##### Table of Contents



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, 2005
 Commission File No.: 0-26192
 MakeMusic! Inc.
  Minnesota
    
    
    
    41-1716250(State or other jurisdiction of
    
    
    
    (IRS Employerincorporation or organization)
    
    
    
    Identification Number)
 (952) 937-9611
 
 o
 Yes þ No o
 þ
 o
 Yes o No þ
    DOCUMENTS INCORPORATED BY REFERENCE
  Yes o No þ




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##### Table of Contents



TABLE OF CONTENTS
 Page No.PART IItem 1.
    
    Description of Business
    
    2Item 2.
    
    Description of Property
    
    11Item 3.
    
    Legal Proceedings
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    12PART IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Services
    
    12Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    12Item 7.
    
    Financial Statements
    
    17Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    34Item 8A.
    
    Controls and Procedures
    
    34Item 8B.
    
    Other Information
    
    35PART IIIItem 9.
    
    Directors and Executive Officers of the Registrant
    
    36Item 10.
    
    Executive Compensation
    
    37Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    37Item 12.
    
    Certain Relationships and Related Transactions
    
    37Item 13.
    
    Exhibits
    
    37Item 14.
    
    Principal Accountant Fees and Services
    
    37Board Compensation PlanConsent of McGladrey & Pullen LLpCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 1




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 General
     Strategy
   MakeMusics business strategy is characterized by the following principles:
 Focus on meeting the needs of a highly influential niche market.
 2




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Deliver high-quality patented technologies and licensed content.
 Capitalize on fundamental shifts in the marketplace.
 Leverage an extensive customer database for targeted and personalized direct marketing.
 Grow the SmartMusic business by leveraging support of music educators, suppliers and
associations. Hal Leonards Essential Elements Book One
 Maintain and strengthen Finale market leadership and revenues.
 Partner with leading industry players.
 Grow the business step by step.
 Products
 SmartMusic.
 3




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Finale notation family.
    4




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Synergy Between Product Lines
   Technology Infrastructure
  www.smartmusic.com .
 www.finalemusic.com .
 www.makemusic.com .
 5




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Marketing, Sales and Distribution
 SmartMusic.
    Essential Elements Essential Elements Book One
 www.smartmusic.com www.makemusic.com www.finalemusic.com
   6




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Finale notation family.
    Product Development
  Website.
  Content and product.
   7




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Competition
    Patents
   Trademarks
  8




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Manufacturing
  Employees
  Available Information
 www.sec.gov
 Cautionary Statements
   While we currently believe that we have sufficient capital, we may have other capital needs.
 9




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We are dependent upon our new product development efforts.
 We are dependent upon the Internet in our business.
 We are dependent upon obtaining and maintaining license agreements with music publishers, of
which there are a limited number.
 Certain of our products have limited and fluctuating sales.
 We have incurred operating losses in the past and may incur losses in the near future.
 We face intense competition.
 Rapid technological changes and obsolescence may adversely affect our business.
 10




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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.
  We are dependent upon certain key personnel.
 We are dependent upon proprietary technology and cannot assure protection of such technology.
 International development plans are subject to numerous risks.
 The market price of our stock may experience volatility.
 
 ITEM 2. DESCRIPTION OF PROPERTY
  11




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ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
   2005
    
    2004High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    5.30
    
    
    $
    4.40
    
    
    $
    3.70
    
    
    $
    2.45Common
    
    Second Quarter
    
    
    4.90
    
    
    
    3.15
    
    
    
    4.40
    
    
    
    2.50Stock
    
    Third Quarter
    
    
    4.70
    
    
    
    3.37
    
    
    
    3.94
    
    
    
    3.00Fourth Quarter
    
    
    11.33
    
    
    
    3.01
    
    
    
    5.95
    
    
    
    3.06
  
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Executive Overview
    12




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Critical Accounting Policies and Estimates
  Revenue recognition. Software Revenue
Recognition Revenue Recognition When a
Right of Return Exists
 Allowance for doubtful accounts.
 Inventory valuation.
 Prepaid licensing reserves.
 13




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Capitalized software costs. Accounting for the Costs of
Computer Software to Be Sold Leased, or Otherwise Marketed
 Post contract support. Software Revenue Recognition
 Impairment of goodwill.
 Deferred tax assets.
 Results of Operations
  December 31
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    %(In $ thousands)
    
    
    (In $ thousands)Notation revenue
    
    $
    9,762
    
    
    $
    9,685
    
    
    $
    77
    
    
    
    1SmartMusic revenue
    
    
    1,533
    
    
    
    1,002
    
    
    
    531
    
    
    
    53Other revenue
    
    
    522
    
    
    
    553
    
    
    
    (31
    )
    
    
    (6
    )Net revenues
    
    
    11,817
    
    
    
    11,240
    
    
    
    577
    
    
    
    5Cost of revenues
    
    
    2,185
    
    
    
    2,054
    
    
    
    131
    
    
    
    6Gross profit
    
    
    9,632
    
    
    
    9,186
    
    
    
    446
    
    
    
    5Percentage of net sales
    
    
    81.5
    %
    
    
    81.7
    %Development expense
    
    
    3,279
    
    
    
    2,830
    
    
    
    449
    
    
    
    16Selling and marketing expense
    
    
    3,882
    
    
    
    3,702
    
    
    
    180
    
    
    
    5General and administrative expense
    
    
    3,000
    
    
    
    3,280
    
    
    
    (280
    )
    
    
    (8
    )Total operating expenses
    
    
    10,161
    
    
    
    9,812
    
    
    
    349
    
    
    
    4Operating loss
    
    
    (529
    )
    
    
    (626
    )
    
    
    97
    
    
    
    16Other income, net
    
    
    32
    
    
    
    118
    
    
    
    (86
    )
    
    
    (73
    )Loss before taxes
    
    
    (497
    )
    
    
    (508
    )
    
    
    11
    
    
    
    2Income taxes
    
    
    1
    
    
    
    2
    
    
    
    (1
    )
    
    
    (50
    )Net loss
    
    $
    (498
    )
    
    $
    (510
    )
    
    $
    12
    
    
    
    2
 14




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Year ended December 31, 2005, compared to the year ended December 31, 2004
 Net revenue.
     Gross profit.
 Development expense.
 Selling and marketing expense.
 15




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General and administrative expense.
 Interest income and expense, net.
 Other Income.
 Income tax.
 Liquidity and capital resources.
     New accounting pronouncements.
 16




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ITEM 7. FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
 
     Minneapolis, Minnesota
 17




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MakeMusic, Inc.
Consolidated Balance Sheets  (In thousands of U.S. dollars, except share and per share data)
 December 312005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,952
    
    
    $
    2,215Accounts receivable (net of allowance of $15 and $38 in
2005 and 2004, respectively)
    
    
    1,004
    
    
    
    830Inventories
    
    
    435
    
    
    
    332Prepaid expenses and other current assets
    
    
    161
    
    
    
    241Total current assets
    
    
    4,552
    
    
    
    3,618Property and equipment, net
    
    
    323
    
    
    
    250Capitalized software products, net
    
    
    471
    
    
    
    347Goodwill, net
    
    
    3,630
    
    
    
    3,630Other intangible assets, net
    
    
    0
    
    
    
    725Other non-current assets
    
    
    66
    
    
    
    83Total assets
    
    $
    9,042
    
    
    $
    8,653Liabilities and shareholders equityCurrent liabilities:Current portion of capital lease obligations
    
    $
    6
    
    
    $
    6Accounts payable
    
    
    441
    
    
    
    494Accrued compensation
    
    
    681
    
    
    
    1,024Other accrued liabilities
    
    
    164
    
    
    
    227Post contract support
    
    
    181
    
    
    
    175Reserve for product returns
    
    
    339
    
    
    
    203Current portion of deferred rent
    
    
    20
    
    
    
    0Deferred revenue
    
    
    916
    
    
    
    697Total current liabilities
    
    
    2,748
    
    
    
    2,826Capital lease obligations, net of current portion
    
    
    9
    
    
    
    16Deferred rent, net of current portion
    
    
    120
    
    
    
    0Shareholders equity:Common stock, $0.01 par value:Authorized
shares  10,000,000Issued and outstanding shares  3,856,654 and 3,419,464
in 2005 and 2004, respectively
    
    
    39
    
    
    
    34Additional paid-in capital
    
    
    62,459
    
    
    
    61,626Accumulated deficit
    
    
    (56,347
    )
    
    
    (55,849
    )Other comprehensive income
    
    
    14
    
    
    
    0Total shareholders equity
    
    
    6,165
    
    
    
    5,811Total liabilities and shareholders equity
    
    $
    9,042
    
    
    $
    8,653
 See accompanying notes.
 18




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MakeMusic, Inc.
Consolidated Statements of Operations  (In thousands of U.S. dollars, except share and per share data)
 Twelve MonthsEnded December 31,2005
    
    
    2004Revenues:Notation revenue
    
    $
    9,762
    
    
    $
    9,685SmartMusic revenue
    
    
    1,533
    
    
    
    1,002Other revenue
    
    
    522
    
    
    
    553NET REVENUES
    
    
    11,817
    
    
    
    11,240COST OF REVENUES
    
    
    2,185
    
    
    
    2,054GROSS PROFIT
    
    
    9,632
    
    
    
    9,186OPERATING EXPENSES:Development expenses
    
    
    3,279
    
    
    
    2,830Selling and marketing expenses
    
    
    3,882
    
    
    
    3,702General and administrative expenses
    
    
    3,000
    
    
    
    3,280Total operating expenses
    
    
    10,161
    
    
    
    9,813LOSS FROM OPERATIONS
    
    
    (529
    )
    
    
    (626
    )Interest income
    
    
    34
    
    
    
    12Interest expense
    
    
    (5
    )
    
    
    (2
    )Other income, net
    
    
    3
    
    
    
    108Loss before income tax
    
    
    (497
    )
    
    
    (508
    )Income taxes
    
    
    1
    
    
    
    2Net loss
    
    $
    (498
    )
    
    $
    (510
    )Loss per common share:Basic
    
    
    (0.14
    )
    
    
    (0.15
    )Diluted
    
    
    (0.14
    )
    
    
    (0.15
    )Weighted average common shares outstanding:Basic
    
    
    3,520,130
    
    
    
    3,374,618Diluted
    
    
    3,520,130
    
    
    
    3,374,618
 See accompanying notes.
 19




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MakeMusic, Inc.
Consolidated Statement of Shareholders Equity  (In thousands of U.S. dollars, except share data)
 Common Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    ShareholdersTotal
    
    
    
    
    
    Paid-In
    
    Accumulated
    
    Deferred
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Capital
    
    Deficit
    
    Compensation
    
    Income
    
    (Deficit)Balance at December
31, 2003
    
    
    3,356,330
    
    
    $
    34
    
    
    $
    61,553
    
    
    
    ($55,339
    )
    
    
    ($153
    )
    
    $
    0
    
    
    $
    6,095Exercise of stock
options and
warrants
    
    
    63,134
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Issuance of stock,
stock options and
warrants for
services
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Amortization of
deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    153Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (510
    )
    
    
    
    
    
    
    
    
    
    
    (510
    )Balance at December
31, 2004
    
    
    3,419,464
    
    
    $
    34
    
    
    $
    61,626
    
    
    
    ($55,849
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    5,811Exercise of stock
options and
warrants
    
    
    437,190
    
    
    
    5
    
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    831Issuance of stock,
stock options and
warrants for
services
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Comprehensive
Income: Unrealized
gain on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (498
    )
    
    
    
    
    
    
    
    
    
    
    (498
    )Balance at December
31, 2005
    
    
    3,856,654
    
    
    $
    39
    
    
    $
    62,459
    
    
    
    ($56,347
    )
    
    $
    0
    
    
    $
    14
    
    
    $
    6,165
 See accompanying notes.
 20




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MakeMusic, Inc.
Consolidated Statements of Cash Flows  (In thousands of U.S. dollars)
 Twelve Months Ended
    
    
    Twelve Months Ended2005
    
    
    2004Operating activitiesNet loss
    
    $
    (498
    )
    
    $
    (510
    )Adjustments to reconcile net loss to net cash provided by operating activities:Amortization of intangible assets
    
    
    725
    
    
    
    979Depreciation and amortization of property, equipment and capitalized software
    
    
    325
    
    
    
    595Loss on disposal of property and equipment
    
    
    21Amortization of deferred compensation
    
    
    
    
    
    
    153Issuance of options and warrants for services
    
    
    7
    
    
    
    11Net changes in assets and liabilities:Accounts receivable
    
    
    (174
    )
    
    
    (336
    )Inventories
    
    
    (103
    )
    
    
    (59
    )Prepaid expenses and other current assets
    
    
    111
    
    
    
    (34
    )Accounts payable
    
    
    (53
    )
    
    
    77Accrued liabilities and product returns
    
    
    (129
    )
    
    
    121Deferred revenue
    
    
    219
    
    
    
    37Net cash provided by operating activities
    
    
    451
    
    
    
    1,034Net cash used in investing activitiesPurchases of property and equipment
    
    
    (255
    )
    
    
    (156
    )Proceeds from disposal of property and equipment
    
    
    5
    
    
    
    Capitalized development and other intangibles
    
    
    (289
    )
    
    
    (132
    )Net cash used in investing activities
    
    
    (539
    )
    
    
    (288
    )Net cash provided by financing activitiesProceeds from stock options and warrants exercised
    
    
    831
    
    
    
    62Payments on long-term debt and capital leases
    
    
    (6
    )
    
    
    (60
    )Net cash provided by financing activities
    
    
    825
    
    
    
    2Net increase in cash and cash equivalents
    
    
    737
    
    
    
    748Cash and cash equivalents, beginning of year
    
    
    2,215
    
    
    
    1,467Cash and cash equivalents, end of year
    
    $
    2,952
    
    
    $
    2,215Supplemental disclosure of cash flow informationInterest paid
    
    
    5
    
    
    
    2
 See accompanying notes.
 21




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Notes to Consolidated Financial Statements
 1. Description of Business
 ® ®
 2. Summary of Significant Accounting Policies
 Consolidation
  Foreign
Currency Translation
  Revenue Recognition
 Software Revenue
Recognition
   22




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2. Summary of Significant Accounting Policies (Continued)
 Accounting
for Shipping and Handling Fees and Costs
 Net Loss Per Share
  Segment Reporting
  Cash and Cash Equivalents
  Fair Value of Financial Instruments
  Accounts Receivable
   Inventories
  23




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2. Summary of Significant Accounting Policies (Continued)
 Property and Equipment
   Capitalized Software Products
  Website development. Accounting for
Web Site Development Costs
  Product development. Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed
  Goodwill
 Goodwill and
Other Intangible Assets
 24




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2. Summary of Significant Accounting Policies (Continued)
 Other Intangible Assets
  Patents and trademarks
  Impairment of Long-Lived Assets
  Leases
 Accounting for Leases
 Income Taxes
  Stock-Based Compensation
 Accounting for Stock-Based Compensation
 25




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2. Summary of Significant Accounting Policies (Continued)
 Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation
 December 31,2005
    
    2004(In thousands)Net loss:Net loss as reported
    
    $
    (498
    )
    
    $
    (510
    )Stock-based compensation included in net loss above
    
    
    0
    
    
    
    153Stock-based compensation under FAS 123
    
    
    (135
    )
    
    
    (429
    )Proforma net loss
    
    $
    (633
    )
    
    $
    (786
    )Basic and diluted loss per share:As reported
    
    $
    (0.14
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.18
    )
    
    $
    (0.23
    )
  Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  26




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Use of Estimates
  Advertising and Promotion
  Deferred Rent
  Reclassifications
  3. New Accounting Pronouncements
 Reporting Accounting Changes in Interim Financial
Statements, Accounting Changes, Reporting Accounting Changes in Interim Financial Statements
 4. Supplemental Balance Sheet Information
 Inventories
  December 31,2005
    
    2004(In thousands)Components
    
    $
    407
    
    
    $
    308Finished goods
    
    
    95
    
    
    
    97Reserve for obsolescence
    
    
    (67
    )
    
    
    (73
    )$
    435
    
    
    $
    332
 27




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Property and Equipment
  December 31,2005
    
    2004(In thousands)Computer equipment and software
    
    $
    2,118
    
    
    $
    2,003Office furniture and other
    
    
    355
    
    
    
    6072,473
    
    
    
    2,610Less accumulated depreciation
    
    
    (2,150
    )
    
    
    (2,360
    )$
    323
    
    
    $
    250
  Capitalized Software Products
  December 31,2005
    
    2004(In thousands)Software translation
    
    $
    125
    
    
    $
    125Repertoire development
    
    
    947
    
    
    
    677Other
    
    
    13
    
    
    
    1,085
    
    
    
    802Less accumulated depreciation and amortization
    
    
    (614
    )
    
    
    (455
    )$
    471
    
    
    $
    347
  Amortization(In thousands)2006
    
    $
    1142007
    
    
    602008
    
    
    43
 Goodwill
  28




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Other intangible Assets
  December 31,2005
    
    2004(In thousands)Distributor/dealer network
    
    $
    1,440
    
    
    $
    1,440Software products
    
    
    2,304
    
    
    
    2,304Customer lists
    
    
    780
    
    
    
    780Total gross value
    
    
    4,524
    
    
    
    4,524Less accumulated amortization
    
    
    (4,524
    )
    
    
    (3,799
    )$
    0
    
    
    $
    725
   Other Non-current Assets
  December 31,2005
    
    2004(In thousands)Patents and trademarks
    
    $
    34
    
    
    $
    40Prepaid royalties
    
    
    32
    
    
    
    43$
    66
    
    
    $
    83
 Deferred Revenue
  December 31,2005
    
    2004(In thousands)Deferred SmartMusic subscription revenue
    
    $
    836
    
    
    $
    565Deferred notation revenue
    
    
    7
    
    
    
    38Deposits
    
    
    73
    
    
    
    94$
    916
    
    
    $
    697
 29




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##### Table of Contents



5. Debt
 Line of Credit
  Deferred Compensation
  6. Shareholders Equity
 Stock Options and Warrants
   Weighted-Shares Reserved
    
    
    
    
    
    
    Non-Plan
    
    
    Averagefor Grant
    
    
    Plan Options
    
    
    Options
    
    
    Exercise PriceOutstanding at December 31, 2003
    
    
    88,030
    
    
    
    841,580
    
    
    
    4,432
    
    
    
    5.38Granted
    
    
    (120,000
    )
    
    
    120,000
    
    
    
    
    
    
    
    3.56Expired
    
    
    
    
    
    
    (8,100
    )
    
    
    (1,193
    )
    
    
    9.95Forfeited
    
    
    49,350
    
    
    
    (71,500
    )
    
    
    
    
    
    
    6.06Cancelled
    
    
    79,439
    
    
    
    (79,439
    )
    
    
    
    
    
    
    2.27Exercised
    
    
    
    
    
    
    (17,620
    )
    
    
    
    
    
    
    2.27Outstanding at December 31, 2004
    
    
    96,819
    
    
    
    784,921
    
    
    
    3,239
    
    
    
    5.37Granted
    
    
    (147,000
    )
    
    
    147,000
    
    
    
    

    
    
    $
    4.40Expired
    
    
    
    
    
    
    (9,600
    )
    
    
    (3,239
    )
    
    $
    26.90Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7.60Cancelled
    
    
    66,856
    
    
    
    (151,206
    )Exercised
    
    
    
    
    
    
    (58,642
    )
    
    
    
    
    
    $
    2.47Outstanding at December 31, 2005
    
    
    16,675
    
    
    
    712,473
    
    
    
    0
    
    
    $
    3.96
  30




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##### Table of Contents



6. Shareholders Equity (Continued)
  Options Outstanding
    
    Options ExercisableOutstanding at
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    December 31,
    
    Weighted-Average
    
    Average Exercise
    
    Exercisable at
    
    Average ExerciseExercise Prices
    
    2005
    
    Remaining Term
    
    Price
    
    December 31, 2005
    
    Price$2.27  $3.50
    
    
    425,229
    
    
    4.10 years
    
    $
    2.36
    
    
    
    174,713
    
    
    $
    2.363.51  10.00
    
    
    242,634
    
    
    5.42 years
    
    
    4.30
    
    
    
    70,267
    
    
    
    4.8110.01  20.00
    
    
    27,310
    
    
    2.15 years
    
    
    11.38
    
    
    
    23,658
    
    
    
    11.6320.01  40.00
    
    
    17,300
    
    
    .82 years
    
    
    26.68
    
    
    
    12,664
    
    
    
    27.74Total
    
    
    712,473
    
    
    4.39 years
    
    $
    3.96
    
    
    
    281,302
    
    
    $
    4.89
     2008 
    
    
    685,7862010 
    
    
    15,0832011 
    
    
    15,000
 7. Commitments
 Capital Lease Obligations
  2006
    
    $
    72007
    
    
    72008
    
    
    2Total minimum lease payments
    
    
    16Less amount representing interest
    
    
    1Present value of net minimum lease payments
    
    
    15Less current portion
    
    
    6Long-term portion
    
    $
    9
 31




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##### Table of Contents



Operating Leases
  2006
    
    $
    2112007
    
    
    1852008
    
    
    1862009
    
    
    1902010
    
    
    1922011
    
    
    48Total
    
    $
    1,012
  8. 401(k) Savings Plan
  9. Income Taxes
  December 31,2005
    
    
    2004(In thousands)Loss carry-forwards
    
    $
    8,113
    
    
    $
    8,311Research and development credits
    
    
    736
    
    
    
    645Inventory
    
    
    26
    
    
    
    28Depreciation and amortization
    
    
    115
    
    
    
    176Deferred revenue
    
    
    348
    
    
    
    265Software development and prepaid royalties
    
    
    90
    
    
    
    48Accrued expenses
    
    
    350
    
    
    
    214Accounts receivable
    
    
    6
    
    
    
    15Valuation allowance for deferred tax assets
    
    
    (9,567
    )
    
    
    (9,258
    )Net deferred tax assets
    
    
    217
    
    
    
    444Deferred tax liability:Software development costs
    
    
    217
    
    
    
    169Intangible assets
    
    
    0
    
    
    
    275Total deferred tax liabilities
    
    
    217
    
    
    
    444Net deferred taxes
    
    $
    
    
    
    $
    
  32




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##### Table of Contents



December 31,2005
    
    
    2004(In thousands)Income tax benefit computed at the statutory rate
    
    $
    (169
    )
    
    $
    (174
    )State tax benefit, net of calculated Federal income tax effects
    
    
    (21
    )
    
    
    (22
    )Unused tax loss carry-forwards and valuation reserve
    
    
    174
    
    
    
    126Permanent differences
    
    
    17
    
    
    
    72Effective income tax expense
    
    $
    1
    
    
    $
    2
 Net Operating Losses
  Research andNet Operating Loss
    
    Development CreditsU.S.
    
    U.S.2007
    
    
    0
    
    
    
    132008
    
    
    525
    
    
    
    722009
    
    
    1,586
    
    
    
    902010
    
    
    2,128
    
    
    
    472011
    
    
    2,192
    
    
    
    432012
    
    
    1,736
    
    
    
    382018
    
    
    770
    
    
    
    462019
    
    
    1,472
    
    
    
    362020
    
    
    4,414
    
    
    
    2021
    
    
    3,037
    
    
    
    722022
    
    
    1,375
    
    
    
    1162023
    
    
    2,117
    
    
    
    722024
    
    
    0
    
    
    
    91$
    21,352
    
    
    $
    736
  10. Litigation
  33




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##### Table of Contents



11. Segment and Geographic Data
   December 31,2005
    
    
    2004(In thousands)Net sales:North America
    
    $
    9,370
    
    
    $
    9,216Europe
    
    
    1,102
    
    
    
    1,289Other foreign countries
    
    
    1,345
    
    
    
    735$
    11,817
    
    
    $
    11,240Long-lived assets:North America
    
    $
    4,490
    
    
    $
    5,032Europe
    
    
    0
    
    
    
    3$
    4,490
    
    
    $
    5,035
 12. Liquidity
  
 ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A.  CONTROLS AND PROCEDURES
  Changes in Internal Controls
  34




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ITEM 8B.  OTHER INFORMATION
  35




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##### Table of Contents



PART III
 
 ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    
    Age
    
    
    PositionWilliam R. Wolff
    
    
    47
    
    
    Chief Executive OfficerJohn W. Paulson
    
    
    57
    
    
    PresidentAlan G. Shuler
    
    
    58
    
    
    Vice President and Chief Financial OfficerRonald B. Raup
    
    
    55
    
    
    Chief Marketing Officer
 William R. Wolff
 John W. Paulson
 Alan G. Shuler
 Ronald B. Raup
 36




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##### Table of Contents



ITEM 10.  EXECUTIVE COMPENSATION
  
 ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
   Number of securities remainingavailable for future issuanceNumber of securities to be
    
    
    Weighted average
    
    
    under equity compensationissued upon exercise of
    
    
    exercise price of
    
    
    plans (excluding securitiesoutstanding options.
    
    
    outstanding options.
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    

712,473
    
    
    $
    3.96
    
    
    
    16,675Totals
    
    
    712,473
    
    
    $
    3.96
    
    
    
    16,675
 
 ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 13.  EXHIBITS
  
 ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
  37




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated:  February 28, 2006
    By:
    /s/ William R. WolffWilliam R. Wolff, Chief Executive Officer    Signature and Title
    
    Date/s/ William R. Wolff
    
    February 28, 2006William R. Wolff, Chairman of the Board and Chief
Executive Officer (principal executive officer)/s/ John W. Paulson
    
    February 28, 2006John W. Paulson, President and Director/s/ Alan G. Shuler
    
    February 28, 2006Alan G. Shuler, Chief Financial Officer (principal
financial and accounting officer)/s/ Philippe H. Aubert
    
    February 28, 2006Philippe H. Aubert, Director/s/ John C. Bergstrom
    
    February 28, 2006John C. Bergstrom, Director/s/ Lawrence M. Morton
    
    February 28, 2006Lawrence M. Morton, Director/s/ John R. Whisnant
    
    February 28, 2006John R. Whisnant, Director
 38




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##### Table of Contents



MAKEMUSIC, INC.
 
 EXHIBIT INDEX FOR
 FORM 10-KSB FOR 2005 FISCAL YEAR
 ExhibitNumber
    
    Description2.1
    
    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. 333-436602.2
    
    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.
333-436602.3
    
    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. 333-436603.1
    
    Restated Articles of Incorporation as amended  incorporated by reference to
Exhibit 3.1 to the Registrants Form 10-KSB for the year ended December 31,
20043.2
    
    Bylawsincorporated by reference to Exhibit 3.2 to the Registrants Form SB-2
Registration Statement, Reg. No. 33-92212C10.1
    
    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. 33-92212C10.2*
    
    1992 Stock Option Planincorporated by reference to Exhibit 10.3 to the
Registrants Form SB-2 Registration Statement, Reg. No. 33-92212C10.3
    
    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.
33-92212C10.4
    
    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. 33-92212C10.5*
    
    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. 33-92212C10.6
    
    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. 33-92212C10.7
    
    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, 199610.8
    
    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, 199710.9
    
    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
 39




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##### Table of Contents



ExhibitNumber
    
    Description10.10
    
    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, 200010.11*
    
    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, 200010.12
    
    Fourth Amendment dated December 11, 2001 to Lease by and between Jorandcor,
Inc. and the Registrant  incorporated by reference to exhibit 10.12 to the
Registrants Form 10-KSB for the year ended December 31, 200210.13
    
    Fifth Amendment, dated January 23, 2003, 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, 200210.14
    
    MakeMusic! 2003 warrant for private placement at $3.20 issued February 28,
2003, with list of amounts purchased by directors, officers and principal
shareholders  incorporated by reference to exhibit 10.15 to the Registrants
Form 10-KSB for the year ended December 31, 200210.15
    
    MakeMusic! 2003 warrant for private placement at $0.50 issued February 28,
2003, with list of amounts purchased by directors, officers and principal
shareholders  incorporated by reference to exhibit 10.16 to the Registrants
Form 10-KSB for the year ended December 31, 200210.16*
    
    MakeMusic! 2003 Equity Incentive Plan, incorporated by reference to exhibit
10.17 to the Registrants Form 10-KSB for the year ended December 31, 200310.17*
    
    Employment Agreement dated June 9, 2004, between the Registrant and William R.
Wolff  incorporated by reference to Exhibit 10.18 to the Registrants Form
10-QSB for the quarter ended September 30, 200410.18*
    
    Transition Agreement and Release dated November 22, 2004, between the
Registrant and Philip Sean Lafleur  incorporated by reference to Exhibit 99.1
to the Registrants Form 8-K filed on November 24, 200410.19*
    
    Board Compensation Plan effective October 1, 2004  December 31, 2005, between
the Registrant and all board members that do not represent more than 5% of
shareholders or are not otherwise compensated by the Company  incorporated by
reference to Exhibit 10.1 to the Registrants Form 8-K filed on February 8,
200510.20*
    
    Board Compensation Plan effective January 23, 200610.21*
    
    Form of Incentive Stock Option Agreement under the MakeMusic! 2003 Equity
Incentive Plan  incorporated by reference to Exhibit 10.21 to the Registrants
Form 10-KSB for the year ended December 31, 200410.22*
    
    Form of Nonqualified Stock Option Agreement under the MakeMusic! 2003 Equity
Incentive Plan  incorporated by reference to Exhibit 10.22 to the Registrants
Form 10-KSB for the year ended December 31, 200410.23*
    
    Form of Restricted Stock Agreement under the MakeMusic! 2003 Equity Incentive
Plan  incorporated by reference to Exhibit 10.23 to the Registrants Form
10-KSB for the year ended December 31, 200423.1
    
    Consent of McGladrey & Pullen LLP, independent registered public accounting firm
 40




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ExhibitNumber
    
    Description24
    
    Power of Attorney (included on the Signatures page of this Form 10-KSB)31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    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. 41