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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

Commission File No.: 0-26192

MakeMusic! Inc.


(Name of Small Business Issuer as specified in its charter)


|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|Minnesota
(State or other jurisdiction of
incorporation or organization) |  | 41-1716250
(IRS Employer
Identification Number)

6210 Bury Drive, Eden Prairie, Minnesota 55346-1718
(Address of principal executive offices)(Zip Code)
Issuers telephone number, including area code: (952) 937-9611

Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.Yes  [X]  No [  ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [  ]

Issuers revenues for its most recent fiscal year: $7,737,000

The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 3, 2003 was approximately $5,614,604 based upon the
closing price of the Registrants Common Stock on such date.

There were 3,208,345 shares of Common Stock outstanding as of March 3,
2003. Such amount reflects the number of shares of Common Stock outstanding
after the Companys one-for-ten reverse stock split, which became effective on
January 16, 2003. All references in the accompanying financial statements to
the number of shares and per share amounts have been retroactively restated to
reflect the Reverse Split.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Annual Report to Shareholders for the fiscal year
ended December 31, 2002 are incorporated by reference into Part II and portions
of the Registrants definitive Proxy Statement for its 2003 Annual Meeting are
incorporated by reference into Part III.

Transitional Small Business Disclosure Format (check one). Yes  [  ]  No  [X]





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TABLE OF CONTENTS



|                                                 |                                                                                                                        |  |  |  |  |  |  | 
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. DESCRIPTION OF BUSINESS                                                                                       
|                                                 | ITEM 2. DESCRIPTION OF PROPERTY                                                                                       
|                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                                             
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                                                           
|PART II.                                        
|                                                 | ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                       
|                                                 | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                     
|                                                 | ITEM 7. FINANCIAL STATEMENTS                                                                                          
|                                                 | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          
|PART III                                        
|                                                 | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|                                                 | ITEM 10. Executive Compensation                                                                                       
|                                                 | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                               
|                                                 | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                               
|                                                 | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                                             
|                                                 | ITEM 14. CONTROLS AND PROCEDURES                                                                                      
|SIGNATURES                                      
|EXHIBIT INDEX                                   
|EX-10.12 Fourth Amendment to Lease              
|EX-10.13 Employment Agreement                   
|EX-10.14 Fifth Amendment to Lease               
|EX-10.15 2003 Warrant for Private Placement     
|EX-10.16 2003 Warrant for Private Placement     
|EX-23.1 Consent of Ernst & Young LLP            
|EX-99.1 Certification by Chief Executive Officer
|EX-99.2 Certification by Chief Financial Officer



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TABLE OF CONTENTS

|         |  |                                                                                                                 |  |         
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                 |  | Page No.
|         |  | Part I                                                                                                          |  |         
|Item 1.  |  | Business                                                                                                        |  | 2       
|Item 2.  |  | Description of Property                                                                                         |  | 13      
|Item 3.  |  | Legal Proceedings                                                                                               |  | 13      
|Item 4.  |  | Submission of Matters to a Vote of Security-Holders                                                             |  | 13      
|         |  | Part II                                                                                                         |  |         
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 14      
|Item 6.  |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 14      
|Item 7.  |  | Financial Statements                                                                                            |  | 19      
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 43      
|         |  | Part III                                                                                                        |  |         
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act |  | 43      
|Item 10. |  | Executive Compensation                                                                                          |  | 44      
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                                                  |  | 44      
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 44      
|Item 13. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                 |  | 44      
|Item 14. |  | Controls and Procedures                                                                                         |  | 45      

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PART I




ITEM 1. DESCRIPTION OF BUSINESS

On March 13, 2002, it was announced that effective immediately we would do
business as MakeMusic! Inc. The name change, formally approved by the
shareholders May 21, 2002 at the annual shareholders meeting, represents the
culmination of the integration of strategies since the merger of Coda Music
Technology and Net4Music in October 2000.

General

MakeMusic! Inc. (MakeMusic! or the Company), a Minnesota corporation,
is a world leader in music education technology whose mission is to enhance and
transform the experience of making, teaching and learning music. Among its
leading products are Finale®, the worlds best-selling music notation software
and SmartMusic®, the complete music practice system that features Intelligent
Accompaniment® and the worlds largest interactive accompaniment library.

For over a decade, Finale has been the worlds best-selling music notation
software. It has transformed the very process by which composers, arrangers,
musicians, teachers, students and publishers create, edit, audition, print and
publish musical scores. In the world of music software, Finale is the
equivalent of Adobe® PageMaker® or Adobe® Illustrator®  it is what musicians
use for page layout of sheet music.

SmartMusic is a complete, interactive, computer-based practice system for
woodwinds, brass players and vocalists. SmartMusic enhances and transforms the
process of practicing music by accompanying musicians while they practice 
following their spontaneous tempo changes like a human accompanist. Offered
through subscription, SmartMusic gives musicians access to a library of more
than 20,000 professionally performed and recorded accompaniments.

Strategy

The Company is working with teachers and publishers in proactive
collaboration to meet the needs of active music makers and market products to
them. The decade-long leadership established by the Companys Finale software
with music educators internationally provides MakeMusic! with the credibility
in the marketplace to exploit the development of SmartMusic and other new
products.

The worldwide market for products and services sold to student, hobbyist
and professional musicians is approximately $10 billion, with music software as
one of its fastest-growing segments. As music educators and parents search for
ways to make student practice time more fun and productive, MakeMusic! is
building on its current leadership position to become a key driver in the
future of music education. Possessing many key technologies that can be
combined together and expanded upon in a cost-effective manner, MakeMusic!
believes it is uniquely positioned to offer continuous innovation to music
makers.

MakeMusics business strategy is characterized by the following principles
with the objective of delivering sustainable and high rates of return for
investors:

Focus on meeting the needs of a highly influential niche market.By
focusing on providing superior, long-lasting solutions for music educators,
MakeMusic! gains exceptional access to the larger market of student and
hobbyist musicians at the lowest possible cost.

Deliver superior patented technologies and licensed content.The
complexity of the notation and Intelligent Accompaniment technologies at the
core of MakeMusics products represent a significant barrier to entry to
competition. Furthermore, the company holds licenses to a major library of
music, adding to this barrier.

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Capitalize on fundamental shifts in the marketplace.MakeMusics products
support two shifts that are leading to long-term growth opportunities: its
products support the adoption of the digital lifestyle in which music is a
market driver; its products provide the building blocks that meet the demand
for quantification and assessment tools in the evolving e-learning market for
music education.

Leverage an extensive customer database for targeted and personalized
direct marketing.With an active database of nearly half a million musicians,
MakeMusic! is able to target, personalize and develop each customers buying
potential in the most profitable fashion. Supporting this initiative,
MakeMusics management has operational experience from world-class CRM
businesses.

Grow the SmartMusic business through the leveraged support of music
educators.The Company introduced an annual subscription for teachers late in
2001 and a monthly subscription for home users in the spring of 2002. In late
October 2002 the Company launched the school-sponsored home subscription
program, allowing schools to sponsor their students use of SmartMusic at home
to obtain substantial discounts.

Maintain and strengthen Finale market leadership and revenues.Finale
music notation software is accepted worldwide as the industry standard. The
Company will seek to maintain its revenues by continuing to introduce
innovative upgrades to its products. The Company intends to grow revenues by
expanding coverage throughout the world and more aggressively pursuing the
marketing of products outside the U.S.

Partner with leading industry players.The Company is continuing to
pursue and expand strategic alliances with entities that have the marketing
power and capital resources to fully exploit SmartMusics potential around the
world. MakeMusic! will also pursue alliances that enhance its technology base
into complementary music and educational markets. Already, MakeMusic! has
forged two key strategic relationships: one is with McGraw-Hill, the largest
music textbook publisher (NYSE: MHP); the other is with Hal Leonard
Corporation, the largest sheet music publishing company.

Grow the business step by step.MakeMusic! has attracted the growth
capital necessary for its development under the best possible conditions in a
difficult market. The Company is now prepared to maximize the runway for
business development by careful cash management while attaining profitability
as expeditiously as possible and continuing to grow revenues and best exploit
business opportunities.

Products

SmartMusic.SmartMusic Studio® is a complete, interactive,
computer-based music system which revolutionizes the way a musician practices
by providing human-like accompaniment in a wide range of musical styles
performed by orchestras, jazz trios, rock bands, etc. Its key innovation, the
patented Intelligent Accompaniment, enables SmartMusic to listen to a musician
as he sings or he plays and follow his spontaneous tempo changes. In addition,
SmartMusic allows the user to start playing at any point in a musical piece,
repeat difficult-to-play segments, change instrumentation, adjust the degree to
which the accompaniment follows the musician, control tempo, transpose the
music into any key, play with or without repeats or designate sections of the
music to cut. The software also includes self-assessment features and allows
the user to record his performance and send it by e-mail. The prototype
technology upon which the SmartMusic Studio system is based was patented by
Carnegie Mellon University and licensed to the Company. The Company then
significantly enhanced the prototype technology with its own proprietary
technology and additional patented features, producing a marketable product.
SmartMusic is a unique product that has won numerous awards as well as the
support of world-class musicians such as Wynton Marsalis, James Galway, Dawn
Upshaw and others.

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Via a subscription, schools, students and hobbyists have access to over
20,000 licensed accompaniments including elementary band methods, classical,
jazz, pop, rock, movie, theater and holiday titles. The Company has entered
into license agreements with top music publishers to produce synthesized
versions of musical arrangements for use with SmartMusic. It has also received
the exclusive rights from certain major publishers to all solo classical works
for voice, woodwinds, brass, percussion, strings and keyboard for the purpose
of musical accompaniment products, which respond in real time to the musician.
MakeMusic! has made its accompaniment selection based on a review of the most
frequently performed titles in American academic solo contests as well as
popular titles of sheet music sold at retail in the United States. In the
future, the Company plans to continue to expand its library of accompaniments
to cover a broad spectrum of musical genres, instruments and skill levels as
well as international preferences for music performance. Further, users of the
Companys latest notation software (see below) can create their own
accompaniments, which can be played by SmartMusic subscribers.

In addition, SmartMusic users have access to a selection of accompaniments
to more than 50,000 skill-development exercises based on scales, intervals,
arpeggios and twisters. The products also feature warm-up exercises for
vocalists, the ability to tap in tempo changes with variations in speed, and
the ability to insert breath marks and cues to wait for a particular tone.
These variables can be saved with the music, creating a personally customized
version of the accompaniment. SmartMusic currently provides accompaniments for
17 standard band instruments (e.g. flutes, clarinets, saxophones, trumpets,
trombones, tubas, etc.) as well as vocalists. In the future, SmartMusic will
add accompaniments for strings, piano, guitar and other instruments.

The Company launched its website www.smartmusic.com and started to market
SmartMusic on a licensed subscription basis to schools in the United States in
December 2001 with a decreasing price scale ranging from $90 per year for the
first subscription down to $20 per year for the fourth and more subscriptions.

The home subscription program, priced $9.95/month or $90/year, was
launched in spring 2002. In response to teachers requests to have an offer
which would encourage all their students to use SmartMusic at home, the Company
developed and launched its new school-sponsored home subscriptions offer in
October 2002, which allows participating students to get a subscription for $20
per year as long as the school signs up at least 25 students. MakeMusic!
believes that the SmartMusic subscription-based revenue model, with its
recurring stream of revenues, offers a significant opportunity to increase
profitability. The Company is also selling a one-year subscription plus
accessories in a packaged box through dealers as a Subscription Starter Kit for
a retail price of $119.95.

With a limited budget for marketing in 2002, more than 1,600 schools were
subscribing to SmartMusic as of March 7, 2003, with schools initially ordering
an average of 2.6 subscriptions for school computers. In addition, more than
100 of these school accounts had purchased school-sponsored home subscriptions
with an average of 33 students per account. During the year, the Company
conducted several quantitative follow-up surveys with subscribing schools,
which reported a 95% satisfaction rate.

Finale notation family.The Company believes it is a market leader in
music notation software with its Finale family of products for use with
Macintosh® and Windows® PC operating systems. Music notation software enables
a musician to enter musical data into a computer using either the computer
keyboard, a MIDI- (Musical Instrument Digital Interface) equipped electronic
music keyboard or other MIDI-equipped instruments and contemporaneously display
the data on a computer screen as a musical score. The dramatic improvements in
speed and flexibility provided by programs like Finale software have made such
software the dominant method for composers, arrangers, publishers and music
teachers to create printed music.

The Finale product is generally recognized as one of the most powerful and
comprehensive notation software products in the world. Finale music notation
software retails for $600. Finale software is differentiated from other music
notation software by its breadth and depth of features, including patented
capabilities such as its hyperscribe feature. HyperScribe® allows users to
freely play music with varying tempos via a MIDI keyboard while the software
interpolates the rhythms and accurately notates the music in real time.

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The Company also produces an Academic/Theological Edition of the Finale
product that is sold exclusively to schools, teachers, college students and
religious institutions at a suggested retail price of $300. This edition has
also been a key source of revenue and registered user base growth for the
Company and it represents a market that is continually being replenished with
new student users.

The product is currently translated into German, French, Spanish, Italian
and Japanese. Related manuals are currently available in German, French,
Spanish, Italian, Swedish, Dutch and Japanese. The Company believes the
international market is a key growth opportunity as computer penetration
increases worldwide. International Finale product revenues represented 19.2%,
20.8%, and 15.4% of total Finale product line sales in 2002, 2001, and 2000,
respectively.

The Finale® Allegro® product, a value version of the powerful Finale music
notation software product, was introduced in 1993. The Finale Allegro music
notation software product retails for $199 and contains a subset of the
notation tools contained in the Finale product. With extensive MIDI
capabilities, Allegro is targeted to an audience that may not read music but
needs to create lead sheets for other musicians, and is therefore known as,
the MIDI Users choice for music notation.

In October 2002, the Company introduced Finale® Guitar, an entry-level
version of Finale for guitar players that retails for $99.95. The newest
addition to the Companys award-winning Finale music notation software line
offers powerful new features for guitarists and fretted instrument players, as
well as file compatibility with Finale 2003, which the company made available
earlier this year. Special features just for the guitar include TAB notation
features that allow users to enter music in a traditional staff and see it
displayed automatically in a TAB staff or vice versa, an extensive library of
special symbols and shapes used with notation for standard guitar or any of the
more than fifty fretted instruments Finale Guitar supports and a feature that
allows users to input notes with a MIDI guitar and see instant TAB notation.

Finale® PrintMusic! ®, an entry-level, yet powerful music notation
software product retails for $69.95 and contains a subset of the notation tools
contained in the Finale and Finale Allegro products. Finale PrintMusic!,
introduced in 1999, allows us to offer an entry-level product to the retail
customer, thereby expanding the base of registered users and increasing the
potential for sales of notation software upgrades. This product is currently
sold as a platform hybrid for Macintosh and Windows and is targeted to a
broader audience in the education and general consumer marketplace.

Finale® NotePad® is a downloadable freeware introduction to the Finale
notation family. As of December 31, 2002, there are 428,645 unique users of
Finale NotePad.

Late in 2002, the Company introduced Finale® NotePad® Plus, an upgraded
version of NotePad available for customers to download for $24.95. NotePad
Plus turns any standard MIDI (Musical Instrument Digital Interface) file into
sheet music. Whether using MIDI files from a persons own sequencer or
accessing the thousands of available Internet MIDI files, NotePad Plus is a
cost-effective route to converting great playback files into sheet music.

Intonation Trainer.The Company introduced Intonation Trainer® in
February 2000, at a retail price of $149.95. Intonation Trainer is an
educational product that is an easy, yet powerful program that actually teaches
woodwind and brass students how to play in tune by listening for and
eliminating intonation beats within intervals and chords.

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Synergy Between Product Lines

From a technology perspective, there are considerable synergies between
the Finale notation business and the SmartMusic business. This is because both
product lines benefit from shared technologies. The Finale notation technology,
for example, is used within SmartMusic to display sheet music, exercises,
beginning band method songs, etc. It is this same technology that puts red and
green notes on the screen to show SmartMusic students what they did wrong and
how to do it right. Similarly, the SmartMusic pitch recognition technology is
used within Finale in its MicNotator® feature, which allows Finale users to
enter notes by simply playing an acoustic instrument into a microphone.

More important than the technology synergies, however, are the market and
customer synergies. Finale is well established in over 30,000 schools, all of
which are targets for SmartMusic. The school decision-makers, teachers, know
and respect Finale and are willing to learn about new products from MakeMusic!
Similarly, the Finale channels of distribution are anxious to build upon their
continuing Finale sales with new products from MakeMusic!

Technology Infrastructure

The MakeMusic! Inc. data center is operated internally offering extensive
uptime and connectivity to the internet backbone via a Qwest dedicated T1
connection. We are currently utilizing Compaq, SUN and Cisco hardware solutions
running under Microsoft Windows and Solaris platforms. All network systems are
backed up daily using Veritas backup software on SDLT tape. Our switched 10/100
Mbps internal network ensures internal traffic flows with no bottlenecks.
Websites are run on Microsoft IIS and Apache servers. A combination of
Microsoft SQL and Oracle are used for database applications. All of our network
systems are fully scalable and upgradeable for future growth.

www.codamusic.com.The Coda Music website now automatically addresses
visitors to www.finalemusic.com, which promotes notation products and
e-commerce with mail-order fulfillment and also downloads of Finale NotePad.

www.smartmusic.com.The SmartMusic website, launched December 2001,
distributes our new SmartMusic subscription product and sells SmartMusic
accessories.

www.makemusic.com.The MakeMusic! website includes information on the
Company and both its notation and SmartMusic products. It provides links to
www.codamusic.com and www.smartmusic.com for people wanting to make purchases
of the Companys products.

Marketing, Sales and Distribution

SmartMusic.MakeMusic! believes its future revenue growth will be driven
by its proprietary, patented product: SmartMusic, the worlds first computer
software that is a complete music practice system. SmartMusic features its
award-winning Intelligent Accompaniment technology and the worlds largest
library of interactive music accompaniments.

The market for SmartMusic is very large, with at-home use being the
biggest potential market. There are over 100,000 school buildings in the U.S.
that have nearly 15 million students enrolled in band, orchestra and choir
programs. The new school-sponsored home subscription offering encourages
teachers to be advocates to students and parents for SmartMusic at home. The
Companys expanding subscription sales model is likely to result in increased
profit margins because of a recurring stream of revenues and cash flow. The
Company plans to focus on adoption and customer satisfaction to leverage the
school-sponsored home subscription model.

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The Company intends to experiment with different marketing channels to
achieve the best mix for profitable growth. In the United States and Canada,
SmartMusic is being marketed by traditional direct mail, e-marketing,
member-get-member initiatives, trade show exposure at over 40 state music
educator conferences and advertising in targeted print media. The Company first
leveraged its SmartMusic user base along with its Finale notation customer
database.

In addition, MakeMusic! has developed SmartMusic Intelligent Accompaniment
software for Hal Leonards Essential Elements®, the worlds best-selling method
books for beginning-band students. This is part of a strategic partnership
with Hal Leonard Corporation, the worlds largest printmusic publisher. This
relationship is very important because students usually start to play in a
school band in the fifth grade. In the United States alone, there are
approximately 2.5 million fifth graders starting band every year. If many of
these students have a successful experience starting out with SmartMusic, they
will likely become users of other SmartMusic software as well as pre-cultivated
customers for other MakeMusic! products, including Finale software and new
products introduced in the future.

Though the primary distribution is via the www.smartmusic.com website and
linked with www.makemusic.com, www.finalemusic.com, and www.codamusic.com, the
Company has a network of education dealers and distributors supporting the
Subscription Starter Kit packaged version of SmartMusic, designed for sale at
retail. Distributors service the music instrument retailers, college bookstore
and educational software markets. The Company intends to work with key dealers
to exploit the beginning band instrument rental opportunity.

SmartMusic currently has over 20,000 accompaniments for 17 standard band
instruments, such as flutes, clarinets, saxophones, trumpets, trombones and
tubas. It is also available for vocal applications. The Company is working on
developing accompaniments for strings to exploit the current pent-up demand for
the strings market.

A future marketing strategy of the Company is to deploy SmartMusic at key
partner sites that already have customers frequenting their sites. SmartMusic
creates the opportunity to strengthen their music makers community while
sharing in the revenues from recurring SmartMusic subscription fees. Offering
SmartMusic is extremely easy for a partner site since the Company projects
SmartMusic on to their site from its own servers and handles all transactions
including back office functions.

The overall international marketplace in Europe, Latin/South America and
the Far East is significantly larger than the North American market. The
modernization of China will soon open up the single largest market for music
software technology like SmartMusic. In Europe, distributors in key
territories including the United Kingdom and Germany are currently marketing
SmartMusic initially in a selective fashion. The Subscription Starter Kit will
assist in expanding their efforts. The majority of SmartMusics worldwide
exposure is driven by the Companys own web-based initiatives and presence to
date.

The Company also intends to continue to deepen the connection with
notation technology to the customers benefit.

Finale notation family.In the United States and Canada, the Finale
family of notation products is sold by a group of channel-specific distributors
in the musical instrument and educational channels. Finale is also marketed to
educational institutions and specialty retailers on a direct basis. Repeat
business is driven by direct marketing to registered users for product upgrades
and trade-ups.

Internationally, Finale notation products are represented by one or more
key distributors in 32 overseas territories, primarily in Europe and Japan.
Available in nine different languages, Finale generates over 20% of its sales
over 125 countries abroad. The Company believes the international markets
present an additional opportunity for future growth, and is investing in
leadership to improve and expand international sales.

Music makers can now also utilize Finale software to create accompaniments
for use with SmartMusic. A Finale file is simply saved as a SmartMusic
accompaniment and becomes part of the Intelligent Accompaniment system. This
interplay provides MakeMusic! with cross-marketing opportunities between Finale
and SmartMusic users and products.

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The Company believes it can significantly build on its Finale notation
software business by continuously expanding the installed base of users,
regularly providing them with upgrades, broadening retail distribution,
producing additional international versions of the products and establishing
the products as a means for electronic transmission of music. Finale upgrades
were introduced on both the Windows platform and Macintosh platform in each of
the last eight years. In 2003 the Company intends to release a Finale
Macintosh version that operates on the Macintosh OSX platform.

Product Development

The Company intends to continue to expand its current product offerings by
developing products for new applications and markets.

Website.Website development expense consists primarily of expenses
required for design and development of the SmartMusic and Coda Music websites
and underlying technology infrastructure. These expenses mainly include
payments to third-party service vendors and personnel costs. All of the
Company websites are continually updated.

In addition, the Company plans to continue to refine the SmartMusic
subscription Internet distribution model, develop its distribution capabilities
on other Internet web sites and has recently transferred its Paris-based
SmartMusic website operations to its Minnesota facility.

Content and product.Content and product development consists primarily
of internal payroll and payments to third parties for the development and
ongoing maintenance of notation products, SmartMusic software, and SmartMusic
accompaniments.

The Company continues to create additional SmartMusic accompaniments.
SmartMusic accompaniment development has limited risk and short development
cycles that typically range from one to four months. Procedures have been
created to synthesize classical music and mark music sequences. Additionally,
the Company has automated some of the process and developed a technical
specification that is used to standardize both quality and process. Unlike a
game manufacturer, which must continually invent new games, we need only look
to the most popular titles in the large and growing supply of musical
compositions to develop additional SmartMusic accompaniments. The Company is
currently developing accompaniments for string instruments to respond to market
demands and intends to release these accompaniments in 2003. Further, the
Company has opened up the possibility for third parties to create SmartMusic
accompaniments as an authorized service provider to publishers and other
parties eager to invest in creating their own accompaniments.

The Company has maintained its competitive position in the music notation
marketplace in part by focusing its improvement efforts over the past eight
years on developing upgrades of the Finale product on a regular basis for the
Macintosh and Windows platforms. The Company expects to make annual releases
of such upgrades. In 2003, we are continuing to invest in product development
to improve the feature set of Finale. The next release of Finale will also
operate on the Macintosh OSX platform. The remainder of the Finale family of
products is updated periodically.

We intend to continue developing music education products with our
proprietary music technologies.

Competition

MakeMusic! believes it is well positioned in music technology markets and
benefits from strong barriers to entry for new competitors in its business
niches because of its: 1) proprietary music notation, Intelligent
Accompaniment and music education software; 2) extensive library of licensed
content; 3) credibility in the music-education marketplace; and 4)
relationships with major industry partners. The Company knows of no other
musical accompaniment product for band instruments and vocalists that responds
to the musician with the exception of In Concert by Cakewalk, which is an
interactive product for MIDI keyboards. The Company expects that SmartMusic
products will also compete with conventional music accompaniment products by
Music Minus One by MMO Music Group, Inc. and MTS 120 by Roland Corporation.
These products offer students the ability to play

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along with prerecorded songs. They differ from the SmartMusic Studio product
in that they do not automatically adjust in real time to the musicians changes
in tempo. The Company believes its SmartMusic system is unique
because this product listens to wind instruments and voice. In addition, the
Company sells accompaniments, while competitors sell only the applications.
However, there can be no assurance that competitors will not enter the market.

The notation market is highly competitive and continues to have
competitors such as Steinberg, Sibelius Software LTD, and Voyetra Inc., a maker
of music writer software.

Competitive factors in marketing the Companys SmartMusic and Finale
products include product features, quality, brand recognition, ease of use,
merchandising, access to distribution channels, retail shelf space and price.
We believe we compete effectively in these areas. In addition, a competitive
advantage is that both product lines benefit from shared technologies. For
example, the SmartMusic pitch recognition technology is used within Finale in
its MicNotator feature, which allows Finale users to enter notes by simply
playing an acoustic instrument into a microphone.

The Company also has market and customer synergies. Finale is well
established in over 30,000 schools, all of which are targets for SmartMusic.
The school decision-makers, teachers, know and respect Finale and are willing
to learn about new products from MakeMusic! Similarly, the Finale channels of
distribution are anxious to build upon their continuing Finale sales with new
products from MakeMusic!

Patents

The Company has licensed, on a worldwide basis for the life of the patent,
from Carnegie Mellon University (CMU) the use of the U.S. patent that covers
the automated accompaniment that listens to and follows tempo changes from a
live performance. The Company has further developed this technology and
patented additional features. The Company has obtained five patents, in
addition to the CMU patent, that protect improvements to the user control of
the software and that contain certain aspects of the repertoire file which
enhance the following capabilities of the software: enhancements to the
algorithms, accompaniment controls and repertoire data files and miscellaneous
interface features of the product. As a result of the additional patented
features developed by the Company and the ability of the Company to develop an
extensive library of repertoire over the next several years, the Company does
not believe that it will be materially adversely affected by the expiration of
the CMU patent in 2005.

The Companys Finale product is covered by three separate patents, which
protect the data structure, the ability to enter music into the product by
tapping tempo with a pedal device or computer keyboard, and the method of
automatically assigning guitar fingerboards to a notated chord. These patents
are licensed from Wenger Corporation on a royalty-free, exclusive, worldwide
basis for the life of the patents.

Trademarks

The Company owns the registered trademarks in the United States for Coda®,
Finale®, Finale® Allegro®, Finale® PrintMusic! ®, Finale® NotePad®,
HyberScribe®, Intonation Trainer®, MicNotator®, Perceive®, Practice Studio®,
SmartMusic®, SmartMusic Accompaniments®, SmartMusic Studio®, Net4Music®, The
Art of Music Notation®, Vivace®, Intelligent Accompaniment®, Intelligent
Accompanist® and Personal Accompanist®. In addition, the names Net4Music®,
SmartMusic® and Finale® have been protected in some foreign countries. The
Company has applied for trademark registration in the U.S. for the name
MakeMusic! and M!. In addition, this report contains references to
trademarks owned by third parties.

Manufacturing

Printing of user manuals, packaging, and the manufacture of related
materials are performed to our specifications by outside subcontractors. The
Company currently uses Advanced Duplication Services, Inc. to perform standard
copying and assembling services, including copying product software CD-ROM
disks, and assembling the product manuals, disks and other product literature
into packages.

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Employees

As of December 31, 2002, the Company employed 77 full-time employees. Of
this total number, 10 positions have been eliminated in 2003 due to the
transfer of certain website and administrative operations from Paris, France to
Minneapolis, Minnesota. The Company believes that its relations with its
employees are good. None of our employees are covered by a collective
bargaining agreement. In addition, the Company relies on independent
contractors to develop its repertoire. We have had no difficulty contracting
with these individuals and believe that our relationships are good. Should the
Company have difficulty securing the services of such persons in the future, it
could adversely affect operations.

Available Information

All reports filed electronically by MakeMusic! with the Securities and
Exchange Commission (SEC), including its annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy and
information statements, other information and amendments to those reports filed
(if applicable), are accessible at no cost by contacting our investor relations
at MakeMusic! These filings are also accessible on the SECs web site at
www.sec.gov. The public may read and copy any materials filed by the Company
with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information for the Public
Reference Room by calling the SEC at 1-800-SEC-0330.

Cautionary Statements

The Private Securities Litigation Reform Act of 1995 (the Reform Act)
provides a safe harbor for forward-looking statements made by us or on our
behalf. We have made, and may continue to make, various written or verbal
forward-looking statements with respect to business and financial matters,
including statements contained in this document, other filings with the
Securities and Exchange Commission, and reports to stockholders.
Forward-looking statements provide current expectations or forecasts of future
events and can be identified by the use of terminology such as believe,
estimate, expect, intend, may, could, will and similar words or
expressions.

The Companys forward-looking statements generally relate to its growth
strategy, financial results, product development and sales efforts.
Forward-looking statements cannot be guaranteed and actual results may vary
materially due to the uncertainties and risks, known and unknown, associated
with such statements. The Company undertakes no obligations to update any
forward-looking statements. The Company wishes to caution investors that the
following important factors, among others, in some cases have affected and in
the future could affect the Companys actual results of operations and cause
such results to differ materially from those anticipated in forward-looking
statements made in this document and elsewhere by or on behalf of the Company.
It is not possible to foresee or identify all factors that could cause actual
results to differ from expected or historic results. As such, investors should
not consider any list of such factors to be an exhaustive statement of all
risks, uncertainties or potentially inaccurate assumptions.

While we currently believe that we have sufficient capital, we may have
other capital needs.The Company believes that, with the funds raised in
February 2003, it has capital, or access to capital, sufficient to meet its
needs through 2003 and to the point at which the Company achieves positive cash
flow. Additional capital may be needed if there is a significant change in our
business plan or operating results. There is no assurance that additional
capital will be available on terms favorable to us or at all.

We are dependent upon our new product development efforts.Additional
development work is required to increase the breadth of our SmartMusic business
and our accompaniment repertoire for SmartMusic Studio products. There can be
no assurance that our timetable for any of our development plans will be
achieved, that sufficient development resources will be available or that
development efforts will be successful.

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We are dependent upon our Internet business.We are dependent on the
Internet to activate our SmartMusic subscriptions and secure our licensed
content. We also utilize the Internet as one of our order-taking channels. A
number of uncertainties related to the Internet exist. If the Internet
develops more slowly than projected or we experience problems developing and
maintaining our Internet operations, our sales, operating results and financial
condition could be adversely affected.

We are dependent upon obtaining and maintaining license agreements with
music publishers, of which there are a limited number.The world market for
music license rights is highly concentrated among a limited number of
publishers. The Company has entered into license agreements with leading music
publishers that provide access to certain musical titles for accompaniment
development. Our contracts with major publishers are not all exclusive, which
means that similar agreements may be made with competitors or that the
publishers themselves may sell the same titles. While we believe that our
relationships with these publishers are good, there can be no assurance that we
will be able to maintain or expand these relationships. The lack of a
sufficient number and variety of musical arrangements would greatly limit the
ability to market our products and services.

Certain of our products have limited and fluctuating sales.Sale of our
SmartMusic subscription revenue products have not achieved, and may not
achieve, significant levels. Further, Internet sales have fluctuated, as have
sales of Finale products, which are historically higher following the release
of product upgrades. We believe that results of operations may fluctuate as a
result of, among other things, the purchasing cycle of the education market and
the timing of releases of new products and product upgrades. Certain states
have had education funding cuts, which could potentially negatively impact
sales of academic products to the education market.

We have incurred operating losses in the past and expect such losses to
continue in the near future.The Company has incurred operating losses since
inception, and will continue to incur such losses in the near future. Such
losses will include non-cash expenses due to the amortization of other
intangible assets recorded as a result of the reverse acquisition transaction
with Net4Music S.A. in 2000. In order to continue to develop our business and
planned product and service offerings, we will be required to devote additional
amounts of capital to our development and marketing efforts, among other
things. There can be no assurance that we will ever operate profitably or
provide an economic return to the investors.

We face intense competition.While competition for the SmartMusic Studio
products is limited, there can be no assurance that others, such as large
electronic and musical instrument manufacturers, will not enter this market.
Competition for the Companys notation products could potentially adversely
impact future sales levels. Our ability to continue to compete effectively
will be substantially dependent upon our ability to continue to improve our
product offerings and Internet resources. If such improvements and development
efforts do not materialize as intended, we may lose our ability to
differentiate our products from those of our competitors. In addition,
increasing competition in the music software market could cause prices to fall
and the volume of transactions to decline, either of which could adversely
affect our business, operating results and financial condition.

Rapid technological changes and obsolescence may adversely affect our
business.We operate in an industry greatly affected by technological changes.
While we are not currently aware of any significant technological changes that
may affect our current technology base, continued advancements in computer
software, hardware and network designs and formats may impact our ability to
effectively maintain our Internet-based sales efforts in a workable and
user-friendly format. The proprietary technology we use to protect access to
our licensed files may be effective for only a limited period by reason of
technological change. The Company must, therefore, devote new resources to
improve or modify this security system, which is a critical aspect of our
ability to establish and maintain relationships with music publishers. While
we currently believe that we have sufficient resources to address technological
changes that may affect our business, there can be no assurance that any such
technological changes will not prove too much for us to overcome in a
cost-effective manner.

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Additional government regulation of the Internet may impair our ability to
fully develop and utilize the Internet as a marketing and distribution medium.
Today, there are relatively few enacted laws specifically directed toward
online services, and the applicability and scope of such laws is still
uncertain, as court interpretations are few. Currently, we do not believe
their impact materially affects the nature of our Internet operations.
Applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. In addition,
because our services are accessible worldwide, foreign jurisdictions may claim
that we are required to comply with their laws. Laws regulating Internet
companies outside of the U.S. may be less favorable then those in the U.S.

Compliance with foreign laws may require us to change our business
practices or restrict our service offerings to an extent that may harm our
financial results. Further, changes to existing laws or the passage of new
laws affecting the Internet could directly affect the way we do business,
create uncertainty on the Internet, reduce demand for our services, increase
the cost of doing business, or otherwise harm our business. Our failure to
comply with domestic or foreign laws could also subject us to penalties ranging
from fines to bans on our ability to offer our services.

We are dependent upon certain key personnel.The Company is highly
dependent on a limited number of key management, including Sean Lafleur and
John Paulson, and key technical personnel. The loss of key personnel, or
inability to hire and retain qualified personnel, could have an adverse effect
on our business, financial condition and results of operations.

We are dependent upon proprietary technology and cannot assure protection
of such technology.There can be no assurance that our proprietary technology
will provide us with significant competitive advantages, that other companies
will not develop substantially equivalent technology or that we will be able to
protect our technologies. The Company could incur substantial costs in seeking
enforcement of its patents or in defending itself against patent infringement
claims by others. Further, there can be no assurance that we will be able to
obtain or maintain patent protection in the markets in which we intend to offer
products.

International development plans are subject to numerous risks.There can
be no guarantee that our international expansion efforts will be successful or
that we will be able to offset the cost of the resources allocated to such
efforts. Moreover, the Company could be faced with the risks inherent in any
international development, such as unpredictable changes in export
restrictions, barriers and customs rates; currency risks; the difficulty of
managing foreign operations; the differences in technological standards,
payment terms and labor laws and practices among countries; collection
problems; political instabilities; seasonal reductions in business, and
unforeseen taxes. Such risk factors could harm our international operations
and, therefore, our business, operating results and financial condition.

The market price of our stock may experience volatility.We cannot
speculate as to the future market price of our Common Stock. Our Common Stock
has experienced, and may continue to experience, substantial price volatility
due to a number of factors, including fluctuations in operating results;
changes in recommendations by stock market analysts regarding us or our
competitors; developments in the industry; and general market conditions that
may be unrelated to our performance.

Potential market delisting.Shares of the Companys common stock are
currently listed on the Nasdaq SmallCap Market and as of March 7, 2003 were
trading below $2.00. In order for shares of the Companys common stock to
remain listed for trading on the SmallCap Market, Nasdaq requires that we meet
certain criteria, including maintenance of a minimum $1.00 per share bid price.
The Company must continue to maintain a minimum of $1.00 per share bid price
to avoid possible delisting.

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ITEM 2. DESCRIPTION OF PROPERTY

The Paris location leases approximately 3,000 square feet of office space
at 24, Rue du Président Wilson, 92300 Levallois-Perret, France, for current
annual net rent of approximately $56,000. This lease expires in June 2005.
The Company has negotiated a termination of this lease as of March 31, 2003 and
is relocating into a less expensive office. The Minnesota location leases
approximately 12,150 square feet of office and warehouse space at 6210 Bury
Drive, Eden Prairie, Minnesota 55346. Rent payments vary from $96,000 to
$125,000 on an annual basis and the lease expires April 30, 2006.




ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation, other than by a
small French sheet music publisher, which the Company believes is without
merit, and is not aware of any threatened litigation that would have a material
adverse effect on its financial condition or results of operations.




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

A special meeting of the Companys shareholders was held on Monday,
February 24, 2003. At the special meeting the shareholders approved the sale
of up to 19,962,363 shares of Common Stock of the Company by a vote of
11,577,391 shares in favor, with 787,770 shares against, 27,400 shares
abstaining and no shares representing broker non-votes. All information on the
shares voted is in shares prior to the January 16 1-for-10 reverse stock split.

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PART II.




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There were no sales of unregistered securities during the year ended December 31, 2002.

The Companys Common Stock traded on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol NMUS until May 22, 2002. On May 23,
2002, it began trading under the symbol MMUS.

On January 16, 2003, the Companys Board of Directors authorized and
implemented a reverse stock split (the Reverse Split) of MakeMusics issued,
outstanding and authorized shares of common stock at a ratio of one-for-ten. As
a result of the Reverse Split, one new share of common stock was issued for
every ten shares of common stock held by stockholders of record as of January
16, 2002. All references in the accompanying financial statements to the number
of shares and per share amounts have been retroactively restated to reflect the
Reverse Split.

|               |  |      |      |      |  |      |      |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ----- | 
|               |  | 2002 |      | 2001
|Common Stock   |  | High |      | Low  |  | High |      | Low
|               |  |      |      |      |  |      |      |    
|First Quarter  |  | $    | 6.50 |      |  | $    | 2.80 |     |  | $ | 32.50 |  |  | $ | 10.60 | 
|Second Quarter |  |      | 7.00 |      |  |      | 4.00 |     |  |   | 14.90 |  |  |   | 9.10  | 
|Third Quarter  |  |      | 5.20 |      |  |      | 3.00 |     |  |   | 11.00 |  |  |   | 4.00  | 
|Fourth Quarter |  |      | 4.30 |      |  |      | 2.10 |     |  |   | 5.50  |  |  |   | 3.20  | 

As of December 31, 2002, there were approximately 200 shareholders of
record of the Companys Common Stock. In addition, the Company estimates that
an additional 1,500 shareholders own stock held for their accounts at brokerage
firms and financial institutions. The Company has never paid cash dividends on
any of its securities. The Company currently intends to retain any earnings
for use in its operations and does not anticipate paying cash dividends in the
foreseeable future.




ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

On March 13, 2002, it was announced that effective immediately the Company
would do business as MakeMusic! Inc. and was later approved by the shareholders
at the annual shareholders meeting held on May 21, 2002. The name change
represents the culmination of the integration of strategies since the merger of
Coda Music Technology and Net4Music in October 2000. Upon shareholder approval
of the corporate name change, the Company also changed its stock-trading symbol
on the Nasdaq Stock Market to MMUS.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
of these financial statements require management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. We believe that the following are some
of the more critical judgment areas in the application of our accounting
policies that currently affect our financial condition and results of
operations:

Revenue recognition.Software revenue is recognized in accordance with
the American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition, when all of the following
conditions are met: there is evidence of an agreement with the customer
(normally a purchase order), delivery has occurred, the total sales price is
fixed and determinable, collectibility is probable and any uncertainties with
regard to customer acceptance are insignificant. For any sales that include a
right of return, the Company tracks return history and records a reduction to
revenue for the estimated return amount in accordance with Financial Accounting
Standards Board (FASB) Statement 148 (FAS 148), Revenue Recognition When a
Right of Return Exists. SmartMusic annual subscription sales are deferred and
amortized to revenue on a pro-rated monthly basis over the life of the
subscription.

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Allowance for doubtful accounts.Our distribution in domestic and
international markets through independent dealers and distributors concentrates
relatively large amounts of receivables in relatively few customer accounts.
Most international customers pay for the product prior to shipment; domestic
dealers and distributors that do not prepay are granted payment terms and
credit limits based on credit checks and account history. We have successfully
done business with most of our dealers and distributors for many years and have
a history of low uncollectable accounts. Any sales directly to home users are
prepaid and schools submit purchase orders for purchases. The Company records
a monthly accrual for potential nonpayments, which has historically been
sufficient to cover uncollected accounts. Financial conditions in
international markets can change very quickly and our allowance for doubtful
accounts cannot anticipate all potential changes.

Licensing reserves.The Companys business requires licensing rights to
certain technologies and songs that will be used in the Companys product.
Many publishers require advance payment in order to license their property,
which are booked as prepaid royalties by the Company. The Company periodically
analyzes the prepayments to estimate the likelihood that it will fully realize
the amounts paid in advance for royalties on each song. A reserve is booked
against the prepaid royalty asset to estimate the amount that may not be
realized.

Impairment of goodwill. In the first quarter of 2002, the Company
evaluated the carrying value of its goodwill and intangible assets in
accordance with the provisions of FASB Statement 142 (FAS 142), Goodwill and
Other Intangible Assets, which were effective for the company as of January 1,
2002. Utilizing a discounted cash flow model, that analysis was used to assess
whether the assets carrying value is fully recoverable. In the fourth quarter
of each year, the Company will perform its annual impairment analysis of
Goodwill. The assessment of potential impairment requires certain judgments
and estimates by the Company, including the determination of an event
indicating impairment; the future cash flows to be generated by the asset;
risks associated with those cash flows; and the Companys discount rate to be
utilized.

Deferred tax assets. We have U.S. net operating loss carryforwards of
approximately $20 million and tax credits of approximately $385,000. The
losses and tax credits are carried forward for U.S. and state corporate income
taxes and can be used to reduce future taxes. At December 31, 2002, we had
deferred tax assets totaling $16,182,000. We have recorded a valuation
allowance against this asset for its full amount because its realization is not
assured beyond reasonable doubt.

Results of Operations

In order to provide the reader with more meaningful analysis, the
following discussion includes comparisons of December 31, 2002 results to the
December 31, 2001 results.

For the year ended December 31, 2002 compared to the year ended December 31, 2001

Net revenue.Net revenues for the year ended December 31, 2002 were
$7,737,000 as compared to $7,462,000 for the year ended December 31, 2001. Net
revenue for 2002 consists of notation software sales of $7,477,000, SmartMusic
sales of $241,000, and digital sheet music sales through the Companys
discontinued Net4Music website of $19,000.

Net revenues of $7,737,000 for the year ended December 31, 2002 were
$275,000 or 3.7% higher than revenue results for the year ended December 31,
2001. Notation sales for the year ended December 31, 2002 of $7,477,000 were
$604,000 or 8.8% higher than the year ended December 31, 2001. This is
primarily due to releasing the Finale 2003 upgrade two and one half months
earlier than Finale 2002 was released. This was partially offset by SmartMusic
and digital sheet music sales for the year ended December 31, 2002 of $260,000,
which were $329,000 or 55.8% lower than the year ended December 31, 2001. This
decrease is due to the discontinued Net4Music digital sheet music website and
the transition of SmartMusic from a packaged retail product to an online
subscription product.

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In November 2001, the Company introduced SmartMusic as an internet-based
product, to home and educational customers on a subscription basis, typically
with a subscription life of 12 months for educational institutions and one
month for home users. In late October 2002, the Company introduced the annual
SmartMusic school-sponsored home subscription. Revenue for annual subscription
sales is allocated over the life of the subscription. Total earned SmartMusic
subscription revenue for the year ended December 31, 2002 was $76,000. Total
unearned SmartMusic subscription revenue was $121,000 as of December 31, 2002,
an increase of $112,000 over the balance at December 31, 2001. The Company is
currently focusing on growing its subscription business and anticipates a
growing trend for this business.

The SmartMusic subscription service for music educators, launched in
November 2001, has been purchased by more than 1,300 schools with more than
3,500 subscriptions as of December 31, 2002. These schools subscriptions
correspond to recurring annual subscription revenue of $124,000 to be
recognized over the subscription period, of which $58,000 was recorded in the
financial statements in the year ended December 31, 2002. The home subscription
program was launched in June 2002. As of December 31, 2002 the Company had 539
active home subscription users resulting in revenues of $18,000 for the year
ended December 31, 2002. The Companys school-sponsored home subscription
program was introduced September 2002 and had 50 schools participating for a
total of 1,953 live home accounts as of December 31, 2002. $1,000 in revenue
was recognized through this program in the year ended December 31, 2002. As of
year end the number of SmartMusic school subscriptions, school-sponsored home
subscriptions and home subscriptions would earn $237,000 of revenue on an
annual basis (annual run rate).

Prior to the introduction of the SmartMusic subscription product,
SmartMusic Studio was available as a packaged, retail software product complete
with instrumental hardware equipment and Intelligent Accompaniments sold
separately. Revenue for the retail SmartMusic product, accompaniments and
accessories for the year ended December 31, 2002 was $154,000, which was
$309,000 lower than the year ended December 31, 2001. This decrease in 2002
SmartMusic product and accompaniment revenue is partially offset by sales of
the instrumental hardware equipment necessary to fully utilize the SmartMusic
subscription application to its full potential. As the Company focuses its
resources on the SmartMusic subscription product, SmartMusic retail product
sales will diminish, however subscription and accessory revenue will continue
to increase.

Gross profit.Gross profit was $6,143,000 for the year ended December 31,
2002, a $411,000 or 7.2% increase from the year ended December 31, 2001. Cost
of revenue includes product costs; royalties paid to publishers; amortization
of capitalized notation, repertoire and SmartMusic software development costs;
and credit card fees. While 2002 net revenues increased over the prior year,
cost of revenue for the year ended December 31, 2002 of $1,594,000 was $136,000
or 7.9% lower compared to the year ended December 31, 2001. Cost of revenue as
a percentage of net revenue for the year ended December 31, 2002 was 20.6%, 2.6
percentage points lower than the same period for 2001. These decreases are
partially due to capitalized repertoire development costs that were fully
amortized in 2001, as well as the expiration of certain royalties.

In addition, the Companys 2002 sales mix consisted of a greater
concentration of our higher margin Finale family of notation products.
Notation sales of $7,477,000 for the year ended December 31, 2002 were 96.6% of
total revenue compared to notation sales of $6,873,000 for the year ended
December 31, 2001, which were 92.1% of total revenue. This was the result of
the early release of Finale 2003 products and an overall shift in revenue away
from SmartMusic packaged good products and digital sheet music, which are lower
margin percentage products.

Website development.Website development expenses of $1,000,000 for the
year ended December 31, 2002 were 67% higher than website development expenses
of $600,000 for the year ended December 31, 2001. Current year website
development expense consists primarily of expenses related to improvement of
the design and development of additional features for the Coda and SmartMusic
website and other underlying technology infrastructure. In the year ended
December 31, 2001, year-to-date expenses were reduced by $369,000 to capitalize
development of the SmartMusic website. After adding back the effects of all
capitalized costs in 2002 and 2001, website development expenses for the year
ended December 31, 2002 would have been $107,000 or 11.1% lower than the year
ended December 31, 2001.

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Content and product development.Content and product development expenses
totaled $2,124,000 for the year ended December 31, 2002 as compared to
$2,373,000 for the year ended December 31, 2001. Current year expenses consist
primarily of Finale notation and SmartMusic product development, SmartMusic
repertoire development, and costs associated with discontinuing the digital
sheet music engraving services. The decrease is largely due to the
discontinued digital sheet music content operations in Lyon, France and
Madagascar in 2001, partially offset by additional personnel and related costs
for Finale 2003 development and for software development in support of the
SmartMusic subscription service.

Selling and marketing expenses.Selling and marketing expenses of
$3,665,000 for the year ended December 31, 2002 were $890,000 or 19.5% lower
than selling and marketing expenses of $4,555,000 for the year ended December
31, 2001. The decrease is largely due to the full impact of the reduced
workforce resulting from the 2001 restructuring efforts relating to the sheet
music operations. This was partially offset by additional marketing efforts
for the SmartMusic subscription service. Our current customer acquisition cost
for schools in 2002 was $205. Total selling and marketing expenses primarily
consist of marketing, advertising and promotion expenses, business development
and customer service activities and payroll.

General and administrative expenses.General and administrative expenses
were $4,849,000 for the year ended December 31, 2002 as compared to general and
administrative expenses of $8,319,000 for the year ended December 31, 2001.
General and administrative expenses consist primarily of payroll and related
expenses for executive and administrative personnel, professional services
expenses relating to financing activities, amortization of certain intangible
assets with definite lives, and other general corporate expenses. The decrease
relates to actual expense reductions as a result of the 2001 restructurings,
the reduction of amortization of license rights due to the write-off of $1.3
million license rights in the 3rd and 4th quarter of 2001, and the
non-amortization of goodwill resulting from the adoption of FASB 142, Goodwill
and Other Intangible Assets (See Note 2). Amortization of goodwill in 2001
was $1,969,000.

Restructuring charges.In 2001, the Company announced restructuring plans
to eliminate redundant responsibilities and cut excess costs and reduce the
digital sheet music operations in its European locations and close its New York
and Lyon operations. As a result of these plans to reduce operating costs,
MakeMusic! recorded a restructuring charge of $1,172,000 in 2001. In the third
quarter of 2002, the Company discontinued its digital sheet music operations
and most of the resources and effort of the Companys European operations were
refocused toward development of SmartMusic. In the fourth quarter of 2002, the
Company announced that it was reducing website development and administrative
expenses in its Paris, France operations and moving them to the Minneapolis,
Minnesota location. As a result, an additional $174,000 in restructuring
charges was accrued.

Impairment of long-lived assets. The Company completed its analysis of
the required transitional impairment test for goodwill upon adoption of FAS
142, Goodwill and Other Intangible Assets, and recorded an $11,500,000 goodwill
impairment in the income statement as a Cumulative effect of change in
accounting principle in the first quarter of 2002. The Company performed its
annual impairment test of goodwill in the fourth quarter of 2002 and concluded
an additional impairment of $2,347,000 had occurred, which was recorded in
current year earnings.

In addition, the Companys intangible assets included license rights for
digital sheet music and capitalized development for the digital store
 www.net4music.com. During
the year ended December 31, 2001, the Company reevaluated the recoverability of
license rights related to a restructuring of the digital sheet music
operations. Management concluded at the time of this restructuring that an
impairment of license rights had occurred and recorded a $1,304,000 non-cash
impairment charge.

During the quarter ended September 30, 2002, the Company announced the
closure of its digital sheet music operations, which resulted in the
revaluation of the recoverability of the license rights and capitalized
development as described in FASB Statement 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Management concluded that a full impairment
of these assets had occurred and recorded a $286,000 non-cash impairment
charge.

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Interest income and expense, net.Net interest expense was $72,000 for
the year ended December 31, 2002 in comparison to a net interest income of
$124,000 for the year ended December 31, 2001. The decrease relates to
reduction in interest income earned due to lower investment levels of available
cash and cash equivalents. Also, the Company has incurred additional interest
expense for the year ended December 31, 2002 relating to its Revolving Note
Payable and Bridge Loan Debt (see Note 2, Summary of Significant Accounting
Policies).

Foreign exchange loss.The Company recognized a foreign exchange loss of
$5,000 in 2002, as opposed to no foreign exchange loss in 2001.

Income tax.Due to operating losses the Company recorded $4,000 minimum
state taxes for both years ended December 31, 2002 and 2001, respectively.

Liquidity and capital resources.Net cash used in operating activities
totaled $2,391,000 and $6,372,000 for the years ended December 31, 2002 and
2001, respectively. The significant reduction in cash usage in 2002 as
compared to 2001 is attributed to increased gross margins from higher revenues
and higher margin products; the full impact of closing the New York facility
and reduction of European operations, which included sales and marketing
expense reductions; personnel reductions for sales and marketing, website
development and content development reductions; and general administrative
expense reductions.

Net cash used in operating activities consisted primarily of net losses of
$3,229,000 and $5,801,000 for the years ended December 31, 2002 and 2001,
respectively, net of depreciation, amortization, cash items in the
restructuring charge and the impairment of intangibles. In addition, accounts
receivable decreased by $296,000 due to collection efforts, refunds of $130,000
for value added tax have been received, deferred revenue increased by $115,000
primarily due to SmartMusic subscription sales, inventories were reduced by
$67,000, and prepaids and other current assets decreased $135,000. The Company
made capital expenditures of $357,000 and paid down long-term debt and capital
leases of $310,000. In September 2002, the Company obtained bridge loans from
investors of $750,000. The Company has total commitments of $3,015,000 in
additional equity investments, which includes conversion of the $750,000 in
bridge loans into equity as of February 24, 2003, the date of shareholder
approval. Of the additional $2,265,000 in financing, $390,000 had been
received as of December 31, 2002.

The Company has significantly reduced future monthly cash outflows as of
the end of 2002. Actual operating cash usage is typically highest in the first
and second quarters, with the third quarter using the least cash or producing
positive cash flow. These quarterly fluctuations are created by the notation
product release cycle and the cyclical impact of sales to schools, as a result
of the school year calendar. In 2002, net cash used in operating activities
during the first six months was $1,799,000 in comparison to $592,000 in the
last six months. Management anticipates additional capital expenditures in
connection with its expected growth in operations and infrastructure. The
Company will also need to continue to spend significant amounts for sales and
marketing, advertising and promoting its brands, content development and
technology and infrastructure development. Management has taken steps to
manage expenses and believes that existing cash, together with cash flows
generated by product sales and the private placement, will be sufficient to
fund operations through 2003 and until the Company achieves positive cash flow.

As of December 31, 2002, the Company had cash and cash equivalents of
$1,859,000.

New Accounting Pronouncements.Refer to Note 3 in the audited financial statements.

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##### Table of Contents






ITEM 7. FINANCIAL STATEMENTS

Report of Independent Auditors

The Board of Directors and Shareholders
MakeMusic! Inc.

We have audited the accompanying consolidated balance sheets of MakeMusic!
Inc. (formerly Net4Music, Inc.) and subsidiaries, as of December 31, 2002 and
2001 and the related consolidated statements of operations, shareholders
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of MakeMusic! Inc.
and subsidiaries as of December 31, 2002 and 2001 and the consolidated results
of their operations and their cash flows for the years ended, in conformity
with accounting principles generally accepted in the United States.

As discussed in Notes 1 and 5, the Company adopted Statement of Accounting
Standard number 142 effective January 1, 2002.

|                     
|---------------------
|/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 25, 2003

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MakeMusic! Inc.
Consolidated Balance Sheets(In thousands of U.S. dollars, except share and per share data)

|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |       |         |  
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------ | ----------- | ------- | ---- | ------ | ----- | ------- | -
|                                                  |                                                                                                       |                                                                                        |        | December 31
|                                                  |                                                                                                       |                                                                                        |        | 2002        |         | 2001
|                                                  |                                                                                                       |                                                                                        |        |             |         |     
|Assets                                            |                                                                                                       |                                                                                        |        |             |         |      |        |      
|Current assets:                                   |                                                                                                       |                                                                                        |        |             |         |      |        |      
|                                                  | Cash and cash equivalents                                                                             |                                                                                        | $      | 1,469       |         |      | $      | 3,258 |        
|                                                  | Cash-restricted                                                                                       |                                                                                        |        | 390         |         |      |        |      |        
|                                                  | Accounts receivable (net of allowance of $36
and $151 as of December 31, 2002 and 2001,
respectively) |                                                                                        |        | 400         |         |      |        | 640   |        
|                                                  | Value added tax receivable                                                                            |                                                                                        |        | 58          |         |      |        | 172   |        
|                                                  | Inventories                                                                                           |                                                                                        |        | 324         |         |      |        | 391   |        
|                                                  | Prepaid expenses and other current assets                                                             |                                                                                        |        | 185         |         |      |        | 341   |        
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |       |        
|Total current assets                              |                                                                                                       |                                                                                        | 2,826  |             |         |      | 4,802  |      
|Property and equipment, net                       |                                                                                                       |                                                                                        | 528    |             |         |      | 1,099  |      
|Capitalized software products, net                |                                                                                                       |                                                                                        | 732    |             |         |      | 770    |      
|Goodwill, net                                     |                                                                                                       |                                                                                        | 3,630  |             |         |      | 17,330 |      
|Intangible assets, net                            |                                                                                                       |                                                                                        | 2,719  |             |         |      | 4,380  |      
|Other non-current assets                          |                                                                                                       |                                                                                        | 157    |             |         |      | 211    |      
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |       |        
|Total assets                                      |                                                                                                       | $                                                                                      | 10,592 |             |         | $    | 28,592 |      
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |      
|Liabilities and shareholders equity              |                                                                                                       |                                                                                        |        |             |         |      |        |      
|Current liabilities:                              |                                                                                                       |                                                                                        |        |             |         |      |        |      
|                                                  | Accounts payable                                                                                      |                                                                                        | $      | 651         |         |      | $      | 749   |        
|                                                  | Accrued expenses and other current liabilities                                                        |                                                                                        |        | 1,303       |         |      |        | 1,095 |        
|                                                  | Revolving note payable                                                                                |                                                                                        |        | 89          |         |      |        |      |        
|                                                  | Convertible loans                                                                                     |                                                                                        |        | 419         |         |      |        |      |        
|                                                  | Current portion of long-term debt                                                                     |                                                                                        |        | 398         |         |      |        | 254   |        
|                                                  | Current portion of capital lease obligations                                                          |                                                                                        |        | 39          |         |      |        | 172   |        
|                                                  | Reserve for product returns                                                                           |                                                                                        |        | 219         |         |      |        | 167   |        
|                                                  | Deposits                                                                                              |                                                                                        |        | 390         |         |      |        |      |        
|                                                  | Deferred revenue                                                                                      |                                                                                        |        | 178         |         |      |        | 63    |        
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |       |        
|Total current liabilities                         |                                                                                                       |                                                                                        | 3,686  |             |         |      | 2,500  |      
|Long-term debt, net of current portion            |                                                                                                       |                                                                                        | 144    |             |         |      | 354    |      
|Capital lease obligations, net of current portion |                                                                                                       |                                                                                        | 7      |             |         |      | 10     |      
|Shareholders equity:                             |                                                                                                       |                                                                                        |        |             |         |      |        |      
|                                                  | Common stock, $0.01 par value:                                                                        |                                                                                        |        |             |         |      |        |       |        
|                                                  |                                                                                                       | Authorized shares  6,500,000 (including
1,500,000 undesignated)                       |        |             |         |      |        |       |         |  
|                                                  |                                                                                                       | Issued and outstanding shares  2,168,860
and 2,086,002 in 2002 and 2001,
respectively |        |             | 22      |      |        |       | 21      |  
|                                                  |                                                                                                       | Additional paid-in capital                                                             |        |             | 58,278  |      |        |       | 57,874  |  
|                                                  |                                                                                                       | Share subscription receivable                                                          |        |             |        |      |        |       | (73     | )
|                                                  |                                                                                                       | Accumulated deficit                                                                    |        |             | (50,877 | )    |        |       | (31,067 | )
|                                                  |                                                                                                       | Accumulated other comprehensive income                                                 |        |             | (73     | )    |        |       | (277    | )
|                                                  |                                                                                                       | Deferred compensation                                                                  |        |             | (595    | )    |        |       | (750    | )
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |      
|Total shareholders equity                        |                                                                                                       |                                                                                        | 6,755  |             |         |      | 25,728 |      
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |      
|Total liabilities and shareholders equity        |                                                                                                       | $                                                                                      | 10,592 |             |         | $    | 28,592 |      
|                                                  |                                                                                                       |                                                                                        |        |             |         |      |        |      

See accompanying notes.

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MakeMusic! Inc.
Consolidated Statements of Operations(In thousands of U.S. dollars, except share and per share data)

|                                                       |                                              |   |                        |       |      |   |           |       | 
|------------------------------------------------------ | -------------------------------------------- | - | ---------------------- | ----- | ---- | - | --------- | ----- | 
|                                                       |                                              |   | Year ended December 31
|                                                       |                                              |   | 2002                   |       | 2001
|                                                       |                                              |   |                        |       |     
|Net revenues                                           |                                              | $ | 7,737                  |       |      | $ | 7,462     |      
|                                                       | Cost of revenues                             |   |                        | 1,594 |      |   |           | 1,730 | 
|                                                       |                                              |   |                        |       |      |   |           |      
|Gross profit                                           |                                              |   | 6,143                  |       |      |   | 5,732     |      
|Operating expenses                                     |                                              |   |                        |       |      |   |           |      
|                                                       | Website development expenses                 |   |                        | 1,000 |      |   |           | 600   | 
|                                                       | Content and product development expenses     |   |                        | 2,124 |      |   |           | 2,373 | 
|                                                       | Selling and marketing expenses               |   |                        | 3,665 |      |   |           | 4,555 | 
|                                                       | General and administrative expenses          |   |                        | 4,849 |      |   |           | 8,319 | 
|                                                       | Restructuring charges                        |   |                        | 174   |      |   |           | 1,172 | 
|                                                       | Impairment of intangible assets and goodwill |   |                        | 2,633 |      |   |           | 1,304 | 
|                                                       |                                              |   |                        |       |      |   |           |      
|                                                       |                                              |   | 14,445                 |       |      |   | 18,323    |      
|                                                       |                                              |   |                        |       |      |   |           |      
|Loss from operations                                   |                                              |   | (8,302                 | )     |      |   | (12,591   | )    
|Interest income                                        |                                              |   | 22                     |       |      |   | 174       |      
|Interest expense                                       |                                              |   | (94                    | )     |      |   | (50       | )    
|Other income and expense, net                          |                                              |   | 68                     |       |      |   | 60        |      
|                                                       |                                              |   |                        |       |      |   |           |      
|Net loss before income tax                             |                                              |   | (8,306                 | )     |      |   | (12,407   | )    
|Income tax                                             |                                              |   | (4                     | )     |      |   | (4        | )    
|                                                       |                                              |   |                        |       |      |   |           |      
|Net loss before cumulative effect of accounting change |                                              |   | (8,310                 | )     |      |   | (12,411   | )    
|Cumulative effect of change in accounting principle    |                                              |   | (11,500                | )     |      |   |          |      
|                                                       |                                              |   |                        |       |      |   |           |      
|Net Loss                                               |                                              | $ | (19,810                | )     |      | $ | (12,411   | )    
|                                                       |                                              |   |                        |       |      |   |           |      
|Basic and diluted loss per common share                |                                              | $ | (8.55                  | )     |      | $ | (5.78     | )    
|Weighted average common shares outstanding             |                                              |   | 2,316,846              |       |      |   | 2,146,585 |      

See accompanying notes.

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MakeMusic! Inc.
Consolidated Statement of Shareholders Equity(In thousands of U.S. dollars, except share data)

|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |         |         |  
|--------------------------------------------------------------------------- | ---------------------- | ---------------------- | ----------- | ------------ | - | ---------- | ---- | ------- | - | ------------ | ------ | ------- | - | ------------ | --- | -------- | - | ------------- | ------- | ------- | ------- | ------------- | ---- | - | - | - | ---- | ----------- | ---- | - | ------ | ------- | ------- | -
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      | Accumulated |      |   |        |        
|                                                                            |                        |                        |             | Common Stock |   | Additional |      |         |   |              |        |         |   |              |     |          |   |               |         | Other   |         | Shareholders'
|                                                                            |                        |                        |             | Total        |   |            |      |         |   | Paid-In      |        | Share   |   | Accumulated  |     | Deferred |   | Comprehensive |         | Equity 
|                                                                            |                        |                        |             | Shares       |   | Amount     |      | Capital |   | Subscription |        | Deficit |   | Compensation |     | Income   |   | (Deficit)    
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |              
|Balance at December 31, 2000                                                |                        |                        | 18,384,275  |              |   | $          | 184  |         |   | $            | 55,642 |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|Reverse Split  1 for 10                                                    |                        |                        | (16,545,808 | )            |   |            | (165 | )       |   |              | 165    |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|Balance at December 31, 2000,
as restated                                   |                        |                        | 1,838,467   |              |   |            | 19   |         |   |              | 55,807 |         |   | $            |    |          |   | $             | (18,656 | )       |         | $             | (918 | ) |   | $ | 83   |             |      | $ | 36,335 |        
|Shares related to put and call
agreements and reverse
acquisition with Coda |                        |                        | 17,586      |              |   |            |     |         |   |              |       |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   |       |        
|Exercise of stock options
and warrants                                      |                        |                        | 50          |              |   |            |     |         |   |              | 1      |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 1      |        
|Issuance of stocks, stock
options and warrants for
services                 |                        |                        | 100         |              |   |            |     |         |   |              | 289    |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 289    |        
|Extension of employee stock
options related to
restructuring                |                        |                        |            |              |   |            |     |         |   |              | 297    |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 297    |        
|Private placement offering, net                                             |                        |                        | 229,840     |              |   |            | 2    |         |   |              | 1,480  |         |   |              | (88 | )        |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 1,394  |        
|Share subscription receivable
receipt                                       |                        |                        |            |              |   |            |     |         |   |              |       |         |   |              | 15  |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 15     |        
|Amortization of deferred
compensation                                       |                        |                        |            |              |   |            |     |         |   |              |       |         |   |              |    |          |   |               |        |         |         |               | 168  |   |   |   |     |             |      |   | 168    |        
|Comprehensive loss:                                                         |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|                                                                            |                        | Net loss               |             |              |  |            |      |         |  |              |        |         |  |              |     |          |  |               |         |         | (12,411 | )             |      |   |  |   |      |             |     |   |        |         | (12,411 | )
|                                                                            |                        | Translation adjustment |             |              |  |            |      |         |  |              |        |         |  |              |     |          |  |               |         |         |        |               |      |   |  |   |      |             | (360 | ) |        |         | (360    | )
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|                                                                            |                        | Comprehensive loss     |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |         | (12,771 | )
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|Balance at December 31, 2001                                                |                        |                        | 2,086,043   |              |   |            | 21   |         |   |              | 57,874 |         |   |              | (73 | )        |   |               | (31,067 | )       |         |               | (750 | ) |   |   | (277 | )           |      |   | 25,728 |        
|Shares related to put and call
agreements and reverse
acquisition with Coda |                        |                        | 82,817      |              |   |            | 1    |         |   |              | (1     | )       |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   |       |        
|Issuance of stocks, stock
options and warrants for
services                 |                        |                        |            |              |   |            |     |         |   |              | 10     |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 10     |        
|Warrants issued to bridge loan
investors                                    |                        |                        |            |              |   |            |     |         |   |              | 395    |         |   |              |    |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 395    |        
|Share subscription receivable
receipt                                       |                        |                        |            |              |   |            |     |         |   |              |       |         |   |              | 73  |          |   |               |        |         |         |               |     |   |   |   |     |             |      |   | 73     |        
|Amortization of deferred
compensation                                       |                        |                        |            |              |   |            |     |         |   |              |       |         |   |              |    |          |   |               |        |         |         |               | 155  |   |   |   |     |             |      |   | 155    |        
|Comprehensive loss:                                                         |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|                                                                            | Net loss               |                        |             |             |   |            |      |        |   |              |        |        |   |              |     |         |   |               |         | (19,810 | )       |               |      |  |   |   |      |            |      |   |        | (19,810 | )      
|                                                                            | Translation adjustment |                        |             |             |   |            |      |        |   |              |        |        |   |              |     |         |   |               |         |        |         |               |      |  |   |   |      | 204         |      |   |        | 204     |        
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|                                                                            | Comprehensive loss     |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        | (19,606 | )      
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        
|Balance at December 31, 2002                                                |                        |                        | 2,168,860   |              |   | $          | 22   |         |   | $            | 58,278 |         |   | $            | 0   |          |   | $             | (50,877 | )       |         | $             | (595 | ) |   | $ | (73  | )           |      | $ | 6,755  |        
|                                                                            |                        |                        |             |              |   |            |      |         |   |              |        |         |   |              |     |          |   |               |         |         |         |               |      |   |   |   |      |             |      |   |        |        

See accompanying notes.

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MakeMusic! Inc.
Consolidated Statements of Cash Flows(In thousands of U.S. dollars)

|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |   |       |      |  
|------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | ---- | ------- | - | ----- | ---- | -
|                                                 |                                                                             |                                                         |                                           |   | Year ended December 31
|                                                 |                                                                             |                                                         |                                           |   | 2002                   |      | 2001   
|                                                 |                                                                             |                                                         |                                           |   |                        |      |        
|Operating activities                             |                                                                             |                                                         |                                           |   |                        |      |         |  
|Net loss                                         |                                                                             | $                                                       | (19,810                                   | ) |                        | $    | (12,411 | )
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                         |                                           |   |                        |      |         |   |      
|                                                 |                                                                             | Amortization of intangible assets                       |                                           |   | 1,583                  |      |         |   | 3,562 |     
|                                                 |                                                                             | Depreciation and amortization of property and equipment |                                           |   | 697                    |      |         |   | 929   |     
|                                                 |                                                                             | Impairment of intangible assets and goodwill            |                                           |   | 14,133                 |      |         |   | 1,304 |     
|                                                 |                                                                             | Amortization of deferred compensation                   |                                           |   | 155                    |      |         |   | 168   |     
|                                                 |                                                                             | Interest on bridge loan and discount                    |                                           |   | 64                     |      |         |   |      |     
|                                                 |                                                                             | Restructuring                                           |                                           |   | 13                     |      |         |   | 647   |     
|                                                 |                                                                             | Issuance of stock, options and warrants for services    |                                           |   | 10                     |      |         |   | 289   |     
|                                                 |                                                                             | Increase (decrease) in cash from:                       |                                           |   |                        |      |         |   |       |     
|                                                 |                                                                             |                                                         | Accounts receivable                       |   |                        | 426  |         |   |       | 619  |  
|                                                 |                                                                             |                                                         | Inventories                               |   |                        | 67   |         |   |       | (79  | )
|                                                 |                                                                             |                                                         | Prepaid expenses and other current assets |   |                        | 135  |         |   |       | 186  |  
|                                                 |                                                                             |                                                         | Accounts payable                          |   |                        | (145 | )       |   |       | (759 | )
|                                                 |                                                                             |                                                         | Accrued liabilities and product returns   |   |                        | 166  |         |   |       | (855 | )
|                                                 |                                                                             |                                                         | Deferred revenue                          |   |                        | 115  |         |   |       | 28   |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Net cash used in operating activities            |                                                                             |                                                         | (2,391                                    | ) |                        |      | (6,372  | )
|Investing activities                             |                                                                             |                                                         |                                           |   |                        |      |         |  
|Purchases of property and equipment, net         |                                                                             |                                                         | (196                                      | ) |                        |      | (352    | )
|Capitalized development and other intangibles    |                                                                             |                                                         | (161                                      | ) |                        |      | (580    | )
|Redemptions of short-term investments            |                                                                             |                                                         |                                          |   |                        |      | 917     |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Net cash used in investing activities            |                                                                             |                                                         | (357                                      | ) |                        |      | (15     | )
|Financing activities                             |                                                                             |                                                         |                                           |   |                        |      |         |  
|Cash proceeds from issuance of shares            |                                                                             |                                                         |                                          |   |                        |      | 1,394   |  
|Proceeds from bridge loan financing              |                                                                             |                                                         | 750                                       |   |                        |      |        |  
|Payments received on share subscription notes    |                                                                             |                                                         | 73                                        |   |                        |      | 15      |  
|Proceeds from revolving note payable             |                                                                             |                                                         | 89                                        |   |                        |      |        |  
|Payments on long-term debt                       |                                                                             |                                                         | (159                                      | ) |                        |      | (93     | )
|Payments on capital leases                       |                                                                             |                                                         | (151                                      | ) |                        |      | (566    | )
|Exercise of stock options                        |                                                                             |                                                         |                                          |   |                        |      | 1       |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Net cash provided by financing activities        |                                                                             |                                                         | 602                                       |   |                        |      | 751     |  
|Effect of exchange rate changes on cash          |                                                                             |                                                         | 357                                       |   |                        |      | (196    | )
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Net decrease in cash and cash equivalents        |                                                                             |                                                         | (1,789                                    | ) |                        |      | (5,832  | )
|Cash and cash equivalents, beginning of year     |                                                                             |                                                         | 3,258                                     |   |                        |      | 9,090   |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Cash and cash equivalents, end of year           |                                                                             | $                                                       | 1,469                                     |   |                        | $    | 3,258   |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  
|Supplemental disclosure of cash flow information |                                                                             |                                                         |                                           |   |                        |      |         |  
|Interest paid                                    |                                                                             | $                                                       | 94                                        |   |                        | $    | 50      |  
|                                                 |                                                                             |                                                         |                                           |   |                        |      |         |  

See accompanying notes.

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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

1. Business Section

The Company develops and markets proprietary music technology products
under the Finale® and SmartMusic® brand that enhance music learning and
composition, increase productivity and make practicing and performing music
fun. Codas innovative products provide easy-to-use, efficient alternatives to
traditional practice, education and composition techniques. Product sales are
via software sales through traditional distribution channels and the Companys
websites.

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of MakeMusic!
Inc. (formerly Net4Music, Inc.), or Predecessors, and its majority-owned
subsidiaries MakeMusic! S.A. (formerly Net4Music S.A., incorporated in France
as a Société Anonyme or corporation in 1995) and Net4Music, Inc. (New York).
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Foreign Currency Translation

Assets and liabilities denominated in foreign currency are translated at
the current exchange rate as of the balance sheet date. Income statement and
cash flow amounts are translated at the average monthly exchange rate.
Translation adjustments resulting from fluctuations in exchange rates are
recorded as a component of Accumulated Other Comprehensive Income in
shareholders equity. Gains and losses from foreign currency transactions are
not material.

Revenue Recognition

Revenue is recognized when goods are shipped or delivered. Software
revenue is primarily derived from the sale of off the shelf products, easily
installed and used by the customer. Software revenue is recognized in
accordance with the AICPA SOP 97-2, Software Revenue Recognition, when all of
the following conditions are met: there is evidence of an agreement with the
customer (normally a purchase order), delivery has occurred, the total sales
price is fixed and determinable, collectibility is probable and any
uncertainties with regard to customer acceptance are insignificant. Customers
are entitled to a free upgrade if the Company launches a new version of a
software product within a specified period after a customer originally
purchased their software. In this event, the Company defers all revenue
recognition for products that were sold within the upgrade replacement window,
until such time that the upgrade is shipped.

When a new version of Finale is released, dealers retain the right to
return any unsold versions of the prior release in exchange for an equal number
of units of the updated version of the product that is returned. The Company
tracks the history of these returns and defers revenue based on the expected
return until the new product is released, at which time the product may be
exchanged for the new version. Based on recent sales trends, the Company
increased its reserve for returns by two percentage points in the year ended
December 31, 2002.

SmartMusic Studio annual subscription sales are deferred and amortized to
revenue on a pro-rated monthly basis over the life of the subscription.

Net Loss Per Share

Basic and diluted net loss per share was computed by dividing the net loss
by the weighted average number of common shares outstanding during the period,
adjusted for the January 16, 2003 one-for-ten reverse stock split. The effect
of options and warrants are excluded as their effect is anti-dilutive.

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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Weighted average shares used in the calculation of net loss per share are
as follows:

|                                                                           |  |      |             |      |  |   |             |  
|-------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                                                           |  | 2002 |             | 2001
|                                                                           |  |      |             |     
|Weighted average shares outstanding                                        |  |      | 2,161,453   |      |  |   | 1,908,312   |  
|Weighted average effect of shares
issuable under put and call
arrangements |  |      | 155,393     |      |  |   | 238,273     |  
|Net weighted average shares                                                |  |      | 2,316,846   |      |  |   | 2,146,585   |  
|Net Loss                                                                   |  | $    | (19,810,000 | )    |  | $ | (12,411,000 | )
|Basic and diluted loss per common share                                    |  | $    | (8.55       | )    |  | $ | (5.78       | )

Segment Reporting

The Company operates in one industry segment, the design, development,
support and marketing of application software solutions to music educators,
music makers and the music publishing industry. Product distribution is
obtained via the Internet as well as a variety of strategic partnerships and
distribution networks to over 125 countries. See Note 13 for selected segment
and geographic data.

Cash and Cash Equivalents

Cash equivalents consist of money market instruments with original
maturities of 90 days or less. Cash equivalents are recorded at cost, which
approximates fair value.

Fair Value of Financial Instruments

At December 31, 2002, and 2001, the carrying values of current financial
instruments such as cash and cash equivalents, accounts receivable, accounts
payable, other current assets, accrued liabilities and other current
liabilities, as well as the current portion of long-term debt and capital lease
obligations, approximated their market values, based on the short-term
maturities of these instruments.

Inventories

Inventories are stated at the lower of weighted average cost or market and
consist of finished products and components net of a reserve for obsolescence.

Property and Equipment

Property and equipment are stated at their acquisition costs net of
accumulated depreciation. Depreciation is computed by using the straight-line
method over the estimated useful life of the purchased software (three years),
computer equipment (three to five years), and furniture (three to ten years).

Property and equipment held under capital leases are capitalized and
depreciated over the useful life of the asset, in case of a contractual option
to buy, or over the residual life of the lease contract.

Capitalized Software Products

Capitalized software products consist of expenditures to develop software
products for sale, including repertoire software and website development.

Website development.Costs incurred in the development of the Companys
website are capitalized in accordance with the Emerging Issues Task Force
(EITF) No. 00-02, Accounting for Web Site Development Costs. Application
development stage costs are capitalized and amortized on a straight-
line basis over the useful life of the website, which is estimated at three
years. The estimated useful life is based on planned or expected significant

25



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MakeMusic! Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

modifications of the site in response to the rapid rate of change in the
Internet industry and technology in general. No costs relating to the
SmartMusic website were capitalized in 2002 as the website was running and
current year costs were maintenance. In 2001, the Company capitalized $369,000
relating to the SmartMusic subscription service.

Website development expenses in the Statement of Operations are primarily
non-capitalized development costs and the amortization costs of capitalized
expenses, as well as costs dedicated to site maintenance and minor
improvements. Costs of preliminary studies of the functional analysis and
website post-implementation costs are expensed as incurred.

Content & product development.Costs incurred in the development of
software products are capitalized in accordance with the FASB Statement 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed. The Company periodically evaluates whether events and circumstances
have occurred that indicate the remaining balance of software development
expenses may not be recoverable.

The costs incurred in the development of repertoire software are also
capitalized in accordance with the FASB Statement 86. As of December 31, 2002
and 2001, the Company has capitalized, net of amortization and reserves,
$398,000 and $313,000, respectively, of costs related to the development of
repertoire software. The capitalized amount represents costs of producing
product masters for new songs as technological feasibility has been established
by the selling of previous titles. When a title is available for release,
expenditures related to that title are no longer capitalized and the
capitalized cost of the title is amortized over a period based on the current
and expected future revenue from the product or the straight-line method, not
to exceed three years. The Company periodically evaluates whether events and
circumstances have occurred that indicate the remaining balance of repertoire
development costs may not be recoverable.

Content development expenses for sheet music (the costs of entering and
engraving music under digital format) were expensed as incurred. Digital sheet
music and the related engraving expenses were discontinued in 2002.

Intangible Assets

Intangible assets consist primarily of goodwill and the identifiable
intangible assets acquired in the 2000 reverse acquisition between Coda Music
Technologies Inc. and Net4Music S.A. (see Note 5).

Goodwill.Goodwill represents the cost in excess of fair value of the
tangible and identified intangible assets of businesses acquired. In
accordance with FAS 142, Goodwill and Other Intangible Assets, goodwill is not
amortized but rather reviewed for impairment annually. Upon adoption of FAS
142 effective January 1, 2002, the Company recorded an impairment charge of
$11,500,000 as a cumulative effect of change in accounting principle as the
result of the FAS 142 transitional impairment test. In the fourth quarter of
2002, the Company performed its annual impairment test and concluded an
additional impairment of $2,347,000 had occurred, which was recorded in current
year earnings.

Identified intangible assets acquired.Identified intangible assets
consist mainly of the value of the notation and SmartMusic software products,
amortized over five years; Coda trade name, amortized over ten years; Coda
website, amortized over three years; distributor/dealer network, amortized over
five years; and customer lists,amortized over five years, all acquired with acquisition of Coda in 2000.

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Patents and trademarks

Costs associated with obtaining patents, trademarks and Internet domain
names are capitalized. These costs are being amortized from three to ten years
depending on their estimated useful lives and are included in other assets on
the balance sheet.

Impairment of Long Lived Assets

The Company reviews the long-lived assets, including identifiable
intangibles and associated goodwill, for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated
undiscounted cash flows are less than the carrying value of the assets, the
carrying value is reduced to the estimated fair value as measured by the
discounted cash flows.

In September 2001, the FASB issued Statement of Financial Accounting
Standard (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective for the Company in its first quarter of fiscal
2002. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives are no longer being amortized but rather are subject to annual
impairment tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives.

Intangible assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable as described FASB Statement 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.

Deposits

As of December 31, 2002, the Company had on hand $390,000 of deposits
related to share subscription agreements for a PIPE financing completed
February 24, 2003, at which time they will be recorded to equity.

Leases

Leases are capitalized in accordance with FASB Statement 13, Accounting
for Leases,which specifies that a lease that transfers the benefits and risks
inherent in the ownership of property to the lessee, the lessee should account
for the lease as the acquisition of an asset and the occurrence of a liability.
The Company includes the capital lease assets in its property and equipment
and records the liability in capital lease obligations, a liability on the
balance sheet.

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
or tax credit carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the amounts of assets and liabilities recorded for income tax and
financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance when management determines that it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
tax rates on the date of enactment.

Stock-Based Compensation

The Company has adopted the disclosure only provisions of FASB Statement
123 (FAS 123),Accounting for Stock-Based Compensation,as amended by FAS 148.FAS 123,
which prescribes the recognition of compensation expense based on the fair
value of options on the grant date, allows companies to apply Accounting
Principles Board Opinion No. 25 (APB 25) and related interpretations in
accounting for its stock plans if certain pro forma disclosures are made
assuming hypothetical fair value method application. Under APB 25, when the
exercise price of an employee stock option equals the market price of the
underlying stock on the date of grant, no

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

compensation expense is recognized. See Note 7 for pro forma disclosures
required by FAS 148, plus additional information on the companys stock
options.

Use of Estimates

Preparation of the Companys consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from those estimates.

Advertising and Promotion

Product costs for promotional samples are classified in the income
statement as sales and marketing expense. Costs associated with the purchase
of tradeshow booths and equipment are included in capitalized property and
equipment and depreciated over its useful life. All other advertising costs
are expensed as incurred.

Reclassifications

Certain amounts in the 2001 consolidated balance sheet and consolidated
statement of operations have been reclassified to conform to the 2002
presentation.

3. New Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(the Interpretation). The Interpretation
will significantly change current practice in the accounting for, and
disclosure of, guarantees. Guarantees meeting the characteristics described in
the Interpretation are required to be initially recorded at fair value, which
is different from the general current practice of recording a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement No. 5., Accounting for Contingencies. The Interpretation also
requires a guarantor to make significant new disclosures even in the likelihood
of the guarantors having to make payments under the guarantee is remote.
There is currently no effect of FASB Interpretation No. 45 on the Companys
financial statements and disclosures.

In April 2002, the FASB issued Statement 145 (FAS 145), Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. FAS 145 updates, clarifies, and simplifies certain
existing accounting pronouncements, including the recording of all gains and
losses from the extinguishments of debt. In 2002, other income includes
$72,000 related to the reduction of a debt (see Note 6).

In June 2002, the FASB issued Statement 146 (FAS 146), Accounting for
Costs Associated with Exit or Disposal Activities,to be effective for exit or
disposal activities that are initiated after December 31, 2002. This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The Company has
accounted for restructuring activities in the years ended December 31, 2002 and
2001 under EITF Issue 94-3, in which a liability for an exit cost, as defined,
is recognized at the date of an entitys commitment to an exit plan. FAS 146
is not expected to have a material impact on the Companys financial statements
upon adoption.

In December 2002, the FASB issued Statement 148 (FAS 148), Accounting
for Stock-Based Compensation Transition and Disclosure, an amendment of FAS
123. FAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of FAS
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. This statement is
effective for financial statements for fiscal years ending after December 15,
2002. The Company accounts for its stock plans under Accounting Principles
Board Opinion No. 25 (APB 25) and uses the disclosure
only provisions of FAS 123 and FAS 148. (See Stock Options and Warrants in
Note 7.)

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

4. Subsequent Events

In February 2003, pursuant to a private placement, the Company sold
707,814 shares of common stock at a price of $3.20 per share for proceeds of
$2,265,000. In October 2002, the Company received a $750,000 bridge loan (See
Note 6) which will be converted to equity, at $2.40 per share, a discount of
25% of the private placement price, as the Company raised over one million
dollars as required by the bridge loan conversion feature. Participants in the
bridge loan received a total of 325,260 shares in exchange for the loans. Net
of expenses, the total cash received from the private placement and bridge loan
conversion to equity was $2,876,838. In addition, with each share purchased
under the private placement, the investor will receive one warrant exercisable
for five years to purchase one common share at the private placement price of
$3.20 or the bridge loan conversion price. The bridge loan holders, when
converted to equity, will also receive one warrant exercisable for five years
to purchase one common share for each share they received on the bridge loan
conversion. Such warrants are exercisable at $0.50 per share. Shareholders
approved the stock issuance for those shares in excess of 20% of outstanding
balances at a special shareholder meeting on February 24, 2003.

As a result of the conversion of bridge loan debt in February 2003, the
Company will be recording interest expense of $706,000 in the first quarter of
2003, equal to the unamortized value assigned to warrants and the value of the
beneficial conversion feature of the bridge loans. This amount is equal to the
full value of the bridge loan less $44,000 of interest that was accreted in the
year ended December 31, 2002. The $706,000 interest expense charge will
eliminate the remaining $350,000 debt discount on the convertible loans and
increase paid-in capital an additional $356,000. See Note 6 related to bridge
loans.

5. Supplemental Balance Sheet Information

Restricted Cash

In December 2002, the Company received $390,000 related to the private
placement financing that is to be completed in February 2003. The Company is
not allowed to use this cash until the private placement is finalized and
approved by shareholders.

Inventories

Inventories consist of the following:

|                         |  |                |     |      |  |   |     |  
|------------------------ |  | -------------- | --- | ---- |  | - | --- | -
|                         |  | December 31,  
|                         |  |               
|                         |  | 2002           |     | 2001
|                         |  |                |     |     
|                         |  | (In thousands)
|Components               |  | $              | 302 |      |  | $ | 349 |  
|Finished goods           |  |                | 111 |      |  |   | 123 |  
|Reserve for obsolescence |  |                | (89 | )    |  |   | (81 | )
|                         |  |                |     |      |  |   |     |  
|                         |  | $              | 324 |      |  | $ | 391 |  
|                         |  |                |     |      |  |   |     |  

Property and Equipment

Property and equipment are as follows:

|                                               |  |                |       |      |  |   |       | 
|---------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2002           |       | 2001
|                                               |  |                |       |     
|                                               |  | (In thousands)
|Computer equipment and software                |  | $              | 2,186 |      |  | $ | 2,069 | 
|Office furniture and other                     |  |                | 596   |      |  |   | 646   | 
|                                               |  |                |       |      |  |   |       | 
|                                               |  |                | 2,782 |      |  |   | 2,715 | 
|Less accumulated depreciation and amortization |  |                | 2,254 |      |  |   | 1,616 | 
|                                               |  |                |       |      |  |   |       | 
|                                               |  | $              | 528   |      |  | $ | 1,099 | 
|                                               |  |                |       |      |  |   |       | 

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

5. Supplemental Balance Sheet Information (continued)

The Company has financed some of its equipment through capital lease
contracts. Capitalized lease costs in property and equipment accounted for
$390,000 and $412,000 as of December 31, 2002 and 2001, respectively.
Accumulated depreciation of capital lease assets at December 31, 2002 and 2001
was $379,000 and $230,000, respectively.

Capitalized Software Products

Capitalized software products are the capitalized expenditures for
creating software for sale and are as follows:

|                                               |  |                |       |      |  |   |       | 
|---------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2002           |       | 2001
|                                               |  |                |       |     
|                                               |  | (In thousands)
|Repertoire development                         |  | $              | 1,701 |      |  | $ | 1,554 | 
|Software translation                           |  |                | 110   |      |  |   | 110   | 
|SmartMusic website                             |  |                | 436   |      |  |   | 369   | 
|                                               |  |                |       |      |  |   |       | 
|                                               |  |                | 2,247 |      |  |   | 2,033 | 
|Less accumulated depreciation and amortization |  |                | 1,515 |      |  |   | 1,263 | 
|                                               |  |                |       |      |  |   |       | 
|                                               |  | $              | 732   |      |  | $ | 770   | 
|                                               |  |                |       |      |  |   |       | 

Intangible Assets

Intangible assets are as follows:

|                                      |  |                |       |      |  |   |       | 
|------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                      |  | December 31,  
|                                      |  |               
|                                      |  | 2002           |       | 2001
|                                      |  |                |       |     
|                                      |  | (In thousands)
|Website development                   |  | $              | 310   |      |  | $ | 897   | 
|Distributor/dealer network            |  |                | 1,440 |      |  |   | 1,440 | 
|License rights                        |  |                |      |      |  |   | 329   | 
|Software products                     |  |                | 2,304 |      |  |   | 2,304 | 
|Customer lists and employee workforce |  |                | 780   |      |  |   | 1,330 | 
|Other intangible assets               |  |                | 130   |      |  |   | 130   | 
|                                      |  |                |       |      |  |   |       | 
|Total gross value                     |  |                | 4,964 |      |  |   | 6,430 | 
|Less accumulated amortization         |  |                | 2,245 |      |  |   | 2,050 | 
|                                      |  |                |       |      |  |   |       | 
|                                      |  | $              | 2,719 |      |  | $ | 4,380 | 
|                                      |  |                |       |      |  |   |       | 

Upon adoption of FAS 142 effective January 1, 2002, the employee workforce
intangible asset has been combined with goodwill.

The Companys intangible assets included license rights for digital sheet
music and capitalized development for the digital store www.net4music.com.
During the quarter ended September 30, 2002, the Company announced the closure
of its digital sheet music operations, which resulted in the revaluation of the
recoverability of the license rights and capitalized development. Management
concluded that a full impairment of these assets had occurred and recorded a
$286,000 non-cash impairment charge.

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

5. Supplemental Balance Sheet Information (continued)

Future estimated amortization expenses related to intangibles for the
years ending December 31, 2002 are as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 1,001 | 
|2004 |  |   | 918   | 
|2005 |  |   | 738   | 
|2006 |  |   | 13    | 
|2007 |  |   | 13    | 

Goodwill

Goodwill resulting from the reverse merger of Net4Music with Coda in 2000
consists of the following:

|                              |  |                |       |      |  |   |        | 
|----------------------------- |  | -------------- | ----- | ---- |  | - | ------ | 
|                              |  | December 31,  
|                              |  |               
|                              |  | 2002           |       | 2001
|                              |  |                |       |     
|                              |  | (In thousands)
|Goodwill                      |  | $              | 5,990 |      |  | $ | 19,690 | 
|Less accumulated amortization |  |                | 2,360 |      |  |   | 2,360  | 
|                              |  |                |       |      |  |   |        | 
|Goodwill, net                 |  | $              | 3,630 |      |  | $ | 17,330 | 
|                              |  |                |       |      |  |   |        | 

With the adoption of FAS 142 the Company ceased amortization of goodwill
as of January 1, 2002. The Company also completed its analysis of the required
transitional impairment test for goodwill and has recorded $11,500,000 goodwill
impairment in the income statement as the Cumulative effect of change in
accounting principle in the first quarter 2002. In the fourth quarter of
2002, the Company recorded additional impairment of $2,347,000 as the result of
its annual impairment test. The following table presents the results of the
Company for all periods presented on a comparable basis:

|                                                                          |  |                              |        |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | - | ------- | -
|                                                                          |  | 12 Months Ended December 31,
|                                                                          |  |                             
|                                                                          |  | 2002                         |        | 2001
|                                                                          |  |                              |        |     
|                                                                          |  | (In thousands)              
|Reported net loss before cumulative
effect of accounting change           |  | $                            | (8,310 | )    |  | $ | (12,411 | )
|Add back goodwill amortization                                            |  |                              |       |      |  |   | 1,969   |  
|                                                                          |  |                              |        |      |  |   |         |  
|Adjusted net loss before cumulative
effect of accounting change           |  | $                            | (8,310 | )    |  | $ | (10,442 | )
|                                                                          |  |                              |        |      |  |   |         |  
|Reported net loss per share before
cumulative effect of accounting
change |  | $                            | (3.59  | )    |  | $ | (5.78   | )
|Goodwill amortization                                                     |  |                              |       |      |  |   | 0.92    |  
|                                                                          |  |                              |        |      |  |   |         |  
|Adjusted net loss per share before
cumulative effect of accounting
change |  | $                            | (3.59  | )    |  | $ | (4.86   | )
|                                                                          |  |                              |        |      |  |   |         |  

Other Non-Current Assets

Other non-current assets are primarily prepaid royalties and unamortized
patent and trademark costs.

|                         |  |                |     |      |  |   |     | 
|------------------------ |  | -------------- | --- | ---- |  | - | --- | 
|                         |  | December 31,  
|                         |  |               
|                         |  | 2002           |     | 2001
|                         |  |                |     |     
|                         |  | (In thousands)
|Prepaid royalties        |  | $              | 84  |      |  | $ | 105 | 
|Patents and trademarks   |  |                | 68  |      |  |   | 73  | 
|Other non-current assets |  |                | 5   |      |  |   | 33  | 
|                         |  |                |     |      |  |   |     | 
|                         |  | $              | 157 |      |  | $ | 211 | 
|                         |  |                |     |      |  |   |     | 

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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

5. Supplemental Balance Sheet Information (continued)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities are as follows:

|                                        |  |                |       |      |  |   |       | 
|--------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                        |  | December 31,  
|                                        |  |               
|                                        |  | 2002           |       | 2001
|                                        |  |                |       |     
|                                        |  | (In thousands)
|Accrued compensation                    |  | $              | 766   |      |  | $ | 645   | 
|Accrued royalties                       |  |                | 30    |      |  |   | 35    | 
|Accrued post contract technical support |  |                | 125   |      |  |   | 110   | 
|Accrued restructuring charges           |  |                | 174   |      |  |   | 161   | 
|Other                                   |  |                | 208   |      |  |   | 144   | 
|                                        |  |                |       |      |  |   |       | 
|                                        |  | $              | 1,303 |      |  | $ | 1,095 | 
|                                        |  |                |       |      |  |   |       | 

In 2001, the Company announced restructuring plans to eliminate redundant
responsibilities and cut excess costs and reduce the digital sheet music
operations in its European locations and close its New York and Lyon
operations. As a result of these plans to reduce operating costs, MakeMusic!
recorded a restructuring charge of $1,172,000 in 2001. In the third quarter of
2002, the Company announced that the MakeMusic! SA digital sheet music
operations would be discontinued and most of the resources and effort of the
Companys European operations would be refocused toward development of
SmartMusic Studio. In the fourth quarter France operations were further
reduced and the SmartMusic website support and administrative functions are to
be moved to the Minneapolis, Minnesota location during the first half of 2003.
As a result, an additional $174,000 in restructuring charges was accrued.

The following table displays a roll-forward of the liabilities for
restructuring charges from December 31, 2000 to December 31, 2002.

|                                         |  |            |        |             |  |       |           |            |  |             |           |       |  |         |         |            |  |   |         |  |  |   |         |  |  |   |         | 
|---------------------------------------- |  | ---------- | ------ | ----------- |  | ----- | --------- | ---------- |  | ----------- | --------- | ----- |  | ------- | ------- | ---------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                         |  | 12/31/2000 |        | Additional  |  |       |           | 12/31/2002 |  | Additional  |           |       |  |         |         | 12/31/2000
|                                         |  | Balance    |        | Restructure |  | Usage |           | Balance    |  | Restructure |           | Usage |  | Balance
|                                         |  |            |        |             |  |       |           |            |  |             |           |       |  |        
|Non-Cash Items:                          |  |            |        |             |  |       |           |            |  |             |           |       |  |         |         |            |  |   |         |  |  |   |         |  |  |   |         | 
|Severance and
related personnel
expenses |  | $          |       |             |  | $     | 297,000   |            |  | $           | 97,000    |       |  | $       |        |            |  | $ |        |  |  | $ |        |  |  | $ |        | 
|Fixed asset write-off                    |  |            |       |             |  |       | 189,000   |            |  |             | 189,000   |       |  |         |        |            |  |   |        |  |  |   |        |  |  |   |        | 
|Cash Items:                              |  |            |        |             |  |       |           |            |  |             |           |       |  |         |         |            |  |   |         |  |  |   |         |  |  |   |         | 
|Severance and
related personnel
expenses |  |            |       |             |  |       | 545,000   |            |  |             | 478,000   |       |  |         | 67,000  |            |  |   | 127,000 |  |  |   | 67,000  |  |  |   | 127,000 | 
|Lease termination                        |  |            | 33,000 |             |  |       | 130,000   |            |  |             | 69,000    |       |  |         | 94,000  |            |  |   |        |  |  |   | 94,000  |  |  |   |        | 
|Moving/Storage                           |  |            |       |             |  |       | 5,000     |            |  |             | 5,000     |       |  |         |        |            |  |   |        |  |  |   |        |  |  |   |        | 
|Other                                    |  |            |       |             |  |       | 6,000     |            |  |             | 6,000     |       |  |         |        |            |  |   | 47,000  |  |  |   |         |  |  |   | 47,000  | 
|                                         |  |            |        |             |  |       |           |            |  |             |           |       |  |         |         |            |  |   |         |  |  |   |         |  |  |   |         | 
|Total                                    |  | $          | 33,000 |             |  | $     | 1,172,000 |            |  | $           | 1,044,000 |       |  | $       | 161,000 |            |  | $ | 174,000 |  |  | $ | 161,000 |  |  | $ | 174,000 | 
|                                         |  |            |        |             |  |       |           |            |  |             |           |       |  |         |         |            |  |   |         |  |  |   |         |  |  |   |         | 

6. Debt

Line of Credit

The Company had a $500,000 line-of-credit agreement that expired on
February 14, 2001.

32



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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

6. Debt (continued)

Long-Term Debt

|                                      |  |                |       |      |  |   |      |  
|------------------------------------- |  | -------------- | ----- | ---- |  | - | ---- | -
|                                      |  | December 31,  
|                                      |  |               
|                                      |  | 2002           |       | 2001
|                                      |  |                |       |     
|                                      |  | (In thousands)
|Conditional advance from ANVAR        |  | $              | 494   |      |  | $ | 486  |  
|Bridge loan (net of debt discounting) |  |                | 419   |      |  |   |     |  
|Convertible bonds                     |  |                | 48    |      |  |   | 122  |  
|Revolving note payable                |  |                | 89    |      |  |   |     |  
|                                      |  |                |       |      |  |   |      |  
|Total long-term debt                  |  |                | 1,050 |      |  |   | 608  |  
|Less current portion                  |  |                | (906  | )    |  |   | (254 | )
|                                      |  |                |       |      |  |   |      |  
|                                      |  | $              | 144   |      |  | $ | 354  |  
|                                      |  |                |       |      |  |   |      |  

Maturities of long-term debt outstanding at December 31, 2002 are as
follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 906   | 
|2004 |  |   | 144   | 
|     |  |   |       | 
|     |  | $ | 1,050 | 
|     |  |   |       | 

Conditional Advance from ANVAR

The outstanding balance from the Agence Nationale pour la Valorisation de
la Recherche (ANVAR), a French state-owned institution dedicated to the
financing of research and development activities of French companies, totaled
$494,000 and $486,000 at year ends 2002 and 2001, respectively. The agreement
with ANVAR contains repayment terms that have been used to classify the debt in
the financial statements. Although the Company anticipates receiving formal
forgiveness of the loans, such forgiveness will not be received until a study
by ANVAR that is currently being done is completed and has not been taken into
account in determining debt classification. ANVAR performed an audit related
to a portion of the debt in the year ended December 31, 2002 and allowed a
reduction of $72,000 of the total due. Consequently, a reduction of $72,000 in
long-term debt was booked into other income. The increase in the balance shown
outstanding as of December 31, 2002 reflects the effect of exchange rate
fluctuations.

Debt  Bridge Loans

On September 30, 2002, the Company issued $750,000 of 10% convertible,
subordinated bridge loans; $360,000 of which was from Company directors and
management. As of February 24, 2003, the Company completed a private
placement of over $3.0 million including the $750,000 convertible bridge loans.
As a result, the loan will automatically convert into common stock at a 25%
discount from the $3.20 price set in the private placement. Also, holders of
stock converted from the bridge loan will receive warrants (Conversion
Warrants) to purchase one additional share of common stock for each converted
share at $0.50 per share.

At the time of issuance, the bridge loan holders would have received
warrants to purchase common stock at $0.10 per share if a private placement of
at least $1.0 million was not completed by March 31, 2003. The value
attributed to these warrants of $395,000, computed using the Black Scholes
model, was recorded as a debt discount at September 30, 2002, with a credit to
additional paid-in capital. The discount was being amortized as interest
expense over the term of the bridge loans assuming no conversion and resulted
in $44,000 of interest expense in 2002.

At the time of the bridge loan conversion, the Company will also record
approximately $350,000 of unamortized discount as interest expense and an
additional $356,000 interest expense related to the beneficial conversion of
the bridge loan into equity.

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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

6. Debt (continued)

Convertible Bonds

In September 1996, MakeMusic! S.A. issued 9,000 convertible bonds to
EUREFI for a total of 137,000 Euros ($144,000 USD at the December 31, 2002
exchange rate) in order to reinforce its equity and finance its growth. These
bonds were originally convertible by the holder, seven bonds giving a right to
four shares of MakeMusic! SA common stock, from January 1, 2000 through the
term of the debt at December 31, 2003. However, in 1999 the Company reached an
agreement with EUREFI that they would not exercise the conversion right. The
debt bears interest at 6% a year payable each half-year at June 30 and December
31. As of December 31, 2002, 3,000 bonds remain unpaid with a balance due of
46,000 Euros or $48,000 (USD).

Revolving Note Payable

On August 5, 2002, the Company signed an agreement for a one-year
asset-based discretionary revolving note of $500,000. The agreement allows the
Company an advance of 75% of domestic accounts receivable at an interest rate
of prime + 4.75% (9.00% as of December 31, 2002) with a minimum interest charge
of $3,000 per month. The Company received its first advance on this line of
credit on September 5, 2002 and as of December 31, 2002 has a balance on the
revolving note of $88,670.

7. Shareholders Equity

On January 3, 2003, the Companys Board of Directors authorized a
one-for-ten reverse stock split effective January 16, 2003. All earnings per
common share amounts, references to common stock, warrant and stock option plan
data and stockholders equity amounts have been restated as if the reverse
stock split had occurred as of the earliest period presented.

In January 2001 the Company issued 100 shares of common stock to a
consultant for services provided. In connection with this issuance the company
recognized expenses in the amount of $1,180.

In August 2001 the Company issued 6,500 options to purchase common stock
at $7.50 to third parties in exchange for advisory and promotional services.
4,000 of these options vested immediately and the remaining 2,500 shares vest
over 60 months as advisory services are received. In connection with these
issuances the Company has recognized expenses of $1,500 and $13,000, for 2002
and 2001, respectively. As the remaining options vest the Company will
recognize additional expenses.

In October 2001, the Company issued 15,000 warrants to purchase common
stock at $6.60 to a third party in exchange for advisory and promotional
services. The warrants vest over 60 months. During 2002 and 2001, the Company
has recognized expenses in the amount of $12,000 and $3,000, respectively, in
relation to the vested portion of warrants. As the remaining warrants vest the
Company will recognize additional expenses.

During 2001, 13,877 warrants related to contracts for music titles became
exercisable at $0.10 per share and the Company recognized an expense in the
amount of $268,000 related to these issuances. As of December 31, 2002,
262,930 warrants remained outstanding.

In September 2001 the Company sold, pursuant to a private placement,
229,840 shares of its common stock at a price of $6.60 per share, based on a
30-day average of the closing price of the company stock preceding the private
placement for proceeds of $1,517,000. Net of expenses, the total cash received
from the private placement was $1,394,000. In addition, with each share
purchased, investors received one warrant exercisable for three and one-half
years to purchase one common share for $6.60. Management and employees
purchased 20,721 shares, of which a portion were made with non-interest bearing
loans to be paid from earned bonuses. As of December 31,

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

2001, $73,000 of the management and employee purchases remained outstanding.
All unpaid balances were paid in full in 2002. Shareholders approved the stock
issuance for those shares in excess of 20% of outstanding balances at a special
shareholder meeting on December 19, 2001.

Authorized Shares

The Companys Restated Articles of Incorporation authorized the issuance
of 6,500,000 shares of $.01 par value capital stock. Of such authorized shares,
5,000,000 have been designated as common shares and 1,500,000 are undesignated
as of December 31, 2002.

Reverse Acquisition

In connection with the October 19, 2000 reverse acquisition, certain
MakeMusic! S.A. shareholders and option and warrant holders retained their
common stock interests in MakeMusic! S.A. with a put and call agreement
permitting conversion of those shares, options or warrants at any time within
five years into MakeMusic! common stock at the same conversion ratio
applicable at the acquisition date. During 2002 and 2001, 106,175 and 22,546
shares were put to the Company and converted to 82,817 and 17,586 MakeMusic!
Inc. shares, respectively. Such remaining shares, options and warrants, if
converted, would be the equivalent of 268,954 shares of MakeMusic! common
stock. The remaining shares subject to the put and call arrangement are
considered to be contingently issuable and are classified within shareholders
equity because the parent is considered to have retained the risks and rewards
of ownership.

Also included in the 2000 reverse acquisition purchase price was the fair
value of all vested Coda options. The intrinsic value of all unvested Coda
options was recorded as deferred compensation in shareholders equity and is
being amortized to compensation expense over the remaining vesting period
ending November 2007.

Stock Options and Warrants

Prior to the reverse acquisition, MakeMusic! S.A. had granted options and
warrants in 2000 to employees, directors, external consultants and licensors.
In connection with the reverse acquisition, certain option and warrant holders
converted their rights into the Companys options or warrants based on the
acquisition conversion rate of .78 and under the same terms as their original
rights. The remaining option and warrant holders retained their right to
purchase MakeMusic! S.A. shares with a put and call agreement, which would
convert to MakeMusic! Inc. shares at a rate of .78. The following table
summarizes the MakeMusic! S.A. options and warrants under put and call
agreements:



|                             |          |        |          |         |                  |             | Weighted-  
|---------------------------- | -------- | ------ | -------- | ------- | ---------------- | ----------- | -----------
|                             |          |        | Ordinary |         | Average Exercise
|Grantee                      |          | Shares |          | Price  
|                             |          |        |          |        
|Balance at December 31, 2000 |          |        | 226,627  |         |                  | Euro 11.443
|                             | Canceled |        |          | (18,049 | )                |             | Euro 13.167
|                             |          |        |          |         |                  |             |            
|Balance at December 31, 2001 |          |        | 208,578  |         |                  | Euro 11.294
|                             | Canceled |        |          | (53,489 | )                |             | Euro 10.813
|                             |          |        |          |         |                  |             |            
|Balance at December 31, 2002 |          |        | 155,089  |         |                  | Euro 11.461

The Company has a stock option plan, which expired September 28, 2002,
pursuant to which options for up to 267,500 shares of its common stock may be
issued to its key employees and directors. The options vest over periods of up
to six years and are granted at prices that must be at least equal to the
stocks fair market value at the grant date. The Company also has granted
non-plan, nonqualified stock options to certain of its directors, European
employees and consultants. These options vest over periods of up to five years
and have been granted at prices at least equal to the stocks fair market value
at the grant date. Effective September 28, 2002 no incentive
stock options or nonqualified employee plan options were available for
issuance as result of expiration of the plan.

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##### Table of Contents



MakeMusic! Inc.
Notes to Consolidated Financial Statements

7.     Shareholders Equity (continued)

In connection with the reverse acquisition, all acquired stock options
remained outstanding under their original terms. The following summarizes
activity under the Companys stock options:

|                                                    |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|--------------------------------------------------- |  | -------- | ------- | ------------ |  | ------------- | ------ | ---------------- |  |  | ------- | - |  | --------- | ----- | 
|                                                    |  |          |         |              |  |               |        |                  |  |  |         |   |  | Weighted-
|                                                    |  | Employee |         | Non-Employee |  |               |        | Average Exercise
|Plan Options                                        |  | Options  |         | Options      |  | Total Options |        | Price           
|                                                    |  |          |         |              |  |               |        |                 
|MakeMusic! Options Outstanding
at December 31, 2000 |  |          | 140,880 |              |  |               | 11,460 |                  |  |  | 152,340 |   |  | $         | 20.80 | 
|Granted                                             |  |          | 69,650  |              |  |               | 6,650  |                  |  |  | 76,300  |   |  |           | 9.60  | 
|Exercised                                           |  |          | (50     | )            |  |               |       |                  |  |  | (50     | ) |  |           | 13.80 | 
|Canceled                                            |  |          | (10,930 | )            |  |               | (2,650 | )                |  |  | (13,580 | ) |  |           | 20.60 | 
|                                                    |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|Outstanding at December 31, 2001                    |  |          | 199,550 |              |  |               | 15,460 |                  |  |  | 215,010 |   |  |           | 16.90 | 
|Granted                                             |  |          | 1,300   |              |  |               |       |                  |  |  | 1,300   |   |  |           | 4.12  | 
|Canceled                                            |  |          | (15,900 | )            |  |               | (1,300 | )                |  |  | (17,200 | ) |  |           | 21.31 | 
|                                                    |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|Outstanding at December 31, 2002                    |  |          | 184,950 |              |  |               | 14,160 |                  |  |  | 199,110 |   |  |           | 16.39 | 
|                                                    |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 

|                                                      |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|----------------------------------------------------- |  | -------- | ------- | ------------ |  | ------------- | ------ | ---------------- |  |  | ------- | - |  | --------- | ----- | 
|                                                      |  |          |         |              |  |               |        |                  |  |  |         |   |  | Weighted-
|                                                      |  | Employee |         | Non-Employee |  |               |        | Average Exercise
|Non Plan Options                                      |  | Options  |         | Options      |  | Total Options |        | Price           
|                                                      |  |          |         |              |  |               |        |                 
|MakeMusic! S.A. Options
Outstanding December 31, 2000 |  |          | 30,770  |              |  |               | 24,261 |                  |  |  | 55,031  |   |  | $         | 13.50 | 
|Canceled                                              |  |          | (1,755  | )            |  |               |       |                  |  |  | (1,755  | ) |  |           | 18.10 | 
|                                                      |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|Outstanding at December 31, 2001                      |  |          | 29,015  |              |  |               | 24,261 |                  |  |  | 53,276  |   |  |           | 13.30 | 
|Canceled                                              |  |          | (29,015 | )            |  |               |       |                  |  |  | (29,015 | ) |  |           | 9.61  | 
|                                                      |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 
|Outstanding at December 31, 2002                      |  |          |        |              |  |               | 24,261 |                  |  |  | 24,261  |   |  |           | 17.73 | 
|                                                      |  |          |         |              |  |               |        |                  |  |  |         |   |  |           |       | 

The weighted-average fair value of options granted during 2002 and 2001 was
$4.12 and $8.40, respectively.

The following summarizes information about stock options outstanding at
December 31, 2002:

|                |  |                     |  |                     |  |                  |       |                   |         |                  |   |      
|--------------- |  | ------------------- |  | ------------------- |  | ---------------- | ----- | ----------------- | ------- | ---------------- | - | -----
|                |  | Options Outstanding |  | Options Exercisable
|                |  |                     |  |                    
|                |  | Outstanding at      |  |                     |  | Weighted-        |       |                   |         | Weighted-       
|Range of        |  | December 31,        |  | Weighted-Average    |  | Average Exercise |       | Exercisable at    |         | Average Exercise
|Exercise Prices |  | 2002                |  | Remaining Term      |  | Price            |       | December 31, 2002 |         | Price           
|                |  |                     |  |                     |  |                  |       |                   |         |                 
|$ 3.20  $10.00 |  | 31,439              |  | 3.80 years          |  | $                | 7.85  |                   | 20,001  |                  | $ | 8.52 
|10.01  20.00   |  | 133,562             |  | 4.40 years          |  |                  | 13.70 |                   | 74,550  |                  |   | 14.78
|20.01  30.00   |  | 46,500              |  | 4.11 years          |  |                  | 25.66 |                   | 29,524  |                  |   | 25.73
|30.01  40.00   |  | 8,570               |  | 3.09 years          |  |                  | 33.65 |                   | 6,803   |                  |   | 33.29
|40.01  40.50   |  | 3,300               |  | 2.32 years          |  |                  | 41.25 |                   | 3,092   |                  |   | 41.25
|                |  |                     |  |                     |  |                  |       |                   |         |                  |   |      
|Total           |  | 223,371             |  | 4.17 years          |  | $                | 16.54 |                   | 133,970 |                  | $ | 17.81
|                |  |                     |  |                     |  |                  |       |                   |         |                  |   |      





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MakeMusic! Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. The fair
value of grants to the Companys employees and directors was estimated at the
grant date using the following assumptions for 2002 and 2001: no expected
dividend yield; risk-free interest rates of 4.62% and 4.75%, respectively;
expected lives of 5 to 7 years; and estimated volatility of 1.121. Had
compensation cost for these options been determined consistent with the fair
value method of SFAS No. 123, Accounting for Stock-Based Compensation, the net
loss and loss per share would have been increased to the following pro forma
amounts:

|                                  |                                       |  |              |         |      |  |   |         |  
|--------------------------------- | ------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                  |                                       |  | December 31,
|                                  |                                       |  |             
|                                  |                                       |  | 2002         |         | 2001
|                                  |                                       |  |              |         |     
|                                  | (In
thousands, except per share data)
|Net loss:                         |                                       |  |              |         |      | 
|                                  | Net loss as reported                  |  | $            | (19,810 | )    |  | $ | (12,411 | )
|                                  | Stock compensation under FAS 123      |  |              | (447    | )    |  |   | (942    | )
|                                  |                                       |  |              |         |      |  |   |        
|                                  | Proforma net loss                     |  | $            | (20,257 | )    |  | $ | (13,353 | )
|                                  |                                       |  |              |         |      |  |   |        
|Basic and diluted loss per share: |                                       |  |              |         |      |  |   |        
|                                  | As reported                           |  | $            | (8.55   | )    |  | $ | (5.78   | )
|                                  | Pro forma                             |  | $            | (8.74   | )    |  | $ | (6.40   | )

In 2000, as a result of the reverse acquisition the Company granted
options to purchase 58,500 shares at prices between $16.40 and $26.30 per share
when the fair value of the Companys stock was $28.10, resulting in deferred
compensation with unamortized value of $595,000 as of December 31, 2002.

Total warrants of 262,930 are outstanding at December 31, 2002, of which
251,680 are exercisable at a weighted average exercise price of $6.29. The
warrants expire as follows: 2005  232,847, 2010  15,083, 2011  15,000.

8. Commitments

Capital Lease Obligations

Future minimum lease payments under capital lease obligations due for the
years ending December 31 are as follows (in thousands):

|                                            |  |   |    | 
|------------------------------------------- |  | - | -- | 
|2003                                        |  | $ | 40 | 
|2004                                        |  |   | 5  | 
|2005                                        |  |   | 4  | 
|                                            |  |   |    | 
|Total minimum lease payments                |  |   | 49 | 
|Less amount representing interest           |  |   | 3  | 
|                                            |  |   |    | 
|Present value of net minimum lease payments |  |   | 46 | 
|Less current portion                        |  |   | 39 | 
|                                            |  |   |    | 
|Long-term portion                           |  | $ | 7  | 
|                                            |  |   |    | 

Operating Leases

The Company leases office and warehouse space and certain equipment under
operating leases through 2006. Total future minimum lease payments under these
leases for the year ending December 31, 2002 are as follows (in thousands):

|      |  |   |     | 
|----- |  | - | --- | 
|2003  |  | $ | 153 | 
|2004  |  |   | 131 | 
|2005  |  |   | 125 | 
|2006  |  |   | 42  | 
|      |  |   |     | 
|Total |  | $ | 451 | 
|      |  |   |     | 

37



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MakeMusic! Inc.
Notes to Consolidated Financial Statements

8. Commitments (continued)

Obligations for operating leases beyond 2003 relate to the Minneapolis
office and the lease on Internet equipment. Rent expense for the years ended
December 31, 2002 and 2001 was $190,000 and $308,000, respectively.

Licensing and Exclusivity Agreements

The Company has entered into license agreements for the distribution of
music publishing catalogs, which require payments based on the sale of its
products. These agreements have ended with the shut down of the digital sheet
music operations and no future payments are required. The Company has entered
into license and exclusivity agreements that require payments based on sales of
its software products and accompaniments. Payments to licensors are included
in cost of sales in the consolidated statement of operations and were $99,000
and $210,000 for the years ended December 31, 2002 and 2001, respectively.

Minimum royalties related to significant licensors are as follows (in
thousands):

|      |  |   |     | 
|----- |  | - | --- | 
|2003  |  |   | 67  | 
|2004  |  |   | 64  | 
|2005  |  |   | 59  | 
|2006  |  |   | 20  | 
|      |  |   |     | 
|Total |  | $ | 210 | 
|      |  |   |     | 

9. 401(k) Savings Plan

The Company has a 401(k) savings plan for the benefit of qualified U.S.
employees. Under the plan, qualified employees may elect to defer up to 80% of
their compensation, subject to a maximum limit determined by the Internal
Revenue Service. The Company, at the discretion of the Board of Directors, may
elect to make additional contributions. The Company made no contributions to
the plan in fiscal 2002. Costs of administering the plan were $4,000 and
$6,000, respectively, for the years ended December 31, 2002 and 2001.

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

10. Income Taxes

Loss before income taxes and cumulative effect of accounting change
includes the following components:

|              |  |                |        |      |  |   |         |  
|------------- |  | -------------- | ------ | ---- |  | - | ------- | -
|              |  | December 31,  
|              |  |               
|              |  | 2002           |        | 2001
|              |  |                |        |     
|              |  | (In thousands)
|France        |  | $              | (2,995 | )    |  | $ | (7,590  | )
|United States |  |                | (5,311 | )    |  |   | (4,817  | )
|              |  |                |        |      |  |   |         |  
|              |  | $              | (8,306 | )    |  | $ | (12,407 | )
|              |  |                |        |      |  |   |         |  

The tax effects of temporary differences at an assumed effective annual
rate of 38% (France, 35%) are shown in the following table:

|                               |                                             |   |                |         |      |   |       |         |  
|------------------------------ | ------------------------------------------- | - | -------------- | ------- | ---- | - | ----- | ------- | -
|                               |                                             |   | December 31,  
|                               |                                             |   | 2002           |         | 2001
|                               |                                             |   |                |         |     
|                               |                                             |   | (In thousands)
|                               | Loss carryforwards                          |   | $              | 15,152  |      |   | $     | 13,192  |  
|                               | Research and development credits            |   |                | 403     |      |   |       | 385     |  
|                               | Inventory                                   |   |                | 117     |      |   |       | 94      |  
|                               | Depreciation and amortization               |   |                | 284     |      |   |       | 213     |  
|                               | Other accruals                              |   |                | 226     |      |   |       | 383     |  
|                               | Valuation allowance for deferred tax assets |   |                | (14,963 | )    |   |       | (12,574 | )
|                               |                                             |   |                |         |      |   |       |        
|Net deferred tax assets        |                                             |   | 1,219          |         |      |   | 1,693 |        
|                               | Deferred tax liability:                     |   |                |         |      |   |       |         |  
|                               | Software development costs                  |   |                | 178     |      |   |       | 138     |  
|                               | Intangible assets                           |   |                | 1,041   |      |   |       | 1,555   |  
|                               |                                             |   |                |         |      |   |       |        
|Total deferred tax liabilities |                                             |   | 1,219          |         |      |   | 1,693 |        
|                               |                                             |   |                |         |      |   |       |        
|Net deferred taxes             |                                             | $ |               |         |      | $ |      |        
|                               |                                             |   |                |         |      |   |       |        

Realization of deferred tax assets is dependent upon the generation of
sufficient future taxable income. Management has determined that sufficient
uncertainty exists regarding the realizability of the net deferred tax assets
and, accordingly, has fully reserved the net deferred tax assets of the
Company.

A reconciliation of income taxes computed using the U.S. statutory rate
(34%) to the effective income tax rate included in the statement of operations
is as follows:

|                                                          |  |                |        |      |  |   |        |  
|--------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                          |  | December 31,  
|                                                          |  | 2002           |        | 2001
|                                                          |  |                |        |     
|                                                          |  | (In thousands)
|Income tax computed at the statutory rate                 |  | $              | (6,736 | )    |  | $ | (4,218 | )
|State taxes, net of calculated federal income tax benefit |  |                | (724   | )    |  |   | (283   | )
|Unused tax loss carryforwards and valuation reserve       |  |                | 2,116  |      |  |   | 3,429  |  
|Permanent differences                                     |  |                | 5,381  |      |  |   | 1,149  |  
|Effect of higher tax rates in France                      |  |                | (36    | )    |  |   | (76    | )
|Other                                                     |  |                | 3      |      |  |   | 3      |  
|                                                          |  |                |        |      |  |   |        |  
|Effective income tax expense                              |  | $              | 4      |      |  | $ | 4      |  
|                                                          |  |                |        |      |  |   |        |  

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

10. Income Taxes (continued)

Net Operating Losses

At December 31, 2002, the Company has net operating loss carryforwards
(NOLs) and research and development credits which may be used to offset
otherwise future taxable income with the following expiration dates:

|     |  |                    |        |                     |  |              |     | 
|---- |  | ------------------ | ------ | ------------------- |  | ------------ | --- | 
|     |  |                    |        |                     |  | Research and
|     |  | Net Operating Loss |        | Development Credits
|     |  | U.S.               |        | U.S.               
|     |  |                    |        |                    
|2006 |  | $                  | 38     |                     |  | $            |    | 
|2007 |  |                    | 243    |                     |  |              | 13  | 
|2008 |  |                    | 825    |                     |  |              | 72  | 
|2009 |  |                    | 1,586  |                     |  |              | 90  | 
|2010 |  |                    | 2,128  |                     |  |              | 47  | 
|2011 |  |                    | 2,192  |                     |  |              | 43  | 
|2012 |  |                    | 1,736  |                     |  |              | 38  | 
|2018 |  |                    | 770    |                     |  |              | 46  | 
|2019 |  |                    | 1,478  |                     |  |              | 36  | 
|2020 |  |                    | 4,414  |                     |  |              |    | 
|2021 |  |                    | 3,037  |                     |  |              |    | 
|2022 |  |                    | 1,344  |                     |  |              |    | 
|     |  |                    |        |                     |  |              |     | 
|     |  | $                  | 19,791 |                     |  | $            | 385 | 
|     |  |                    |        |                     |  |              |     | 

MakeMusic! S.A. has additional operating loss carryforwards in France of
$14.07 million which expire between 2003 and 2007 plus $3.5 million which can
be carried forward indefinitely under French law.

Included in the U.S. NOLs are those of MakeMusic! S.A.s now inactive
subsidiary with federal and state NOLs of approximately $7.1 million, which
begin to expire in 2019. These loss carryforwards can only be used by the
entity that has generated the corresponding tax losses.

At December 31, 2002, approximately $9.5 million of the Companys NOLs
have a full valuation allowance that, if and when realized, will result in a
reduction of goodwill associated with the Coda acquisition. Section 382 of the
Internal Revenue Code restricts the annual utilization of these NOLs incurred
prior to a change in ownership. Such a change in ownership has occurred in
connection with the Coda reverse acquisition, thereby potentially restricting
the NOLs available to the Company. The Company has yet to determine whether
any limitation on these NOLs exists at December 31, 2002. The Companys
subsidiary in New York had also generated approximately $4.6 million in NOLs
that may also be subject to Section 382 limitations due to the significant
changes in control of Net4Music S.A. in the previous year. There can be no
assurance that certain of the Companys NOLs will be available for use in the
future.

11. Litigation

In the ordinary course of business, the Company can be party to legal
actions, proceedings or claims. Corresponding costs are accrued when it is more
likely than not that loss will be incurred and the amount can be precisely or
reasonably estimated. The Company is not a party to any material litigation,
other than by a small French sheet music publisher, which the Company believes
is without merit, and is not aware of any threatened litigation that would have
a material adverse effect on its financial condition or results of operations.

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

12. Related Party Transactions

On September 28, 2001 the Company sold pursuant to a private placement,
229,839 shares of its common stock at a price of $6.60 per share, based on a
30-day average of the closing price of the company stock preceding September
20, 2001. Management and employees purchased 20,721 shares, with $88,000 of the
purchases being made with non-interest bearing loans to be paid from earned
bonuses. As of December 31, 2001, the outstanding loan balance was $73,000.
All of the loans have been collected as of December 31, 2002.

13. Segment and Geographic Data

The Company operates in one industry segment, being the design,
development, support and marketing of application solutions to music educators,
music makers and the music publishing industry. The Company provides the
technologies, products and services to optimize the entire music-maker supply
chain.

During 2002 and 2001, the Company had sales of approximately $553,000 and
$831,000 respectively to a major customer. Accounts receivable from this
customer were approximately $20,000 at December 31, 2002.

The geographic distribution of the Companys revenue and long-lived assets
are summarized in the following table:

|                   |                         |   |                |       |      |   |        |        | 
|------------------ | ----------------------- | - | -------------- | ----- | ---- | - | ------ | ------ | 
|                   |                         |   | December 31,  
|                   |                         |   | 2002           |       | 2001
|                   |                         |   |                |       |     
|                   |                         |   | (In thousands)
|Net sales:         |                         |   |                |       |      |   |        |       
|                   | North America           |   | $              | 6,182 |      |   | $      | 5,773  | 
|                   | Europe                  |   |                | 848   |      |   |        | 900    | 
|                   | Other foreign countries |   |                | 707   |      |   |        | 789    | 
|                   |                         |   |                |       |      |   |        |        | 
|                   |                         | $ | 7,737          |       |      | $ | 7,462  |       
|                   |                         |   |                |       |      |   |        |       
|Long-lived assets: |                         |   |                |       |      |   |        |       
|                   | North America           |   | $              | 7,451 |      |   | $      | 22,845 | 
|                   | Europe                  |   |                | 315   |      |   |        | 945    | 
|                   |                         |   |                |       |      |   |        |       
|                   |                         | $ | 7,766          |       |      | $ | 23,790 |       
|                   |                         |   |                |       |      |   |        |       

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MakeMusic! Inc.
Notes to Consolidated Financial Statements

14. Quarterly Results of Operations (Unaudited)

The following table summarizes the 2002 unaudited consolidated statement
of operations data compared to the 2001. The operating results for any quarter
are not necessarily indicative of results for any future period.

|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |       |  | 
|------------------------------------------------------------------- | ------------------- | -------- | ------- | ------------- |  | ------------ | ------ | ----------- |  | - | ------ | ----- |  | - | ------ | ----- |  | 
|                                                                    |                     |          |         | Quarter Ended
|                                                                    |                     |          |         |              
|(In thousands, except per share data)                               |                     | March 31 |         | June 30       |  | September 30 |        | December 31
|                                                                    |                     |          |         |               |  |              |        |            
|2002                                                                |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Net Revenues                                                        |                     | $        | 1,942   |               |  | $            | 1,417  |             |  | $ | 2,445  |       |  | $ | 1,933  |      
|                                                                    | Cost of revenues    |          |         | 365           |  |              |        | 364         |  |   |        | 402   |  |   |        | 463   | 
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Gross profit                                                        |                     |          | 1,577   |               |  |              | 1,053  |             |  |   | 2,043  |       |  |   | 1,470  |      
|Operating expenses                                                  |                     |          | 3,015   |               |  |              | 2,899  |             |  |   | 2,726  |       |  |   | 2,998  |      
|Impairment - intangibles                                            |                     |          |        |               |  |              |       |             |  |   | 193    |       |  |   | 2,440  |      
|Restructuring                                                       |                     |          |        |               |  |              |       |             |  |   |       |       |  |   | 174    |      
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|                                                                    | Total Operating Exp |          |         | 3,015         |  |              |        | 2,899       |  |   |        | 2,919 |  |   |        | 5,612 | 
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Loss from operations                                                |                     | $        | (1,438  | )             |  | $            | (1,846 | )           |  | $ | (876   | )     |  | $ | (4,142 | )    
|Net Loss before cumulative affect of
change in accounting principle |                     |          | (1,429  | )             |  |              | (1,848 | )           |  |   | (883   | )     |  |   | (4,150 | )    
|Cumulative effect of change in
accounting principle (FAS 142)       |                     |          | (11,500 | )             |  |              |       |             |  |   |       |       |  |   |       |      
|Net Loss                                                            |                     |          | (12,929 | )             |  | $            | (1,848 | )           |  | $ | (883   | )     |  | $ | (4,150 | )    
|Basic and diluted loss per common share                             |                     | $        | (5.58   | )             |  | $            | (0.80  | )           |  | $ | (0.38  | )     |  | $ | (1.79  | )    
|                                                                    |                     |          |         |               |  |              |        |            
|2001                                                                |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Net Revenues                                                        |                     | $        | 1,916   |               |  | $            | 1,215  |             |  | $ | 2,042  |       |  | $ | 2,289  |      
|                                                                    | Cost of revenues    |          |         | 435           |  |              |        | 329         |  |   |        | 446   |  |   |        | 520   | 
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Gross profit                                                        |                     |          | 1,481   |               |  |              | 886    |             |  |   | 1,596  |       |  |   | 1,769  |      
|Operating expenses                                                  |                     |          | 5,013   |               |  |              | 3,933  |             |  |   | 3,748  |       |  |   | 3,153  |      
|Impairment - intangibles                                            |                     |          |        |               |  |              |       |             |  |   | 796    |       |  |   | 508    |      
|Restructuring                                                       |                     |          | 645     |               |  |              |       |             |  |   | 386    |       |  |   | 141    |      
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|                                                                    | Total Operating Exp |          |         | 5,658         |  |              |        | 3,933       |  |   |        | 4,930 |  |   |        | 3,802 | 
|                                                                    |                     |          |         |               |  |              |        |             |  |   |        |       |  |   |        |      
|Loss from operations                                                |                     | $        | (4,177  | )             |  | $            | (3,047 | )           |  | $ | (3,334 | )     |  | $ | (2,033 | )    
|Net Loss                                                            |                     | $        | (4,129  | )             |  | $            | (3,035 | )           |  | $ | (3,260 | )     |  | $ | (1,987 | )    
|Basic and diluted loss per common share                             |                     | $        | (1.98   | )             |  | $            | (1.45  | )           |  | $ | (1.55  | )     |  | $ | (0.86  | )    

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|ITEM 8. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------

None




PART III






|ITEM 9. |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS;COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
|------- |  | --------------------------------------------------------------------------------------------------------------

The names and ages of the executive officers of the Company and their
positions and offices presently held are as follows:

|                    |  |     |    |          |  |                                                  
|------------------- |  | --- | -- | -------- |  | -------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Philip Sean Lafleur |  |     | 39 |          |  | Chairman of the Board and Chief Executive
Officer
|                    |  |     |    |          |  |                                                  
|John W. Paulson     |  |     | 55 |          |  | President                                        
|                    |  |     |    |          |  |                                                  
|Barbara S. Remley   |  |     | 51 |          |  | Chief Financial Officer, Treasurer and
Secretary 

Philip Sean Lafleurjoined the Company in November 2000 as Chief Operating
Officer and a director. He became Chief Executive Officer in January 2001 and
Chairman of the Board in October 2001. Prior to joining the Company, Mr.
Lafleur held the position of Vice President for European Internet Operations
for Trader.com. In 1990 Mr. Lafleur joined Bertelsmann, where for nine years
he held a variety of positions including Deputy Marketing Manager France
Loisirs (Paris), President of Québec Loisirs (Montréal), and Executive Director
of Music and Multimedia Operations and Foreign Subsidiaries for France Loisirs.
In this last position, Mr. Lafleur acted as Chairman of the Music Expert
Committee for Bertelsmanns European book and music clubs. Mr. Lafleur holds a
BS honors degree in Physics from U.B.C. Vancouver, Canada. After beginning his
career as a Business Analyst for McKinsey & Co in Toronto, Mr. Lafleur went on
to obtain an Honors MBA from INSEAD (Fontainebleau).

John W. Paulson,founder of the company, has served as director, Chairman
and CEO from 1990 to a merger in 2000 and continues to serve as a director.
From 1982 to 1990, Mr. Paulson was Chairman and CEO of Springboard Software,
Inc., a publicly held company he founded to develop and market educational
consumer software products. Prior to founding Springboard, Mr. Paulson was a
public school music teacher for nine years. He has a Master of Arts in Music
Education from the Eastman School of Music, is a published composer, was a
professional musician for over ten years and continues to be active as a music
clinician and guest conductor. Mr. Paulson has served on the Board of Directors
of the National Association of Music Merchants, the Wenger Corporation and the
St. Paul Chamber Orchestra.

Barbara S. Remleyhas been Chief Financial Officer of the Company since
May 1998 and Secretary and Treasurer since November 1999. In 1997 and 1998 Ms.
Remley consulted for various entities. From 1992 to 1997, Ms. Remley held
various titles including President, Chief Operating Officer and Chief Financial
Officer of Garment Graphics, Inc., a designer, marketer and distributor of
licensed sports apparel, which filed a Chapter 11 in 1997 and was subsequently
converted to a Chapter 7. She also has ten years of public accounting
experience with Ernst & Young (formerly Ernst & Ernst).

The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled Election of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance which appear in the Companys definitive Proxy
Statement for its 2003 Annual Meeting of Shareholders.

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ITEM 10.     EXECUTIVE COMPENSATION

The information required by Item 10 is incorporated herein by reference to
the section labeled Executive Compensation which appears in the Companys
definitive Proxy Statement for its 2003 Annual Meeting of Shareholders.




ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 11 regarding security ownership is
incorporated herein by reference to the sections labeled Principal
Shareholders and Management Shareholdings which appear in the Companys
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.

The following table provides information concerning the Companys equity
compensation plans as of December 31, 2002.

|                                                           |  |                            |         |                        |  |                               |       |  |  |                               
|---------------------------------------------------------- |  | -------------------------- | ------- | ---------------------- |  | ----------------------------- | ----- |  |  | ------------------------------
|                                                           |  |                            |         |                        |  |                               |       |  |  | Number of securities remaining
|                                                           |  | Number of
securities to be |         | Weighted average       |  | available for future issuance
|                                                           |  | issued
upon exercise of    |         | exercise price of      |  | under equity
compensation    
|                                                           |  | outstanding
options,       |         | outstanding
options,   |  | plans (excluding
securities  
|                                                           |  | warrants
and rights103     |         | warrants
and rights104 |  | reflected in column (a))     
|                                                           |  | (a)                        |         | (b)                    |  | (c)                          
|                                                           |  |                            |         |                        |  |                              
|Equity compensation
plans approved by
security holders     |  |                            | 199,810 |                        |  |                               | 16.39 |  |  | None                          
|                                                          
|Equity compensation
plans not approved
by security holders |  |                            | 33,083  | (1)                    |  |                               | 4.17  |  |  |                               



| | (1) |  | Warrants issued to consultants
| | --- |  | ------------------------------




ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 12 is incorporated by reference to the
section labeled Certain Transactions which appears in the Companys
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.




|                                               |  |                                                                                                                     
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------
|ITEM
13.      EXHIBITS AND REPORTS ON FORM 8-K
|                                              
|(a)                                            |  | Exhibits.                                                                                                           
|                                               |  |                                                                                                                     
|                                               |  | See Exhibit Index immediately following the certifications to this Form
10-KSB.                                   
|                                               |  |                                                                                                                     
|(b)                                            |  | Reports on Form 8-K.                                                                                                
|                                               |  |                                                                                                                     
|                                               |  | On October 9, 2002, the Company filed a press release on Form 8-K
announcing the completion of its bridge financing.

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ITEM 14.      CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to
the filing of this report. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commissions rules
and forms. Subsequent to the date of this evaluation, there have not been any
significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect the Companys internal controls.

45



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|                       |  |  |  |                                              |  | 
|---------------------- |  |  |  | -------------------------------------------- |  | 
|                       |  |  |  | MakeMusic! Inc.                             
|                       |  |  |  |                                             
|Dated:  March 20, 2003 |  |  |  | By: /s/ Philip Sean Lafleur                 
|                       |  |  |  |                                             
|                       |  |  |  | Philip Sean Lafleur, Chief Executive Officer

In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

(Power of Attorney)

Each person whose signature appears below constitutes and appoints PHILIP SEAN
LAFLEUR and BARBARA S. REMLEY as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause
to be done by virtue thereof.

|                                                                                                                              |  |               
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature and Title                                                                                                           |  | Date          
|                                                                                                                             
|                                                                                                                              |  |               
|                                                                                                                             
|/s/ Philip Sean Lafleur

Philip Sean Lafleur, Chairman of the Board and Chief
Executive Officer (principal executive officer) |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ Barbara S. Remley

Barbara S. Remley, Chief Financial Officer (principal
financial and accounting officer)                |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ Philippe Aubert

Philippe Aubert, Director                                                                                |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ Timothy P. Bajarin

Timothy P. Bajarin, Director                                                                          |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ Francois J. Duliège

Francois J. Duliège, Director                                                                        |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ Patrick Revenu

Patrick Revenu, Director                                                                                  |  | March 20, 2003
|                                                                                                                              |  |               
|/s/ John W. Paulson

John W. Paulson, Director                                                                                |  | March 20, 2003

46



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##### Table of Contents



|                                                   |  |               
|-------------------------------------------------- |  | --------------
|Signature and Title                                |  | Date          
|                                                  
|                                                   |  |               
|/s/ Martin Velasco

Martin Velasco, Director       |  | March 20, 2003
|                                                   |  |               
|/s/ Benson K. Whitney

Benson K. Whitney, Director |  | March 20, 2003

47



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##### Table of Contents



Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Philip Sean Lafleur, Chief Executive Officer, certify that:

1.     I have reviewed this annual report on Form 10-KSB of MakeMusic!
Inc.;

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 the annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 filling 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 officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | 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 officer 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.

|                     |  |     |  |                                                
|-------------------- |  | --- |  | -----------------------------------------------
|Date: March 20, 2003 |  | By: |  | /s/ Philip Sean
Lafleur
Chief Executive Officer

48



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##### Table of Contents



Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Barbara S. Remley, Chief Financial Officer, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-KSB of MakeMusic!
Inc.;                                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 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 the annual report, fairly present in
all material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                     
|
| | 4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
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 filling 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 officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 officer 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.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                              
|-------------------- |  | --- |  | ---------------------------------------------
|Date: March 20, 2003 |  | By: |  | /s/ Barbara S.
Remley
Chief Financial Officer

49



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##### Table of Contents






MAKEMUSIC! INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 2002 FISCAL YEAR

|        |  |                                                                                                                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                              
|Number  |  | Description                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                              
|3.1     |  | Amended and Restated Articles of Incorporationincorporated by
reference to Exhibit 3(i) to the Registrants Form 8-K filed
November 3, 2000                                                                                                                 
|        |  |                                                                                                                                                                                                                                                              
|2.1     |  | Stock Purchase Agreement, dated August 11, 2000, by and among the
Registrant, Net4Music S.A. and certain shareholders of Net4Music
S.A.  incorporated by reference to Exhibit 2.1 to the
Registrants Registration Statement on Form S-4, Reg. No. 333
43660
|        |  |                                                                                                                                                                                                                                                              
|2.2     |  | Put and Call Agreement entered into by the Registrant and certain
shareholders and option and warrant holders of Net4Music S.A. 
incorporated by reference to Exhibit 2.2 to the Registrants
Registration Statement on Form S-4, Reg. No. 333-43660        
|        |  |                                                                                                                                                                                                                                                              
|2.3     |  | Shareholder Voting Agreement entered into by the Registrant and
certain shareholders of the Registrantincorporated by reference
to Exhibit 2.3 to the Registrants Registration Statement on Form
S-4, Reg. No. 333-43660                                   
|        |  |                                                                                                                                                                                                                                                              
|3.2     |  | Bylawsincorporated by reference to Exhibit 3.2 to the
Registrants Form SB-2 Registration Statement, Reg. No. 33-92212C                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                              
|10.1    |  | Lease dated October 23, 1992 between the Registrant and Jorandcor,
Inc.incorporated by reference to Exhibit 10.1 to the Registrants
Form SB-2 Registration Statement, Reg. No. 33-92212C                                                                   
|        |  |                                                                                                                                                                                                                                                              
|10.2*   |  | 1992 Stock Option Planincorporated by reference to Exhibit 10.3
to the Registrants Form SB-2 Registration Statement, Reg. No.
33-92212C                                                                                                                    
|        |  |                                                                                                                                                                                                                                                              
|10.3    |  | License Agreement dated June 10, 1992 between the Registrant and
Carnegie Mellon University, including Amendments 1 and
2incorporated by reference to Exhibit 10.11 to the Registrants
Form SB-2 Registration Statement, Reg. No. 33-92212C                
|        |  |                                                                                                                                                                                                                                                              
|10.4    |  | License Agreement dated December 31, 1992 between the Registrant
and Wenger Corporationincorporated by reference to Exhibit 10.12
to the Registrants Form SB-2 Registration Statement, Reg. No.
33-92212C                                                  
|        |  |                                                                                                                                                                                                                                                              
|10.5*   |  | Form of Nonqualified Stock Option Agreement for Options Granted
Outside the 1992 Stock Option Planincorporated by reference to
Exhibit 10.13 to the Registrants Form SB-2 Registration
Statement, Reg. No. 33-92212C                                       
|        |  |                                                                                                                                                                                                                                                              
|10.6    |  | Educational Software Distribution Agreement dated July 26, 1991
between the Registrant and The Douglas Stewart
Companyincorporated by reference to Exhibit 10.17 to the
Registrants Form SB-2 Registration Statement, Reg. No. 33-92212C                   
|        |  |                                                                                                                                                                                                                                                              
|10.7    |  | Amendment No. 3 to License Agreement between the Registrant and
Carnegie Mellon University dated August 28, 1996  incorporated by
reference to Exhibit 10.1 to the Registrants 10-QSB for the
quarter ended September 30, 1996                             

50



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                     
|Number  |  | Description                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                     
|10.8    |  | Second Amendment to Lease by and between Jorandcor, Inc. and the
Registrantincorporated by reference to Exhibit 10.14 to the
Registrants Form 10-KSB for the year ended December 31, 1997                                         
|        |  |                                                                                                                                                                                                                                     
|10.9    |  | Amendment No. 4 to License Agreement between the Registrant and Carnegie
Mellon University dated December 30, 1998  incorporated by reference to
Exhibit 10.10 to the Registrants Form 10-KSB for the year ended
December 31, 1998
|        |  |                                                                                                                                                                                                                                     
|10.10   |  | Third Amendment to Lease by and between Jorandcor, Inc. and the
Registrant  incorporated by reference to Exhibit 10.1 to the
Registrants Form 10-QSB for the quarter ended March 31, 2000                                         
|        |  |                                                                                                                                                                                                                                     
|10.11*  |  | Employment Agreement dated October 19, 2000 between the Registrant and
John W. Paulson  incorporated by reference to Exhibit 10.15 to the
Registrants Form 10-KSB for the year ended December 31, 2000                            
|        |  |                                                                                                                                                                                                                                     
|10.12   |  | Fourth Amendment dated December 11, 2001 to Lease by and between
Jorandcor, Inc. and the Registrant                                                                                                                                 
|        |  |                                                                                                                                                                                                                                     
|10.13*  |  | Employment Agreement dated September 1, 2002 between MakeMusic! Inc. and
Philip Sean Lafleur.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                     
|10.14   |  | Fifth Amendment dated January 23, 2003 to Lease by and between
Jorandcor, Inc. and the Registrant                                                                                                                                   
|        |  |                                                                                                                                                                                                                                     
|10.15   |  | MakeMusic! 2003 warrant for private placement at $3.20 issued February
28, 2003 with list of amounts purchased by directors, officers and
principal shareholders.                                                                   
|        |  |                                                                                                                                                                                                                                     
|10.16   |  | MakeMusic 2003 warrant for private placement at $0.05 issued February
28, 2003 with list of amounts purchased by directors, officers and
principal shareholders.                                                                    
|        |  |                                                                                                                                                                                                                                     
|21      |  | Subsidiaries of the Registrant:                                                                                                                                                                                                     
|        |  | MakeMusic! S.A. (a French corporation)
        Net4Music (New York) Inc. (a Delaware corporation)
        Musify Inc. (a Delaware corporation)                                                                                      
|       
|23.1    |  | Consent of Ernst & Young LLP, independent public accountants                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                     
|24      |  | Power of Attorney (included on the Signatures page of this Form 10-KSB)                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                     
|99.1    |  | Certification by Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                 
|        |  |                                                                                                                                                                                                                                     
|99.2    |  | Certification by Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                 



---

|       Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-KSB.
|-----------------------------------------------------------------------------------------------------------------------------------

51