##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period
from to .
 Commission File No.: 0-26192
 MakeMusic, Inc.
  Minnesota
(State or other jurisdiction of 
incorporation or organization)
    
    41-1716250
(IRS Employer
Identification No.)
 
 (952) 937-9611
  Common Stock $.01 par value
(Title of each class)
    
    NASDAQ Capital Market
(Name of each exchange on which registered)
  o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if smaller reporting company)
    
    Smaller Reporting Company þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  Yes o No þ




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##### 



TABLE OF CONTENTS
 Page No.PART IItem 1. Business
    
    
    2Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. (Removed and Reserved)
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    16Item 8. Financial Statements and Supplementary Data
    
    
    25Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    43Item 9A. Controls and Procedures
    
    
    43Item 9B. Other Information
    
    
    44PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    45Item 11. Executive Compensation
    
    
    49Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    56Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    57Item 14. Principal Accounting Fees and Services
    
    
    58PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    59EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  1




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##### Table of Contents



PART I
 
 ITEM 1.
    
    BUSINESS
 Introduction
  ®
 ®
 SmartMusic
 Market Need
 No Child
Left Behind Act
  The SmartMusic Solution
  
 2




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®
 1.
    
    Teachers log in to SmartMusic Gradebook via a web browser, select a title the students
are preparing for concert, and select a pre-defined assignment for that title. Teachers
then set a due date, how many points the assignment is worth, and finally post the
assignment to all students in the band or orchestra. This process takes the teacher about
one minute.2.
    
    Students log in to SmartMusic at home or at a school practice room and are immediately
greeted by a list of assignments that are due. When students click on an assignment, it is
automatically loaded for them and practice instructions are displayed. Students can then
practice the assignment with SmartMusics practice tools: slow down the tempo, hear how
their part is performed, set practice loops, use the tuner, etc. Students can even record
their performance so that they can listen to themselves and better detect problems they
need to correct. As students practice, they see notes and rhythms that were performed
incorrectly turn red and notes that were performed correctly turn green. In this manner,
SmartMusic automatically assesses student performances, giving each student a score.3.
    
    Once a student achieves a desired score, they click the Submitbutton so that the
assignment and its final score are automatically sent to the teachers SmartMusic
Gradebook. Although the student needs an Internet connection to do this, no browser or
e-mail program is required.4.
    
    Teachers can now see in their SmartMusic Gradebook which students have submitted
assessment assignments and what grades were automatically given by SmartMusic. If the
teacher required students to submit recordings of an assignment, the recordings are also in
the Gradebook. Teachers can listen to recordings with a single click which facilitates an
efficient grading process.
 SmartMusic Assignments
    How Does SmartMusic Develop Skills and Motivate Students?
  
    
    Assessment. SmartMusic assesses student performance. Wrong notes and rhythms turn red
while correct notes turn green. SmartMusic scores each attempt by the students, giving
practice time a video game-like appeal.
    
    Practice with professional accompaniment. SmartMusic puts the student into an ensemble
of professionals. The music comes alive for them as they hear how professionals create the
drama, excitement, and beauty of the music.
    
    Practice at slower tempos. Students need to slow music down in order to master the
technical challenges. SmartMusic allows students to set any tempo and then gradually build
up speed.
 3




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
    
    Hear how your part is performed. SmartMusic will play each students part so that they
can hear how a professional would perform it.
    
    Record yourself. Students often cannot hear what they are doing wrong as they sing or
play. SmartMusic allows them to record themselves so that they can instantly hear what
needs to be corrected.
    
    Intelligent Accompaniment®. When practicing solo literature that requires
expressive interpretation, SmartMusic listens to the students as they speed up or slow down
and the accompaniment follows their tempo changes. Students are free to experiment with
phrasing, learning to project their personalities into the music and making it their own.
    
    Practice performing in tune. The SmartMusic tuner is built in and helps students hear
where the pitch should be.
    
    Fingering charts. When students do not know how to finger a note, they just click on it
to see its fingering chart. SmartMusic knows for which instrument to provide the fingering.
(primarily for wind instruments)
    
    Practice loops. Students can isolate difficult measures for concentrated practice.
    
    Skill-development exercises in all keys. SmartMusic includes a large library of
exercises that foster skills related to scales, intervals, arpeggios, rhythms, playing by
ear, and jazz improvisation.
    
    Wide range of repertoire. The SmartMusic accompaniment library includes classical, jazz,
opera, worship, musical theater, classic rock, pop, and other genres. The accompaniments,
made by professionals, are stylistic, authentic, and fun to practice with. Many of the jazz
accompaniments, for example, are created by Wynton Marsaliss musicians.
 Licensing, Publisher Relations and Content Development
      4




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SmartMusic Application Development
    Licensed Technology
  SmartMusic Patents
  SmartMusic Website and Back Office Development
   SmartMusic Accessories
  5




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##### Table of Contents



SmartMusic Subscription Business
    
    
    Number of SmartMusic educator accounts
    
    Number of SmartMusic Gradebook teachers (those having issued assignments to 50+
students)
    
    Total number of SmartMusic subscriptions
    
    Subscription renewal rates
  SmartMusic Site Licenses
  SmartMusic Sales and Marketing
   6




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www.smartmusic.com www.makemusic.com www.finalemusic.com
 SmartMusic Competition
  ®,
 Finale family of notation products
 ® ®
 ®
   7




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®
 ® ®
 ® 
 Finale Sales and Marketing
      Finale Competition
  8




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Synergies between SmartMusic and Finale products
  General Information
 Customer Support
 www.finalemusic.com www.smartmusic.com
 Principal Sources and Suppliers
  Dependence on Major Customers
  Product Development
   Trademarks
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
 9




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 
 Technology Infrastructure
 ® ® ® ®
  MakeMusic Websites:
 www.smartmusic.com
 www.smartmusic.com/impact
 www.finalemusic.com
 www.makemusic.com www.smartmusic.com www.finalemusic.com
 Available Information
 www.sec.gov
 Cautionary Statements
   10




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We currently believe that we have sufficient capital, but we may have other future capital
needs.
 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.
 11




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The uncertainty in worldwide economic conditions may divert consumer spending from our
products.
 We have incurred operating losses in the past and may incur losses in the future.
 We face intense competition.
 Rapid technological changes and obsolescence may adversely affect our business.
 The success of our web-based products and services is dependent upon our ability to protect
user information and comply with data protection laws and regulations.
  We are dependent upon certain key personnel.
 12




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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.
 We will be exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
 Significant management judgment is required for certain financial statement entries.
 13




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ITEM 2.
    
    PROPERTIES
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    (REMOVED AND RESERVED)
 14




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2009
    
    2008High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    4.50
    
    
    $
    1.86
    
    
    $
    10.39
    
    
    $
    8.53Common
Stock
    
    Second Quarter
    
    
    3.90
    
    
    
    2.31
    
    
    
    9.50
    
    
    
    7.34Third Quarter
    
    
    4.05
    
    
    
    2.61
    
    
    
    8.00
    
    
    
    6.10Fourth Quarter
    
    
    5.00
    
    
    
    3.06
    
    
    
    6.95
    
    
    
    2.02
  Dividends
  Recent Sales of Unregistered Equity Securities
   
 ITEM 6.
    
    SELECTED FINANCIAL DATA
  15




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 Executive Overview
  
    
    Providing integrated technology, content and web services to enhance and expand how
music is taught, learned and prepared for performance.
    
    Providing music education content developers with a technology-enriched publishing
platform that leverages their copyrighted assets while simultaneously increasing the
content and value of the SmartMusic library.
    
    Offering software solutions for engraving and electronically distributing sheet
music.
 ® ®
 ®
    16




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Dec-08
    
    
    Mar-09
    
    
    Jun-09
    
    
    Sep-09
    
    
    Dec-09Total Subscriptions
    
    
    106,584
    
    
    
    110,318
    
    
    
    111,059
    
    
    
    122,577
    
    
    
    133,782Educator Accounts
    
    
    9,185
    
    
    
    9,091
    
    
    
    8,616
    
    
    
    9,003
    
    
    
    9,269Educators who have issued assignments*
    
    
    1,436
    
    
    
    1,874
    
    
    
    1,994
    
    
    
    1,178
    
    
    
    1,857Gradebook Teachers*
    
    
    601
    
    
    
    829
    
    
    
    874
    
    
    
    453
    
    
    
    886Site Licenses
    
    
    203
    
    
    
    208
    
    
    
    203
    
    
    
    236
    
    
    
    322Site License Educator Subscriptions
    
    
    1,341
    
    
    
    1,461
    
    
    
    1,417
    
    
    
    1,762
    
    
    
    2,181
 
 *
    
    Annual statistics that restart on July 1 of each year reflecting the start of the
school-year cycle     17




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QuarterlyBeginning
    
    
    
    
    
    Renewed
    
    
    
    
    
    
    
    
    
    Quarter End
    
    Net NewQuarter End Date
    
    Subscriptions
    
    New Subscriptions
    
    Subscriptions
    
    Renewal Rate
    
    Subscriptions Ended
    
    Subscriptions
    
    Subscriptions9/30/2008
    
    
    95,632
    
    
    
    20,347
    
    
    
    20,017
    
    
    
    53
    %
    
    
    37,877
    
    
    
    98,119
    
    
    
    2,48712/31/2008
    
    
    98,119
    
    
    
    17,907
    
    
    
    17,942
    
    
    
    66
    %
    
    
    27,384
    
    
    
    106,584
    
    
    
    8,4653/31/2009
    
    
    106,584
    
    
    
    10,609
    
    
    
    12,241
    
    
    
    64
    %
    
    
    19,116
    
    
    
    110,318
    
    
    
    3,7346/30/2009
    
    
    110,318
    
    
    
    5,256
    
    
    
    11,350
    
    
    
    72
    %
    
    
    15,865
    
    
    
    111,059
    
    
    
    7419/30/2009
    
    
    111,059
    
    
    
    24,456
    
    
    
    29,585
    
    
    
    70
    %
    
    
    42,523
    
    
    
    122,577
    
    
    
    11,51812/31/2009
    
    
    122,577
    
    
    
    20,122
    
    
    
    26,402
    
    
    
    75
    %
    
    
    35,319
    
    
    
    133,782
    
    
    
    11,205
    Critical Accounting Estimates
  18




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Allowance for doubtful accounts.
  Sales returns and allowance reserves.
  Inventory valuation.
 Stock based compensation. Compensation  Stock
Compensation,
 Capitalized software costs. Software  Costs of Software to be Sold, Leased or
Marketed,
 19




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Post contract support. Software  Software Revenue Recognition,
 Impairment of goodwill. Intangibles  Goodwill and other, .
 Income taxes. Income taxes
   20




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Income taxes
  Results of Operations
  Year Ended December 31,2009
    
    
    2008
    
    
    Increase (Decrease)
    
    
    %(In $ thousands)Notation revenue
    
    $
    10,617
    
    
    $
    10,289
    
    
    $
    328
    
    
    
    3
    %SmartMusic revenue
    
    
    5,014
    
    
    
    4,070
    
    
    
    944
    
    
    
    23
    %Other revenue
    
    
    811
    
    
    
    797
    
    
    
    14
    
    
    
    2
    %Net revenue
    
    
    16,442
    
    
    
    15,156
    
    
    
    1,286
    
    
    
    8
    %Cost of revenues
    
    
    2,598
    
    
    
    2,380
    
    
    
    218
    
    
    
    9
    %Gross profit
    
    
    13,844
    
    
    
    12,776
    
    
    
    1,068
    
    
    
    8
    %Percentage of net sales
    
    
    84
    %
    
    
    84
    %Development
    
    
    5,081
    
    
    
    4,633
    
    
    
    448
    
    
    
    10
    %Selling and marketing
    
    
    4,139
    
    
    
    4,318
    
    
    
    (179
    )
    
    
    -4
    %General administrative
    
    
    3,736
    
    
    
    3,385
    
    
    
    351
    
    
    
    10
    %Total operating expenses
    
    
    12,956
    
    
    
    12,336
    
    
    
    620
    
    
    
    5
    %Operating income
    
    
    888
    
    
    
    440
    
    
    
    448
    
    
    
    102
    %Other income
    
    
    71
    
    
    
    59
    
    
    
    12
    
    
    
    20
    %Net income before taxes
    
    $
    959
    
    
    $
    499
    
    
    $
    460
    
    
    
    92
    %Income tax expense (benefit)
    
    
    (2,494
    )
    
    
    8
    
    
    
    2,502
    
    
    
    31275
    %Net income
    
    $
    3,453
    
    
    $
    491
    
    
    $
    2,962
    
    
    
    603
    %
 21




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Year ended December 31, 2009 compared to the year ended December 31, 2008
 Net revenue.
 ®
      Gross profit.
 Development expense.
 22




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##### Table of Contents



Selling and marketing expense.
 General and administrative expense.
 Interest income and expense, net.
 Income tax.
  Liquidity and capital resources.
 23




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Contractual Obligations and Commitments
  Capital Lease
    
    
    Operating Lease
    
    
    Total LeaseObligations
    
    
    Obligations
    
    
    Obligations(in thousands)2010
    
    $
    67
    
    
    $
    192
    
    
    $
    2592011
    
    
    27
    
    
    
    48
    
    
    
    752012
    
    
    5
    
    
    
    0
    
    
    
    5Thereafter
    
    
    0
    
    
    
    0
    
    
    
    0$
    99
    
    
    $
    240
    
    
    $
    339
  Off-Balance Sheet Arrangements
  New accounting pronouncements.
 24




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
     /s/ McGladrey & Pullen, LLP Minneapolis, Minnesota
 25




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MakeMusic, Inc.
 Balance Sheets
 (In thousands of U.S. dollars, except share and per share data)
 December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,943
    
    
    $
    6,592Accounts
receivable (net of allowance of $33 and $44 in 2009 and 2008, respectively)
    
    
    1,277
    
    
    
    1,397Inventories
    
    
    386
    
    
    
    465Deferred income taxes, net
    
    
    1,587
    
    
    
    Prepaid expenses and other current assets
    
    
    294
    
    
    
    293Total current assets
    
    
    12,487
    
    
    
    8,747Property and equipment, net
    
    
    533
    
    
    
    673Capitalized software products, net
    
    
    2,645
    
    
    
    2,631Goodwill
    
    
    3,630
    
    
    
    3,630Long Term deferred income taxes, net
    
    
    977
    
    
    
    Other non-current assets
    
    
    6
    
    
    
    10Total assets
    
    $
    20,278
    
    
    $
    15,691Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    $
    61
    
    
    $
    56Accounts payable
    
    
    726
    
    
    
    373Accrued compensation
    
    
    1,167
    
    
    
    1,170Other accrued liabilities
    
    
    297
    
    
    
    302Post contract support
    
    
    132
    
    
    
    146Reserve for product returns
    
    
    414
    
    
    
    382Deferred revenue
    
    
    2,913
    
    
    
    2,336Total current liabilities
    
    
    5,710
    
    
    
    4,765Capital lease obligations, net of current portion
    
    
    30
    
    
    
    76Other long term liabilities
    
    
    8
    
    
    
    39Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and
outstanding shares  4,756,891 and 4,635,529 in 2009 and 2008, respectively
    
    
    48
    
    
    
    46Additional paid-in capital
    
    
    65,980
    
    
    
    65,716Accumulated deficit
    
    
    (51,498
    )
    
    
    (54,951
    )Total shareholders equity
    
    
    14,530
    
    
    
    10,811Total liabilities and shareholders equity
    
    $
    20,278
    
    
    $
    15,691
 See accompanying notes.
 26




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MakeMusic, Inc.
 Statements of Income
 (In thousands of U.S. dollars, except share and per share data)
 YearEnded December 31,2009
    
    
    2008Notation revenue
    
    $
    10,617
    
    
    $
    10,289SmartMusic revenue
    
    
    5,014
    
    
    
    4,070Other revenue
    
    
    811
    
    
    
    797NET REVENUE
    
    
    16,442
    
    
    
    15,156COST OF REVENUES
    
    
    2,598
    
    
    
    2,380GROSS PROFIT
    
    
    13,844
    
    
    
    12,776OPERATING EXPENSES:Development expenses
    
    
    5,081
    
    
    
    4,633Selling and marketing expenses
    
    
    4,139
    
    
    
    4,318General and administrative expenses
    
    
    3,736
    
    
    
    3,385Total operating expenses
    
    
    12,956
    
    
    
    12,336INCOME FROM OPERATIONS
    
    
    888
    
    
    
    440Other, net
    
    
    71
    
    
    
    59Net income before income tax
    
    
    959
    
    
    
    499Income tax expense (benefit)
    
    
    (2,494
    )
    
    
    8Net Income
    
    $
    3,453
    
    
    $
    491Income per common share:Basic
    
    $
    0.74
    
    
    $
    0.11Diluted
    
    $
    0.72
    
    
    $
    0.10Weighted average common shares outstanding:Basic
    
    
    4,685,480
    
    
    
    4,620,651Diluted
    
    
    4,771,734
    
    
    
    4,779,235
 See accompanying notes.
 27




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MakeMusic, Inc.
 Statement of Shareholders Equity
 (In thousands of U.S. dollars, except shares)
 AdditionalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBALANCE AT DECEMBER 31, 2007
    
    
    4,517,803
    
    
    $
    45
    
    
    $
    65,017
    
    
    $
    (55,442
    )
    
    $
    9,620Exercise of stock options and warrants
    
    
    117,726
    
    
    
    1
    
    
    
    299
    
    
    
    
    
    
    
    300Share based compensation
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    400Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    491BALANCE AT DECEMBER 31, 2008
    
    
    4,635,529
    
    
    
    46
    
    
    
    65,716
    
    
    
    (54,951
    )
    
    
    10,811Exercise of stock options and warrants
    
    
    37,800
    
    
    
    1
    
    
    
    85
    
    
    
    
    
    
    
    86Redemption of stock, net of cashless option
exercise
    
    
    59,446
    
    
    
    1
    
    
    
    (121
    )
    
    
    
    
    
    
    (120
    )Issuance of restricted shares, net of forfeiture
    
    
    24,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share based compensation
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    300Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,453
    
    
    
    3,453BALANCE AT DECEMBER 31, 2009
    
    
    4,756,891
    
    
    $
    48
    
    
    $
    65,980
    
    
    $
    (51,498
    )
    
    $
    14,530
 See accompanying notes.
 28




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##### Table of Contents



MakeMusic, Inc.
 Statements of Cash Flows
 (In thousands of U.S. dollars)
 YearEnded December 31,2009
    
    
    2008Cash flows from operating activitiesNet income
    
    $
    3,453
    
    
    $
    491Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    943
    
    
    
    876(Gain) Loss on disposal of assets
    
    
    (7
    )
    
    
    21Deferred income taxes, net
    
    
    (2,564
    )
    
    
    Share based compensation
    
    
    300
    
    
    
    400Net changes in operating assets and liabilities:Accounts receivable
    
    
    121
    
    
    
    94Inventories
    
    
    79
    
    
    
    (133
    )Prepaid expenses and other current assets
    
    
    (1
    )
    
    
    (73
    )Accounts payable
    
    
    353
    
    
    
    (54
    )Accrued liabilities and product returns
    
    
    (21
    )
    
    
    95Deferred revenue
    
    
    577
    
    
    
    634Net cash provided by operating activities
    
    
    3,233
    
    
    
    2,351Cash flows from investing activitiesPurchases of property and equipment
    
    
    (227
    )
    
    
    (359
    )Proceeds from disposal of property and equipment
    
    
    9
    
    
    
    Capitalized development and other intangibles
    
    
    (570
    )
    
    
    (1,684
    )Net cash used in investing activities
    
    
    (788
    )
    
    
    (2,043
    )Cash flows from financing activitiesProceeds from stock options and warrants exercised
    
    
    86
    
    
    
    300Payments of redemption of stock
    
    
    (121
    )
    
    
    Payments on capital leases
    
    
    (59
    )
    
    
    (57
    )Net cash provided by (used in) financing activities
    
    
    (94
    )
    
    
    243Net increase in cash and cash equivalents
    
    
    2,351
    
    
    
    551Cash and cash equivalents, beginning of year
    
    
    6,592
    
    
    
    6,041Cash and cash equivalents, end of year
    
    $
    8,943
    
    
    $
    6,592Supplemental disclosure of cash flow informationInterest paid
    
    $
    10
    
    
    $
    13Income taxes paid
    
    
    5
    
    
    
    8Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    18
    
    
    
    
 See accompanying notes.
 29




---



##### Table of Contents



Notes to Financial Statements
 1. Description of Business
 ® ®
 2. Summary of Significant Accounting Policies
 Revenue Recognition
 Software  Software
Revenue Recognition,
  Revenue
Recognition  Principal Agent Considerations,
  Net Income Per Common Share
  30




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Accounts Receivable
   Inventories
  Property and Equipment
   Capitalized Software Products
  31




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Product development
 Software  Costs of Software to be Sold, Leased or Marketed,
   Goodwill
 Intangibles  Goodwill and Other,
 Impairment of Long-Lived Assets
  32




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Income Taxes
     Balance at January 1, 2009
    
    $
    3,142Additions based on tax positions related to the current year
    
    
    20Net reductions for tax provisions of prior years
    
    
    (29
    )Settlements
    
    
    Balance at December 31, 2009
    
    $
    3,133
    33




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Stock-Based Compensation
  Compensation  Stock
Compensation
   2009
    
    2008Risk-free interest rate
    
    
    1.27
    %
    
    
    0.74
    %Expected life, in years
    
    
    4.2
    
    
    
    1.5Expected volatility
    
    
    76.61
    %
    
    
    79.57
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  Advertising and Promotion
  Use of Estimates
  34




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Subsequent Events
  3. New Accounting Pronouncements
  4. Supplemental Balance Sheet Information
 Inventories
  December 31,2009
    
    2008(In thousands)Components
    
    $
    317
    
    
    $
    391Finished goods
    
    
    138
    
    
    
    123Reserve for obsolescence
    
    
    (69
    )
    
    
    (49
    )$
    386
    
    
    $
    465
 Property and Equipment
  December 31,2009
    
    2008(In thousands)Computer equipment and software
    
    $
    2,551
    
    
    $
    2,458Office furniture and other
    
    
    482
    
    
    
    6573,033
    
    
    
    3,115Less accumulated depreciation
    
    
    (2,500
    )
    
    
    (2,442
    )$
    533
    
    
    $
    673
   35




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Capitalized Software Products
  December 31,2009
    
    
    2008(In thousands)Repertoire development
    
    $
    4,032
    
    
    $
    3,467Software translation
    
    
    125
    
    
    
    125SmartMusic website
    
    
    461
    
    
    
    461SmartMusic Gradebook development
    
    
    511
    
    
    
    5115,129
    
    
    
    4,564Less accumulated depreciation and amortization
    
    
    (2,484
    )
    
    
    (1,933
    )$
    2,645
    
    
    $
    2,631
  (In thousands)2010
    
    $
    7262011
    
    
    7262012
    
    
    6072013
    
    
    4092014
    
    
    177$
    2,645
 Goodwill
  36




---



##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Deferred Revenue
  December 31,2009
    
    2008(In thousands)Deferred SmartMusic subscription revenue
    
    $
    2,834
    
    
    $
    2,235Deferred notation revenue
    
    
    42
    
    
    
    51Deposits
    
    
    37
    
    
    
    50$
    2,913
    
    
    $
    2,336
 Other Accrued Liabilities
  December 31,2009
    
    2008(In thousands)Accrued royalties
    
    $
    82
    
    
    $
    56Accrued general expenses
    
    
    223
    
    
    
    246$
    305
    
    
    $
    302
 5. Shareholders Equity
 Stock Options and Warrants
  37




---



##### Table of Contents



5. Shareholders Equity (Continued)
  Weighted Average
    
    
    Weighted AverageShares Reserved
    
    
    2003 Plan
    
    
    
    
    
    
    Option Exercise
    
    
    Remaining Contractfor Future Grant
    
    
    Restricted Shares
    
    
    Plan Option Shares
    
    
    Price
    
    
    LifeAt December 31, 2008
    
    
    635,663
    
    
    
    
    
    
    
    659,855
    
    
    $
    4.50Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (136,644
    )
    
    
    26,644
    
    
    
    110,000
    
    
    $
    3.39Expired
    
    
    52,500
    
    
    
    
    
    
    
    (59,300
    )
    
    $
    6.13Cancelled
    
    
    34,528
    
    
    
    (2,528
    )
    
    
    (32,000
    )
    
    $
    5.83Exercised
    
    
    
    
    
    
    
    
    
    
    (232,800
    )
    
    $
    2.27At December 31, 2009
    
    
    586,047
    
    
    
    24,116
    
    
    
    445,755
    
    
    $
    5.09
    
    
    2.9 YearsOutstanding Exercisable Options at December 31, 2009
    
    
    
    
    
    
    
    
    
    
    297,255
    
    
    $
    5.19
    
    
    1.9 Years
   Range of Exercise Prices
    
    
    
    
    
    Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted Remaining
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseFrom
    
    to
    
    Outstanding
    
    (in Years)
    
    Price
    
    Outstanding
    
    Price$  0.00
    
    to
    
    $
    2.27
    
    
    
    32,200
    
    
    
    0.51
    
    
    $
    2.27
    
    
    
    32,200
    
    
    $
    2.27$  2.27
    
    to
    
    $
    3.50
    
    
    
    129,729
    
    
    
    3.85
    
    
    $
    2.99
    
    
    
    61,729
    
    
    $
    2.46$  3.51
    
    to
    
    $
    6.00
    
    
    
    168,995
    
    
    
    2.05
    
    
    $
    5.38
    
    
    
    122,745
    
    
    $
    5.50$  6.01
    
    to
    
    $
    10.00
    
    
    
    84,833
    
    
    
    3.68
    
    
    $
    6.96
    
    
    
    60,583
    
    
    $
    7.22$10.01
    
    to
    
    $
    11.00
    
    
    
    29,998
    
    
    
    4.37
    
    
    $
    10.21
    
    
    
    19,998
    
    
    $
    10.23Total
    
    445,755
    
    
    
    2.93
    
    
    $
    5.09
    
    
    
    297,255
    
    
    $
    5.19
     38




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##### Table of Contents



6. Commitments
 Capital Lease Obligations
  2010
    
    $
    672011
    
    
    262012
    
    
    5Total minimum lease payments
    
    
    98Less amount representing interest
    
    
    (7
    )Present value of net minimum lease payments
    
    
    91Less current portion
    
    
    (61
    )Long-term portion
    
    $
    30
 Operating Leases
  2010
    
    $
    1922011
    
    
    48Total
    
    $
    240
  7. 401(k) Savings Plan
  39




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##### Table of Contents



8. Income Taxes
  December 31,2009
    
    
    2008(In thousands)Deferred tax assets:Loss carry-forwards
    
    $
    6,474
    
    
    $
    6,955Research and development credits
    
    
    1,069
    
    
    
    1,055Inventory
    
    
    26
    
    
    
    18Depreciation and amortization
    
    
    114
    
    
    
    157Deferred revenue
    
    
    1,087
    
    
    
    823Software development and prepaid royalties
    
    
    55
    
    
    
    51Accrued expenses
    
    
    420
    
    
    
    486Accounts receivable
    
    
    13
    
    
    
    16Valuation allowance for deferred tax assets
    
    
    (5,690
    )
    
    
    (8,612
    )Deferred tax assets
    
    $
    3,568
    
    
    $
    949Deferred tax liability:Software development costs
    
    
    1,004
    
    
    
    949Net deferred tax assets
    
    $
    2,564
    
    
    $
    
  December 31,2009
    
    
    2008(In thousands)Current assets
    
    $
    1,587
    
    
    $
    Long-term assets
    
    
    977
    
    
    
    Net deferred tax assets
    
    $
    2,564
    
    
    $
    
  December 31,2009
    
    
    2008(In thousands)Current tax expense
    
    $
    70
    
    
    $
    8Deferred tax benefit
    
    
    (2,564
    )
    
    
    Total tax expense (benefit)
    
    
    ($2,494
    )
    
    $
    8
 40




---



##### Table of Contents



8. Income Taxes (continued)
   December 31,2009
    
    2008(In thousands)Income tax expense computed at the statutory rate
    
    $
    326
    
    
    $
    169State tax expense, net of calculated federal income tax effects
    
    
    37
    
    
    
    10R&D Credits
    
    
    (10
    )
    
    
    (22
    )Change in Valuation Allowance
    
    
    (2,922
    )
    
    
    (324
    )Permanent differences
    
    
    80
    
    
    
    151Other
    
    
    (5
    )
    
    
    24Income tax expense (benefit)
    
    $
    (2,494
    )
    
    $
    8
 Net Operating Losses
  Federal
Net Operating Loss
    
    Research and Development Credits(In thousands)2010
    
    $710
    
    $472011
    
    2,192
    
    432012
    
    1,736
    
    382018
    
    770
    
    462019
    
    491
    
    362020
    
    
    
    2021
    
    1,474
    
    722022
    
    1,336
    
    1162023
    
    9,115
    
    722024
    
    
    
    912025
    
    
    
    682026
    
    
    
    712027
    
    
    
    1682028
    
    
    
    1012029
    
    
    
    100$17,824
    
    $1,069
  41




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##### Table of Contents



9. Litigation
  10. Segment and Geographic Data
       For the year ended December 31, 2009(In thousands)Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    11,060
    
    
    $
    5,382
    
    
    $
    0
    
    
    $
    16,442COST OF REVENUES
    
    
    940
    
    
    
    1,658
    
    
    
    0
    
    
    
    2,598GROSS PROFIT
    
    
    10,120
    
    
    
    3,724
    
    
    
    0
    
    
    
    13,844OPERATING EXPENSES:Development expenses
    
    
    1,898
    
    
    
    1,937
    
    
    
    1,246
    
    
    
    5,081Selling and marketing expenses
    
    
    1,816
    
    
    
    1,607
    
    
    
    716
    
    
    
    4,139General and administrative expenses
    
    
    77
    
    
    
    70
    
    
    
    3,589
    
    
    
    3,736Total Operating Expenses
    
    
    3,791
    
    
    
    3,614
    
    
    
    5,551
    
    
    
    12,956Income (loss) from Operations
    
    
    6,329
    
    
    
    110
    
    
    
    (5,551
    )
    
    
    888Other Income and income taxes
    
    
    0
    
    
    
    0
    
    
    
    2,565
    
    
    
    2,565NET INCOME/(LOSS)
    
    $
    6,329
    
    
    $
    110
    
    
    
    ($2,986
    )
    
    $
    3,453
 42




---



##### Table of Contents



10. Segment and Geographic Data (continued)
  December 31,2009
    
    2008(In thousands)Net sales:North America
    
    $
    13,921
    
    
    $
    12,755Europe
    
    
    1,314
    
    
    
    1,334Japan
    
    
    716
    
    
    
    625Other foreign countries
    
    
    491
    
    
    
    442$
    16,442
    
    
    $
    15,156
 
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T).
    
    CONTROLS AND PROCEDURES
   Managements Report on Internal Control Over Financial Reporting
  43




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##### Table of Contents



Changes in Internal Controls
  
 ITEM 9B.
    
    OTHER INFORMATION
  44




---



##### Table of Contents



PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Directors and Executive Officers
  Name
    
    
    Age
        

    PositionJeffrey A. Koch
    
    
    45
    
    
    Chairman of the BoardRonald B. Raup
    
    
    59
    
    
    Chief Executive Officer and DirectorMichael E. Cahr
    
    
    69
    
    
    DirectorTrevor A. DSouza(1)
    
    
    44
    
    
    DirectorKeith A. Fenhaus(2)
    
    
    52
    
    
    Director, Lead Independent DirectorRobert B. Morrison
    
    
    48
    
    
    DirectorGraham Richmond
    
    
    37
    
    
    DirectorMichael Skinner
    
    
    59
    
    
    DirectorAndrew C. Stephens(1)
    
    
    46
    
    
    DirectorKaren L. VanDerBosch
    
    
    46
    
    
    Chief Financial Officer and Treasurer
 
 (1)
    
    As previously disclosed, Mr. DSouza and Mr. Stephens were appointed to the Board of
Directors effective March 2, 2010.(2)
    
    The Board of Directors has determined that Mr. Fenhaus qualifies as an audit committee financial expert under the applicable federal securities laws.  Audit Committee
    
    Compensation Committee
    
    Governance CommitteeKeith A. Fenhaus, Chair
    
    Michael Skinner, Chair
    
    Graham Richmond, ChairMichael E. Cahr
    
    Michael E. Cahr
    
    Keith A. FenhausGraham Richmond
    
    Robert B. Morrison
    
    Robert B. Morrison
  Audit Committee
    
    Compensation Committee
    
    Governance CommitteeKeith A. Fenhaus, Chair
    
    Michael Skinner, Chair
    
    Graham Richmond, ChairMichael E. Cahr
    
    Michael E. Cahr
    
    Robert B. MorrisonTrevor A. DSouza
    
    Jeffrey A. Koch
    
    Trevor A. DSouza
 Jeffrey A. Koch
 45




---



##### Table of Contents



Ronald B. Raup
 Michael E. Cahr
 Trevor DSouza
 46




---



##### Table of Contents



Keith A. Fenhaus
 Robert B. Morrison
 Graham Richmond
 47




---



##### Table of Contents



Michael Skinner
 Andrew C. Stephens
 Karen L. VanDerBosch
 Section 16(a) Beneficial Ownership Reporting Compliance
  48




---



##### Table of Contents



Code of Ethics and Business Conduct
  Audit Committee
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
 Overview
  Employment Agreements and Termination of Employment Agreements
   49




---



##### Table of Contents



Base Salaries
  
    
    the Chief Executive Officers recommendations as to compensation for all other
executive officers;
    
    the scope of responsibility, experience, time in position, and individual
performance of each officer, including the Chief Executive Officers;
    
    the effectiveness of each executives leadership performance and potential to
enhance stockholders value; and
    
    internal equity.
   Executive Incentive Compensation
    50




---



##### Table of Contents



Material Terms of Non-Equity Incentive Plan Awards
    Long-Term Incentive Compensation
   Material Terms of Option Grants
   51




---



##### Table of Contents



Material Terms of Restricted Stock Awards
    Summary Compensation Table
  52




---



##### Table of Contents



Change in PensionValue andNon-Equity
    
    
    NonqualifiedIncentive Plan
    
    
    DeferredBonus
    
    
    Stock Awards
    
    
    Option Awards
    
    
    Compensation
    
    
    Compensation
    
    
    All OtherSalary
    
    
    (1)
    
    
    (2)
    
    
    (2)
    
    
    (1)
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Ronald B. Raup
    
    
    2009
    
    
    $
    216,000
    
    
    
    
    
    
    $
    16,175
    
    
    $
    45,039
    
    
    $
    120,960
    
    
    
    
    
    
    $
    1,000
    
    
    $
    399,174Chief Executive Officer
    
    
    2008
    
    
    $
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    56,000
    
    
    
    
    
    
    
    
    
    
    $
    256,000Karen L. VanDerBosch
    
    
    2009
    
    
    $
    185,000
    
    
    
    
    
    
    $
    10,008
    
    
    $
    32,170
    
    
    $
    77,700
    
    
    
    
    
    
    
    
    
    
    $
    304,878Secretary, Treasurer and
Chief Financial Officer
    
    
    2008
    
    
    $
    165,000
    
    
    
    
    
    
    $
    8,663
    
    
    $
    125,999
    
    
    $
    34,650
    
    
    
    
    
    
    
    
    
    
    $
    325,649
 
 (1)
    
    The Bonus column is used by us to include only discretionary bonus payments apart from
our non-equity incentive compensation plans. Payments under such incentive plans, including
payments for achieving certain financial performance goals, are set forth in the Non-Equity
Incentive Plan Compensation column. Payments under the 2008 Executive Compensation Plan have
been made in 2009 for services and performance during 2008, and payments under the Executive
Incentive Compensation Plan have been made in 2010 for services and performance during 2009.(2)
    
    Represents the grant date fair value of options awarded during the fiscal years ended
December 31, 2009 and December 31, 2008, in accordance with Financial Accounting Standards
Board Accounting Standards Codification Topic 718, Compensation  Stock Compensation, for
outstanding performance-based share or unit grants (Stock Awards column) and option awards
(Option Awards column) under the 2003 Equity Incentive Plan, as amended with shareholder
approval in 2006 and 2008 (the 2003 Plan). The assumptions used to determine the valuation
of the 2009 awards are discussed in Note 5 to our consolidated financial statements. See the
table entitled Outstanding Equity Awards at 2009 Fiscal Year End and the narrative
discussion entitled Material Terms of Option Grants and Material Terms of Restricted Stock
Awards for further information regarding option awards and stock awards. The assumptions used
to determine the valuation of the 2008 awards are discussed in Note 5 to our consolidated
financial statements, included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008. 53




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##### Table of Contents



Outstanding Equity Awards at 2009 Fiscal Year End
 Stock Awards
    
    
    Equity IncentiveEquity Incentive
    
    
    Plan Awards:Plan Awards:
    
    
    Market orOption Awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    
    Number of
    
    
    Payout ValueEquity Incentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of
    
    
    Unearned Shares,
    
    
    of UnearnedPlan Awards: Number
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Shares of
    
    
    Units or
    
    
    Shares, UnitsNumber of
    
    
    Number of
    
    
    of Securities
    
    
    
    
    
    
    
    
    
    
    Shares or
    
    
    Units of
    
    
    Other
    
    
    or otherSecurities
    
    
    Securities
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    Units of
    
    
    Stock that
    
    
    Rights that
    
    
    Rights thatUnderlying
    
    
    Underlying
    
    
    Unexercised
    
    
    Option Exercise
    
    
    Option Expiration
    
    
    Stock that
    
    
    Have not
    
    
    have not
    
    
    have notUnexercised Options
    
    
    Unexercised Options
    
    
    Unearned Options
    
    
    Price
    
    
    Date
    
    
    have not Vested
    
    
    Vested(9)
    
    
    Vested
    
    
    VestedName
    
    (#) Exercisable
    
    
    (#) Unexercisable
    
    
    (#)
    
    
    ($)
    
    
    
    
    
    (#)
    
    
    ($)
    
    
    (#)
    
    
    ($)Ronald B. Raup
    
    
    2,664
    
    
    
    0
    (1)
    
    
    
    
    
    $
    4.90
    
    
    
    2/1/2012
    
    
    
    5,392
    (7)
    
    $
    22,21524,000
    
    
    
    0
    (1)
    
    
    
    
    
    $
    3.75
    
    
    
    9/15/201563,750
    
    
    
    21,250
    (2)
    
    
    
    
    
    $
    6.00
    
    
    
    12/31/20105,244
    
    
    
    15,756
    (3)
    
    
    
    
    
    $
    3.50
    
    
    
    1/7/2016Karen L. VanDerBosch
    
    
    23,125
    
    
    
    6,875
    (4)
    
    
    
    
    
    $
    6.14
    
    
    
    12/7/2013
    
    
    
    3,336
    (8)
    
    $
    13,7449,984
    
    
    
    10,016
    (5)
    
    
    
    
    
    $
    10.15
    
    
    
    1/2/20153,744
    
    
    
    11,256
    (5)
    
    
    
    
    
    $
    3.50
    
    
    
    1/7/2016
 
 (1)
    
    Options are fully vested.(2)
    
    Options vest annually on December 31 for the first three years, and on the first day of each
quarter during the fourth year.(3)
    
    Monthly vesting 437 options for 47 months and 461 for 1 month beginning January 31, 2009.(4)
    
    Monthly vesting 625 options for 48 months beginning December 31, 2006.(5)
    
    Monthly vesting 416 options for 47 months and 448 for 1 month beginning January 31, 2008.(6)
    
    Monthly vesting 312 options for 47 months and 336 for 1 month beginning January 31, 2009.(7)
    
    On March 2, 2009, Mr. Raup was awarded 7,189 shares of restricted stock under the 2008
Executive Compensation Plan for exceeding the target level of operating margins for the 2008
fiscal year. The risks of forfeiture lapse as to 25% of the award each year beginning on March
2, 2009, and ending on March 2, 2012, provided that Mr. Raup does not voluntarily terminate
his employment without good reason and is not terminated for cause.(8)
    
    On March 2, 2009, Ms. VanDerBosch was awarded 4,448 shares of restricted stock under the 2008
Executive Compensation Plan for exceeding the target level of operating margins for the 2008
fiscal year. The risks of forfeiture lapse as to 25% of the award each year beginning on March
2, 2009, and ending on March 2, 2012, provided that Ms. VanDerBosch does not voluntarily
terminate her employment without good reason and is not terminated for cause.(9)
    
    The amounts reflect the value based on the closing price of our Common Stock on December 31,
2009 of $4.12. 54




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##### Table of Contents



Director Compensation
   Director Compensation Table
  Change in PensionValue andNonqualifiedFees Earned or Paid
    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    Deferredin
    
    
    
    
    
    
    Option
    
    
    Incentive Plan
    
    
    Compensation
    
    
    All OtherCash(1)
    
    
    Stock Awards
    
    
    Awards(2)
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Michael Cahr
    
    $
    20,000
    
    
    
    
    
    
    $
    5,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,363Keith Fenhaus
    
    $
    30,000
    
    
    
    
    
    
    $
    5,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,363Jeffrey Koch
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    60,956
    (3)
    
    $
    60,956Robert Morrison
    
    $
    30,000
    
    
    
    
    
    
    $
    5,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,363Graham Richmond
    
    $
    30,000
    
    
    
    
    
    
    $
    5,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,363Michael Skinner
    
    $
    30,000
    
    
    
    
    
    
    $
    5,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,363
 
 (1)
    
    All directors received the amount of cash compensation to which they were entitled
under the Board Compensation Plan, as described in the paragraphs directly preceding this
Director Compensation Table in the section entitled Director Compensation. In lieu of
director fees, Jeffrey Koch provided consulting services to MakeMusic during 2009 and was
compensated in that capacity.(2)
    
    Represents the grant date fair value of options awarded during the fiscal year ended
December 31, 2009, in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718, Compensation  Stock Compensation. The assumptions used to
determine the valuation of the awards are discussed in Note 5 to our consolidated financial
statements, included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009. At fiscal year end the aggregate number of option awards outstanding for each
non-employee director then serving as a director was as follows: Jeffrey Koch, 0; Michael
Cahr, 8,000, Keith Fenhaus, 11,333; Robert Morrison, 14,000; Graham Richmond, 18,000; and
Michael Skinner, 16,000.(3)
    
    Jeffrey Koch was paid a fee for consulting services provided to the Company. 55




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 PRINCIPAL SHAREHOLDERS
  Name and Address
    
    Number of Shares
    
    
    Percentof Beneficial Owner
    
    Beneficially Owned
    
    
    of ClassLaunchEquity
Partners, LLC  Designated Series Education Partners
    
    
    1,362,829
    (1)
    
    
    28.6
    %4230 N Oakland Ave #317

Shorewood, WI 53211-2042
 
 (1)
    
    Represents shares held by LaunchEquity Acquisition Partners, LLC  Designated
Series Education Partners, a designated series of a Delaware series limited liability company
(LEAP), as set forth in the most recent Schedule 13D/A filed by LaunchEquity Partners, LLC
with the Securities and Exchange Commission on March 5, 2010. LEAP is solely managed by
LaunchEquity Partners, LLC, an Arizona limited liability company, the
managing members of which are
Andrew C. Stephens and Jane Kim. LaunchEquity Partners, LLC and its
managing members, have voting
and dispositive power over all the shares held by LEAP. MANAGEMENT SHAREHOLDINGS
  Name of Beneficial
    
    Number of Shares
    
    
    PercentOwner or Identity of Group
    
    Beneficially Owned
    
    
    of Class(1)Ronald B. Raup
    
    
    124,704
    (2)
    
    
    2.6
    %Karen L. VanDerBosch
    
    
    49,212
    (3)
    
    
    1.0
    %Jeffrey A. Koch
    
    
    64,919
    (4)
    
    
    1.4
    %Michael E. Cahr
    
    
    32,710
    (5)
    
    
    *Trevor A. DSouza
    
    
    0
    
    
    
    *Keith A. Fenhaus
    
    
    12,665
    (6)
    
    
    *Robert B. Morrison
    
    
    11,332
    (6)
    
    
    *Graham Richmond
    
    
    15,332
    (6)
    
    
    *Michael Skinner
    
    
    13,331
    (6)
    
    
    *Andrew C. Stephens
    
    
    1,362,829
    (7)
    
    
    28.6
    %All current
executive officers and directors as a group (8 persons)
    
    
    1,687,034
    (8)
    
    
    33.9
    %
 
 *
    
    Less than 1%(1)
    
    Based on 4,759,391 shares of Common Stock issued and outstanding as of March 5,
2010. Shares not outstanding but deemed beneficially owned by virtue of the right of a person
to acquire them as of March 5, 2010, or within sixty days of such date, are treated as
outstanding only when determining the percent owned by such individual and when determining
the percent owned by a group. 56




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##### Table of Contents



(2)
    
    Includes 10,580 shares which are owned outright and 110,529 shares that may be
purchased upon exercise of options that are exercisable as of March 5, 2010 or within 60 days
of such date.(3)
    
    Includes 2,224 shares which are owned outright and 44,764 shares that may be purchased
upon exercise of options that are exercisable as of March 5, 2010 or within 60 days of such
date.(4)
    
    Represents shares held by The Koch Family Trust (the Trust). Mr. Koch is trustee
of the Trust and thus has voting and dispositive power over all the shares held by the Trust.
Mr. Koch disclaims beneficial ownership of the shares in the Trust except to the extent of his
pecuniary interest therein.(5)
    
    Includes 27,378 shares which are owned outright and 5,332 shares that may be
purchased upon exercise of options that are exercisable as of March 5, 2010 or within 60 days
of such date.(6)
    
    Represents shares that may be purchased upon exercise of options that are
exercisable as of March 5, 2010 or within 60 days of such date.(7)
    
    Represents 1,362,829 shares held by LaunchEquity Acquisition Partners, LLC 
Designated Series Education Partners. Mr. Stephens has
shared voting and investment power with
respect to such shares. See footnote (1) to preceding table.(8)
    
    Includes 213,285 shares that may be purchased by all officers and directors as a
group upon exercise of options exercisable as of March 5, 2010 or within 60 days of such date. Securities Authorized for Issuance Under Equity Compensation Plans
  Number ofsecuritiesremainingavailable forfuture issuanceNumber of
    
    
    
    
    
    
    under equitysecurities to be
    
    
    
    
    
    
    compensation plansissued upon
    
    
    Weighted-average
    
    
    (excludingexercise of
    
    
    exercise price of
    
    
    securitiesoutstanding
    
    
    outstanding
    
    
    reflected inoptions
    
    
    options
    
    
    column (a)Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by
security holders
    
    
    445,755
    
    
    $
    5.09
    
    
    
    586,047Total
    
    
    445,755
    
    
    $
    5.09
    
    
    
    586,047
 
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Relationships and Related Transactions
  Director Independence
  57




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##### Table of Contents



ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  McGladrey & Pullen, LLP2008
    
    
    2009Audit Fees
    
    $
    232,000
    
    
    $
    202,000Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    18,000
    
    
    
    78,000All Other Fees
    
    
    
    
    
    
    $
    250,000
    
    
    $
    280,000
 Audit Fees
 Tax Fees
  Pre-Approval of Audit Fees
   58




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Financial Statements. The following financial statements are included in Part II, Item
8 of this Annual Report on Form 10-K:Report of McGladrey & Pullen LLP on Financial Statements as of and for the periods
ended December 31, 2009 and December 31, 2008Balance Sheets as of December 31, 2009 and 2008Statements of Income for the years ended December 31, 2009 and 2008Statements of Shareholders Equity for the years ended December 31, 2009 and 2008Statements of Cash Flows for the years ended December 31, 2009 and 2008Notes to Financial Statements(2)
    
    Financial Statement Schedules. The following consolidated financial statement schedules
are included in Item 8: Not applicable.(3)
    
    Exhibits. See Exhibit Index to Form 10-K immediately following the signature page
of this Form 10-K for a description of the documents that are filed as Exhibits to this
report or incorporated by reference herein.
 59




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated:  March 5, 2010
    By:
    /s/ Ronald B. RaupRonald B. Raup, Chief Executive Officer   
 Signature and Title
    
    Date/s/ Ronald B. Raup
    
    March 5, 2010Ronald B. Raup, Chief Executive Officer and Director/s/ Karen L. VanDerBosch
    
    March 5, 2010Karen L. VanDerBosch, Chief Financial Officer/s/ Jeffrey A. Koch
    
    March 5, 2010Jeffrey A. Koch, Chairman of the Board, Director/s/ Michael E. Cahr
    
    March 5, 2010Michael E. Cahr, DirectorMarch 5, 2010Trevor A. DSouza, Director/s/ Keith A. Fenhaus
    
    March 5, 2010Keith A. Fenhaus, Director/s/ Robert Morrison
    
    March 5, 2010Robert Morrison, Director/s/ Graham Richmond
    
    March 5, 2010Graham Richmond, Director/s/ Michael R. Skinner
    
    March 5, 2010Michael R. Skinner, Director/s/ Andrew C. Stephens
    
    March 5, 2010Andrew C. Stephens, Director
 60




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##### Table of Contents



MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-K FOR 2009 FISCAL YEAR
 ExhibitNumber
    
    Description3.1
    
    Restated Articles of Incorporation as amended  incorporated by reference to Exhibit 3.1 to the
Registrants Form 10-QSB for the quarter ended June 30, 20063.2
    
    Bylaws as amended  incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed
December 10, 20074.1
    
    Form of specimen certificate representing common stock of MakeMusic, Inc.  incorporated by
reference to Exhibit 4.1 to the Registrants Form 10-KSB for the year ended December 31, 200710.1*
    
    MakeMusic 2003 Equity Incentive Plan, as amended through November 24, 2008  incorporated by
reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended December 31, 200810.2*
    
    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, 200410.3*
    
    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, 200410.4*
    
    Form of Restricted Stock Agreement under the MakeMusic 2003 Equity Incentive Plan  incorporated
by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended December 31, 200810.5*
    
    Form of Restricted Stock Unit Agreement under the MakeMusic 2003 Equity Incentive Plan 
incorporated by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended
December 31, 200810.6*
    
    Board Compensation Plan effective February 15, 2007, as amended January 31, 2008 and as further
amended January 28, 2009  incorporated by reference to Exhibit 10.6 to the Registrants Form
10-K for the year ended December 31, 2008.10.7*
    
    Employment Agreement dated May 8, 2009 between the Registrant and Ronald B. Raup  incorporated
by reference to Exhibit 10.3 to the Registrants Form 10-Q for the quarter ended March 31, 200910.8*
    
    Employment Agreement dated May 8, 2009 between the Registrant and Karen L. VanDerBosch 
incorporated by reference to Exhibit 10.4 to the Registrants Form 10-Q for the quarter ended
March 31, 200910.9*
    
    Amendment No. 1 to Employment Agreement between the Registrant and John W. Paulson 
incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended
September 30, 200810.10*
    
    Separation Agreement effective December 31, 2008 between the Registrant and John W. Paulson 
incorporated by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended
December 31, 200810.11*
    
    2009 Executive Compensation Plan  incorporated by reference to Exhibit 10.2 to the Registrants
Form 10-Q for the quarter ended March 31, 200910.12
    
    Agreement dated March 2, 2010 among the Registrant, LaunchEquity Partners, LLC and LaunchEquity
Acquisition Partners, LLC  Designated Series Education Partners  incorporated by reference to
Exhibit 10.1 to the Registratnts 8-K filed March 3, 2010
 61




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##### Table of Contents



ExhibitNumber
    
    Description23.1
    
    Consent of McGladrey & Pullen LLP, independent registered public accounting firm24.1
    
    Power of Attorney (included on the Signatures page of this Form 10-K)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 2002
 
 *
    
    Indicates a management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K. 62