   | Combined Guarantor Subsidiaries* |   | Eliminations |   |        | Consolidated |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------- | - | ------------------------------ |  | - | -------------------------------- | - | ------------ | - | ------ | ------------ | -
|Assets                                                      |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|                                                           
|Current assets:                                             |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Cash                                                        |  | $                           |        |   |                       | $ | 1,781                          |  | $ |                                 |   |              | $ |       |              | $
|Accounts receivable, net                                    |  |                             |        |   |                       |   | 25,298                         |  |   |                                 |   |              |   | 1,233  |              |  
|Inventories                                                 |  |                             |        |   |                       |   | 11,401                         |  |   |                                 |   |              |   |       |              |  
|Prepaid expenses and other assets                           |  |                             |        |   |                       |   | 1,719                          |  |   |                                 |   |              |   |       |              |  
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Total current assets                                        |  |                             |        |   |                       |   | 40,199                         |  |   |                                 |   |              |   | 1,233  |              |  
|Property and equipment, net                                 |  |                             |        |   |                       |   | 109,699                        |  |   |                                 |   |              |   | 1,190  |              |  
|Intangible assets, net                                      |  |                             |        |   |                       |   | 244,913                        |  |   |                                 |   |              |   | 25,843 |              |  
|Deferred subscriber acquisition costs and other assets, net |  |                             | 2,050   |   |                       |   | 51,114                         |  |   | 2,177                            |   |              |   | 5      |              |  
|Advances to/from subsidiaries                               |  |                             |        |   |                       |   | 62                             |  |   |                                 |   |              |   |       |              |  
|Investment in subsidiaries                                  |  |                             | 118,379 |   |                       |   | 22,333                         |  |   |                                 |   |              |   |       |              |  
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Total assets                                                |  | $                           | 120,429 |   |                       | $ | 468,320                        |  | $ | 2,177                            |   |              | $ | 28,271 |              | $
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|                                                           
|Liabilities and Members Interest                           |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|                                                           
|Current liabilities:                                        |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Accounts payable                                            |  | $                           |        |   |                       | $ | 10,002                         |  | $ |                                 |   |              | $ | 47     |              | $
|Accrued expenses                                            |  |                             |        |   |                       |   | 17,267                         |  |   | 3,312                            |   |              |   | 1,037  |              |  
|Current maturity of other liabilities                       |  |                             |        |   |                       |   | 2,924                          |  |   |                                 |   |              |   |       |              |  
|Current maturities of long termdebt                         |  |                             |        |   |                       |   | 7,769                          |  |   |                                 |   |              |   | 86     |              |  
|Advance billings                                            |  |                             |        |   |                       |   | 1,040                          |  |   |                                 |   |              |   |       |              |  
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Total current liabilities                                   |  |                             |        |   |                       |   | 39,002                         |  |   | 3,312                            |   |              |   | 1,170  |              |  
|                                                           
|Long-term debt                                              |  |                             | 64,484  |   |                       |   | 293,371                        |  |   | 115,000                          |   |              |   | 2,059  |              |  
|Related party notes                                         |  |                             |        |   |                       |   | 10,000                         |  |   |                                 |   |              |   |       |              |  
|Other liabilities                                           |  |                             |        |   |                       |   | 7,568                          |  |   |                                 |   |              |   | 2,647  |              |  
|Advances to/from subsidiaries                               |  |                             |        |   |                       |   |                               |  |   |                                 |   |              |   | 62     |              |  
|Mandatorily redeemable preferred units                      |  |                             | 109,114 |   |                       |   |                               |  |   |                                 |   |              |   |       |              |  
|                                                           
|Members interest/Shareholder equity                        |  |                             | (53,169 | ) |                       |   | 118,379                        |  |   | (116,135                         | ) |              |   | 22,333 |              |  
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  
|Total liabilities and members interest                     |  | $                           | 120,429 |   |                       | $ | 468,320                        |  | $ | 2,177                            |   |              | $ | 28,271 |              | $
|                                                            |  |                             |         |   |                       |   |                                |  |   |                                  |   |              |   |        |              |  

---

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



F-38



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Condensed Consolidating Statements of Operations for the year ended
December 31, 2002

(In thousands)



|                                                                                 |  |   | Muzak Holdings LLC (Parent) |   |  |   | Muzak LLC (Co-issuer) |   |  |   | MuzakFinance Corp (Co-issuer) |   |  |   | Combined Guarantor Subsidiaries* |   |  |   | Eliminations |  |   | Consolidated |  
|-------------------------------------------------------------------------------- |  | - | --------------------------- | - |  | - | --------------------- | - |  | - | ----------------------------- | - |  | - | -------------------------------- | - |  | - | ------------ |  | - | ------------ | -
|Revenues:                                                                        |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|Music and other businessservices                                                 |  | $ |                            |   |  | $ | 155,910               |   |  | $ |                              |   |  | $ | 7,089                            |   |  | $ |             |  | $ | 162,999      |  
|Equipment and relatedservices                                                    |  |   |                            |   |  |   | 54,757                |   |  |   |                              |   |  |   |                                 |   |  |   |             |  |   | 54,757       |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                 |  |   |                            |   |  |   | 210,667               |   |  |   |                              |   |  |   | 7,089                            |   |  |   |             |  |   | 217,756      |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                
|Cost of Revenues:                                                                |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|Music and other businessservices excluding depreciation and amortization
expense |  |   |                            |   |  |   | 32,090                |   |  |   |                              |   |  |   | 2,377                            |   |  |   |             |  |   | 34,467       |  
|Equipment and relatedservices                                                    |  |   |                            |   |  |   | 43,754                |   |  |   |                              |   |  |   |                                 |   |  |   |             |  |   | 43,754       |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                 |  |   |                            |   |  |   | 75,844                |   |  |   |                              |   |  |   | 2,377                            |   |  |   |             |  |   | 78,221       |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                
|                                                                                 |  |   |                            |   |  |   | 134,823               |   |  |   |                              |   |  |   | 4,712                            |   |  |   |             |  |   | 139,535      |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|Selling, general and administrative expenses                                     |  |   |                            |   |  |   | 70,259                |   |  |   |                              |   |  |   | 1,764                            |   |  |   |             |  |   | 72,023       |  
|Depreciation and amortizationexpense                                             |  |   |                            |   |  |   | 65,829                |   |  |   |                              |   |  |   | 4,280                            |   |  |   |             |  |   | 70,109       |  
|Management fee                                                                   |  |   |                            |   |  |   | (1,418                | ) |  |   |                              |   |  |   | 1,418                            |   |  |   |             |  |   |             |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                
|Income (loss) from operations                                                    |  |   |                            |   |  |   | 153                   |   |  |   |                              |   |  |   | (2,750                           | ) |  |   |             |  |   | (2,597       | )
|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**                                             |  |   | (30,029                     | ) |  |   | (2,020                | ) |  |   |                              |   |  |   |                                 |   |  |   | 32,049       |  |   |             |  
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                
|Loss before income taxes                                                         |  |   | (37,982                     | ) |  |   | (30,029               | ) |  |   | (11,774                       | ) |  |   | (2,976                           | ) |  |   | 43,823       |  |   | (38,938      | )
|Income tax benefit                                                               |  |   |                            |   |  |   |                      |   |  |   |                              |   |  |   | (956                             | ) |  |   |             |  |   | (956         | )
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  
|                                                                                
|Net loss                                                                         |  | $ | (37,982                     | ) |  | $ | (30,029               | ) |  | $ | (11,774                       | ) |  | $ | (2,020                           | ) |  | $ | 43,823       |  | $ | (37,982      | )
|                                                                                 |  |   |                             |   |  |   |                       |   |  |   |                               |   |  |   |                                  |   |  |   |              |  |   |              |  

---

|* |  | 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-39



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2002(In thousands)



|                                                                |  | Muzak Holdings LLC (Parent) |   | Muzak LLC (Co-issuer) |   |         | Muzak Finance Corp (Co-issuer) |  | CombinedGuarantor Subsidiaries* |   |  | Eliminations |      | Consolidated | 
|--------------------------------------------------------------- |  | --------------------------- | - | --------------------- | - | ------- | ------------------------------ |  | ------------------------------- | - |  | ------------ | ---- | ------------ | 
|Cash Flows from Operating Activities:                           |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|Net cash provided by operating activities                       |  | $                           |  |                       | $ | 30,757  |                                |  |                                 |  |  | $            | 832  |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|                                                               
|Cash Flows from Investing Activities:                           |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|Proceeds from sale of fixed assets                              |  |                             |  |                       |   | 41      |                                |  |                                 |  |  |              |     |              | 
|Capital expenditures for property and equipment and intangibles |  |                             |  |                       |   | (38,830 | )                              |  |                                 |  |  |              |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|Net cash used in investing activities                           |  |                             |  |                       |   | (38,789 | )                              |  |                                 |  |  |              |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|                                                               
|Cash Flows from Financing Activities:                           |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|Change in book overdrafts                                       |  |                             |  |                       |   | 2,987   |                                |  |                                 |  |  |              |     |              | 
|Borrowings under revolver                                       |  |                             |  |                       |   | 15,000  |                                |  |                                 |  |  |              |     |              | 
|Repayment under revolver                                        |  |                             |  |                       |   | (10,000 | )                              |  |                                 |  |  |              |     |              | 
|Repayments of senior credit facility                            |  |                             |  |                       |   | (6,693  | )                              |  |                                 |  |  |              |     |              | 
|Proceeds from issuance of note payable to related party         |  |                             |  |                       |   | 10,000  |                                |  |                                 |  |  |              |     |              | 
|Repayment of interest rate protection agreement                 |  |                             |  |                       |   | (372    | )                              |  |                                 |  |  |              |     |              | 
|Repayments of other debt                                        |  |                             |  |                       |   | (2,520  | )                              |  |                                 |  |  |              | (80  | )            | 
|Payment of fees associated with financing                       |  |                             |  |                       |   | (1,924  | )                              |  |                                 |  |  |              |     |              | 
|Advances to/from subsidiaries                                   |  |                             |  |                       |   | 752     |                                |  |                                 |  |  |              | (752 | )            | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|Net cash provided by/(used in) financing activities             |  |                             |  |                       |   | 7,230   |                                |  |                                 |  |  |              | (832 | )            | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|                                                               
|Decrease in cash                                                |  |                             |  |                       |   | (802    | )                              |  |                                 |  |  |              |     |              | 
|                                                               
|Cash, beginning of period                                       |  |                             |  |                       |   | 2,583   |                                |  |                                 |  |  |              |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 
|                                                               
|Cash, end of period                                             |  | $                           |  |                       | $ | 1,781   |                                |  | $                               |  |  | $            |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                 |   |  |              |      |              | 

---

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



F-40



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Condensed Consolidating Balance Sheets as of December 31, 2001(In thousands)

|                                                          |  | Muzak Holdings LLC (Parent) |         |   | Muzak LLC(Co-issuer) |   | Muzak Finance Corp(Co-issuer) |  |   | Combined Guarantor Subsidiaries* |   | Eliminations |   |        | Consolidated |  
|--------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------- | - | ----------------------------- |  | - | -------------------------------- | - | ------------ | - | ------ | ------------ | -
|Assets                                                    |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|                                                         
|Current assets:                                           |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|Cash                                                      |  | $                           |        |   |                      | $ | 2,583                         |  | $ |                                 |   |              | $ |       |              | $
|Accounts receivable, net                                  |  |                             |        |   |                      |   | 22,632                        |  |   |                                 |   |              |   | 1,681  |              |  
|Inventories                                               |  |                             |        |   |                      |   | 9,402                         |  |   |                                 |   |              |   |       |              |  
|Prepaid expenses and other assets                         |  |                             |        |   |                      |   | 1,441                         |  |   |                                 |   |              |   |       |              |  
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|Total current assets                                      |  |                             |        |   |                      |   | 36,058                        |  |   |                                 |   |              |   | 1,681  |              |  
|                                                         
|Property and equipment, net                               |  |                             |        |   |                      |   | 116,338                       |  |   |                                 |   |              |   | 1,681  |              |  
|Intangible assets, net                                    |  |                             |        |   |                      |   | 262,914                       |  |   |                                 |   |              |   | 29,632 |              |  
|Deferred subscriber acquisition costs andother assets net |  |                             | 2,382   |   |                      |   | 47,631                        |  |   | 2,594                            |   |              |   | 7      |              |  
|Advances to/from subsidiaries                             |  |                             |        |   |                      |   | 1,008                         |  |   |                                 |   |              |   |       |              |  
|Investment in subsidiaries                                |  |                             | 146,533 |   |                      |   | 24,353                        |  |   |                                 |   |              |   |       |              |  
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|Total assets                                              |  | $                           | 148,915 |   |                      | $ | 488,302                       |  | $ | 2,594                            |   |              | $ | 33,001 |              |  
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|                                                         
|Liabilities and Members Interest                         |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|                                                         
|Current liabilities:                                      |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|Accounts payable                                          |  | $                           |        |   |                      | $ | 4,951                         |  | $ |                                 |   |              | $ | 241    |              | $
|Accrued expenses                                          |  |                             |        |   |                      |   | 20,333                        |  |   | 3,312                            |   |              |   | 945    |              |  
|Current maturity of other liabilities                     |  |                             |        |   |                      |   | 4,115                         |  |   |                                 |   |              |   |       |              |  
|Current maturities of long term debt                      |  |                             |        |   |                      |   | 6,695                         |  |   |                                 |   |              |   | 80     |              |  
|Advance billings                                          |  |                             |        |   |                      |   | 870                           |  |   |                                 |   |              |   |       |              |  
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|Total current liabilities                                 |  |                             |        |   |                      |   | 36,964                        |  |   | 3,312                            |   |              |   | 1,266  |              |  
|Long term debt                                            |  |                             | 56,861  |   |                      |   | 295,923                       |  |   | 115,000                          |   |              |   | 2,361  |              |  
|Other liabilities                                         |  |                             |        |   |                      |   | 8,882                         |  |   |                                 |   |              |   | 4,013  |              |  
|Advances to/from subsidiaries                             |  |                             |        |   |                      |   |                              |  |   |                                 |   |              |   | 1,008  |              |  
|Mandatorily redeemable preferred units                    |  |                             | 92,266  |   |                      |   |                              |  |   |                                 |   |              |   |       |              |  
|Members interest/Shareholder equity                      |  |                             | (212    | ) |                      |   | 146,533                       |  |   | (115,718                         | ) |              |   | 24,353 |              |  
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  
|                                                         
|Total liabilities and members interest                   |  | $                           | 148,915 |   |                      | $ | 488,302                       |  | $ | 2,594                            |   |              | $ | 33,001 |              | $
|                                                          |  |                             |         |   |                      |   |                               |  |   |                                  |   |              |   |        |              |  

---

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



F-41



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Condensed Consolidating Statements of Operations for the year ended
December 31, 2001 (In thousands)



|                                                                                  |  | Muzak Holdings LLC (Parent) |         |   | Muzak LLC (Co-issuer) |   |         | Muzak Finance Corp (Co-issuer) |  |   | Combined Guarantor Subsidiaries* |   |  | Eliminations |        | Consolidated | 
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------- | - | ------- | ------------------------------ |  | - | -------------------------------- | - |  | ------------ | ------ | ------------ | 
|Revenues:                                                                         |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Music and other business services                                                 |  | $                           |        |   |                       | $ | 141,767 |                                |  | $ |                                 |   |  | $            | 8,705  |              | 
|Equipment and relatedservice                                                      |  |                             |        |   |                       |   | 52,889  |                                |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 194,656 |                                |  |   |                                 |   |  |              | 8,705  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Cost of Revenues:                                                                 |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Music and other business services excluding depreciation and amortization
expense |  |                             |        |   |                       |   | 29,264  |                                |  |   |                                 |   |  |              | 1,908  |              | 
|Equipment and relatedservice                                                      |  |                             |        |   |                       |   | 40,335  |                                |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 69,599  |                                |  |   |                                 |   |  |              | 1,908  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 125,057 |                                |  |   |                                 |   |  |              | 6,797  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Selling, general and administrative expenses                                      |  |                             |        |   |                       |   | 67,220  |                                |  |   |                                 |   |  |              | 887    |              | 
|Depreciation and amortization expense                                             |  |                             |        |   |                       |   | 70,990  |                                |  |   |                                 |   |  |              | 4,678  |              | 
|Management fee                                                                    |  |                             |        |   |                       |   | (6,754  | )                              |  |   |                                 |   |  |              | 6,754  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Loss from operations                                                              |  |                             |        |   |                       |   | (6,399  | )                              |  |   |                                 |   |  |              | (5,522 | )            | 
|                                                                                 
|Other income (expense):                                                           |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Interest expense                                                                  |  |                             | (7,052  | ) |                       |   | (32,123 | )                              |  |   | (11,774                          | ) |  |              | (215   | )            | 
|Other, net                                                                        |  |                             |        |   |                       |   | (449    | )                              |  |   |                                 |   |  |              | (32    | )            | 
|Equity in earnings of subsidiaries**                                              |  |                             | (44,145 | ) |                       |   | (5,174  | )                              |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Loss before income taxes                                                          |  |                             | (51,197 | ) |                       |   | (44,145 | )                              |  |   | (11,774                          | ) |  |              | (5,769 | )            | 
|Income tax benefit                                                                |  |                             |        |   |                       |   |        |                                |  |   |                                 |   |  |              | (595   | )            | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Net loss                                                                          |  | $                           | (51,197 | ) |                       | $ | (44,145 | )                              |  | $ | (11,774                          | ) |  | $            | (5,174 | )            | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 

---

|* |  | 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-42



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2001(In thousands)



|                                                                |  | Muzak Holdings LLC (Parent) |   | Muzak LLC (Co-issuer) |   |         | Muzak Finance Corp (Co-issuer) |  | Combined Guarantor Subsidiaries* |    |  | Eliminations |      | Consolidated | 
|--------------------------------------------------------------- |  | --------------------------- | - | --------------------- | - | ------- | ------------------------------ |  | -------------------------------- | -- |  | ------------ | ---- | ------------ | 
|Cash Flows from Operating Activities:                           |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|Net cash provided by operating activities                       |  | $                           |  |                       | $ | 37,475  |                                |  |                                  | $ |  | $            | 560  |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|                                                               
|Cash Flows from Investing Activities:                           |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|Acquisitions, net of cash acquired                              |  |                             |  |                       |   | (979    | )                              |  |                                  |   |  |              |     |              | 
|Proceeds from sale of fixed assets                              |  |                             |  |                       |   | 313     |                                |  |                                  |   |  |              |     |              | 
|Capital expenditures for property and equipment and intangibles |  |                             |  |                       |   | (42,242 | )                              |  |                                  |   |  |              |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|Net cash used in investing activities                           |  |                             |  |                       |   | (42,908 | )                              |  |                                  |   |  |              |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|                                                               
|Cash Flows from Financing Activities:                           |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|Change in book overdrafts                                       |  |                             |  |                       |   | (5,322  | )                              |  |                                  |   |  |              |     |              | 
|Borrowings of revolver                                          |  |                             |  |                       |   | 19,800  |                                |  |                                  |   |  |              |     |              | 
|Repayment of revolver                                           |  |                             |  |                       |   | (2,500  | )                              |  |                                  |   |  |              |     |              | 
|Repayments of senior credit facility                            |  |                             |  |                       |   | (5,193  | )                              |  |                                  |   |  |              |     |              | 
|Repayments of other debt                                        |  |                             |  |                       |   | (2,267  | )                              |  |                                  |   |  |              | (74  | )            | 
|Advances to/from subsidiaries                                   |  |                             |  |                       |   | 490     |                                |  |                                  |   |  |              | (490 | )            | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|Net cash provided by/(used in) financing activities             |  |                             |  |                       |   | 5,008   |                                |  |                                  |   |  |              | (564 | )            | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|                                                               
|Decrease in cash                                                |  |                             |  |                       |   | (425    | )                              |  |                                  |   |  |              | (4   | )            | 
|                                                               
|Cash, beginning of period                                       |  |                             |  |                       |   | 3,008   |                                |  |                                  |   |  |              | 4    |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 
|                                                               
|Cash, end of period                                             |  | $                           |  |                       | $ | 2,583   |                                |  | $                                |   |  | $            |     |              | 
|                                                                |  |                             |   |                       |   |         |                                |  |                                  |    |  |              |      |              | 

---

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



F-43



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Condensed Consolidating Statements of Operations for the year ended
December 31, 2000 (In thousands)



|                                                                                  |  | Muzak Holdings LLC (Parent) |         |   | Muzak LLC (Co-issuer) |   |         | Muzak Finance Corp (Co-issuer) |  |   | Combined Guarantor Subsidiaries* |   |  | Eliminations |        | Consolidated | 
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------- | - | ------- | ------------------------------ |  | - | -------------------------------- | - |  | ------------ | ------ | ------------ | 
|Revenues:                                                                         |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Music and other business services                                                 |  | $                           |        |   |                       | $ | 130,261 |                                |  | $ |                                 |   |  | $            | 7,906  |              | 
|Equipment and related services                                                    |  |                             |        |   |                       |   | 53,981  |                                |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 184,242 |                                |  |   |                                 |   |  |              | 7,906  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Cost of Revenues:                                                                 |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Music and other business services excluding depreciation and amortization
expense |  |                             |        |   |                       |   | 27,685  |                                |  |   |                                 |   |  |              | 2,071  |              | 
|Equipment and related services                                                    |  |                             |        |   |                       |   | 39,019  |                                |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 66,704  |                                |  |   |                                 |   |  |              | 2,071  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|                                                                                  |  |                             |        |   |                       |   | 117,538 |                                |  |   |                                 |   |  |              | 5,835  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Selling, general andadministrative expenses                                       |  |                             |        |   |                       |   | 62,490  |                                |  |   |                                 |   |  |              | 1,308  |              | 
|Depreciation and amortization expense                                             |  |                             |        |   |                       |   | 59,119  |                                |  |   |                                 |   |  |              | 4,006  |              | 
|Management fee                                                                    |  |                             |        |   |                       |   | (5,147  | )                              |  |   |                                 |   |  |              | 5,147  |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Income (loss) from operations                                                     |  |                             |        |   |                       |   | 1,076   |                                |  |   |                                 |   |  |              | (4,626 | )            | 
|                                                                                 
|Other income (expense)                                                            |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Interest expense                                                                  |  |                             | (6,255  | ) |                       |   | (39,813 | )                              |  |   | (11,774                          | ) |  |              | (220   | )            | 
|Other, net                                                                        |  |                             |        |   |                       |   | (437    | )                              |  |   |                                 |   |  |              |       |              | 
|Loss from extingushment of debt                                                   |  |                             |        |   |                       |   | (1,418  | )                              |  |   |                                 |   |  |              |       |              | 
|Equity in earnings of subsidiaries**                                              |  |                             | (44,356 | ) |                       |   | (3,764  | )                              |  |   |                                 |   |  |              |       |              | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Loss before income taxes                                                          |  |                             | (50,611 | ) |                       |   | (44,356 | )                              |  |   | (11,774                          | ) |  |              | (4,846 | )            | 
|Income tax benefit                                                                |  |                             |        |   |                       |   |        |                                |  |   |                                 |   |  |              | (1,082 | )            | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 
|Net loss                                                                          |  | $                           | (50,611 | ) |                       | $ | (44,356 | )                              |  | $ | (11,774                          | ) |  | $            | (3,764 | )            | 
|                                                                                  |  |                             |         |   |                       |   |         |                                |  |   |                                  |   |  |              |        |              | 

---

|* |  | 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-44



---

MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2000 (In thousands)



|                                                                       |  | Muzak Holdings LLC (Parent) |          |   | Muzak LLC (Co-issuer) |   |         | Muzak Finance Corp (Co-issuer) |  | Combined Guarantor Subsidiaries* |   |  | Eliminations |        |   | Consolidated |  
|---------------------------------------------------------------------- |  | --------------------------- | -------- | - | --------------------- | - | ------- | ------------------------------ |  | -------------------------------- | - |  | ------------ | ------ | - | ------------ | -
|Cash Flows from Operating Activities:                                  |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Net cash used in operatingactivities                                   |  | $                           |         |   |                       | $ | (1,439  | )                              |  | $                                |  |  | $            | (2,017 | ) |              | $
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Cash Flows from Investing Activities:                                  |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Acquisitions, net of cash acquired                                     |  |                             |         |   |                       |   | (44,665 | )                              |  |                                  |  |  |              |       |   |              |  
|Proceeds from sale of fixed assets                                     |  |                             |         |   |                       |   | 239     |                                |  |                                  |  |  |              |       |   |              |  
|Capital expenditures for property, plant and equipment and intangibles |  |                             |         |   |                       |   | (45,683 | )                              |  |                                  |  |  |              |       |   |              |  
|Investment in subsidiaries                                             |  |                             | (118,426 | ) |                       |   |        |                                |  |                                  |  |  |              |       |   |              |  
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Net cash used in investingactivities                                   |  |                             | (118,426 | ) |                       |   | (90,109 | )                              |  |                                  |  |  |              |       |   |              |  
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Cash Flows from Financing Activities:                                  |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Change in book overdrafts                                              |  |                             |         |   |                       |   | (6,820  | )                              |  |                                  |  |  |              |       |   |              |  
|Borrowings under revolver                                              |  |                             |         |   |                       |   | 39,400  |                                |  |                                  |  |  |              |       |   |              |  
|Repayment under revolver                                               |  |                             |         |   |                       |   | (60,400 | )                              |  |                                  |  |  |              |       |   |              |  
|Borrowings from senior creditfacility                                  |  |                             |         |   |                       |   | 10,000  |                                |  |                                  |  |  |              |       |   |              |  
|Repayments of senior creditfacility                                    |  |                             |         |   |                       |   | (3,600  | )                              |  |                                  |  |  |              |       |   |              |  
|Proceeds from sale of interest rate swap                               |  |                             |         |   |                       |   | 4,364   |                                |  |                                  |  |  |              |       |   |              |  
|Proceeds from issuance of preferred stock, net of fees                 |  |                             | 82,790   |   |                       |   |        |                                |  |                                  |  |  |              |       |   |              |  
|Proceeds from issuance of membership units                             |  |                             | 35,636   |   |                       |   |        |                                |  |                                  |  |  |              |       |   |              |  
|Repayment of floating rate notes                                       |  |                             |         |   |                       |   | (36,540 | )                              |  |                                  |  |  |              |       |   |              |  
|Borrowing of floating rate notes                                       |  |                             |         |   |                       |   | 36,000  |                                |  |                                  |  |  |              |       |   |              |  
|Repayment of note payable to related parties                           |  |                             |         |   |                       |   | (3,000  | )                              |  |                                  |  |  |              |       |   |              |  
|Repayments of other debt                                               |  |                             |         |   |                       |   | (1,970  | )                              |  |                                  |  |  |              | (68    | ) |              |  
|Payment of fees associated with financing                              |  |                             |         |   |                       |   | (1,490  | )                              |  |                                  |  |  |              |       |   |              |  
|Proceeds from contributionsby parent                                   |  |                             |         |   |                       |   | 118,426 |                                |  |                                  |  |  |              |       |   |              |  
|Advances to/from subsidiaries                                          |  |                             |         |   |                       |   | (1,919  | )                              |  |                                  |  |  |              | 1,919  |   |              |  
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Net cash provided by/(used in) financing activities                    |  |                             | 118,426  |   |                       |   | 92,451  |                                |  |                                  |  |  |              | 1,851  |   |              |  
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Increase (decrease) in cash                                            |  |                             |         |   |                       |   | 903     |                                |  |                                  |  |  |              | (166   | ) |              |  
|Cash, beginning of period                                              |  |                             |         |   |                       |   | 2,105   |                                |  |                                  |  |  |              | 170    |   |              |  
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  
|Cash, end of period                                                    |  | $                           |         |   |                       | $ | 3,008   |                                |  | $                                |  |  | $            | 4      |   |              | $
|                                                                       |  |                             |          |   |                       |   |         |                                |  |                                  |   |  |              |        |   |              |  

---

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



F-45



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MUZAK HOLDINGS LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





16.    Quarterly Financial Data (Unaudited): (In Thousands)



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



|                                                             |  | Fiscal 2002   |        
|------------------------------------------------------------ |  | ------------- | -------
|                                                             |  | First Quarter |        
|Net Revenue                                                  |  | $             | 50,963 
|Cost of revenues, excluding depreciation and amortization(a) |  |               | 17,318 
|Income (loss) from operations(b)                             |  |               | (2,276 
|Net Loss                                                     |  |               | (11,546





|                                                             |  | Fiscal 2001   |        
|------------------------------------------------------------ |  | ------------- | -------
|                                                             |  | First Quarter |        
|Net Revenue                                                  |  | $             | 49,968 
|Cost of revenues, excluding depreciation and amortization(c) |  |               | 16,647 
|Loss from operations(d)                                      |  |               | (2,988 
|Net Loss                                                     |  |               | (13,473



|                                                          |  | Fiscal 2000   |        
|--------------------------------------------------------- |  | ------------- | -------
|                                                          |  | First Quarter |        
|Net Revenue                                               |  | $             | 43,695 
|Cost of revenues, excluding depreciation and amortization |  |               | 15,704 
|Loss from operations                                      |  |               | (145   
|Net Loss                                                  |  |               | (11,241

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|(a) |  | The second quarter of 2002 includes a $3.1 million charge to increase reserves for estimated prior period licensing royalties and related expenses.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | The first quarter of 2002 includes a $0.5 million charge in connection with exploring various financing alternatives.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(c) |  | The fourth quarter of 2001 includes a $1.2 million charge related to a license fee audit.
|--- |  | -----------------------------------------------------------------------------------------

|(d) |  | The first quarter of 2001 includes a charge of $0.7 million related to the postponed private placement of Senior Subordinated Notes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



Historically, Muzak has experienced slight seasonality in its
equipment and related services revenues and costs of revenues resulting primarily from a significant retail client base which constructs and opens new retail stores in time for the fourth quarter holiday season. Accordingly, Muzak experiences higher
equipment and related services revenues and costs of goods in the third and fourth quarters, as opposed to the first half of the year, as a result of the installation and servicing of these new retail locations. However, this seasonality was less of
a factor during 2002 due to less capital spending associated with a reduction in new location store build outs among national clients, particularly within the retail sector.





F-46



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MUZAK LLC



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2002, 2001, and 2000



|                                           |  | Balance at Beginning of Period ($) |  | Additions/Charges to Costs and Expenses(a) ($) |  | Deductions (b) ($) |   |  | Balance at end of Period ($)
|------------------------------------------ |  | ---------------------------------- |  | ---------------------------------------------- |  | ------------------ | - |  | ----------------------------
|For the year ended December 31, 2002       |  |                                    |  |                                                |  |                    |   |  |                             
|Allowance for doubtful accounts receivable |  | 1,943                              |  | 2,905                                          |  | (3,140             | ) |  | 1,708                       
|For the year ended December 31, 2001       |  |                                    |  |                                                |  |                    |   |  |                             
|Allowance for doubtful accounts receivable |  | 4,066                              |  | 2,381                                          |  | (4,504             | ) |  | 1,943                       
|For the year ended December 31, 2000       |  |                                    |  |                                                |  |                    |   |  |                             
|Allowance for doubtful accounts receivable |  | 3,683                              |  | 817                                            |  | (434               | ) |  | 4,066                       

---

|(a) |  | Includes allowances acquired in conjunction with business acquisitions.
|--- |  | -----------------------------------------------------------------------

|(b) |  | Current year writeoffs include bad debts associated with both prior year and current year sales.
|--- |  | ------------------------------------------------------------------------------------------------



S-1