##### 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, 2010
 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
    
    41-1716250(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 7615 Golden Triangle Drive, Suite M, Eden Prairie, MN 55344
 (952) 937-9611
  Common Stock $.01 par value
    
    NASDAQ Capital Market(Title of each class)
    
    (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
    
    Smaller Reporting Company þ(Do not check if smaller reporting company)
 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
    
    
    26Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    44Item 9A.Controls and Procedures
    
    
    45Item 9B. Other Information
    
    
    46PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    47Item 11. Executive Compensation
    
    
    50Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    58Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    59Item 14. Principal Accounting Fees and Services
    
    
    60PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    61EX-10.4EX-10.8EX-10.17EX-10.18EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  1




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Important Factors Regarding Future Results
  
 PART I
 
 ITEM 1. BUSINESS
 Introduction
  ®
 ®
 SmartMusic
 Market Need
 No Child
Left Behind Act Race to the Top
  2




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The SmartMusic Solution
  
 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 those 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
    3




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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.
    
    Hear how their part is performed. SmartMusic will play each students part so
that they can hear how a professional would perform it.
    
    Record. 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.
    
    Follow me feature. 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 make 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 can just
click on it to see its fingering chart. SmartMusic automatically provides the right chart
for the instrument that the student is playing. (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
  5




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SmartMusic Accessories
  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 Agreements
  SmartMusic Sales and Marketing
  6




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




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®
 ® ®
 ® 
 Finale Sales and Marketing
    8




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Finale Competition
  Synergies between SmartMusic and Finale products
  General Information
 Customer Support
  Principal Sources and Suppliers
  Dependence on Major Customers
  9




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Product Development
   Trademarks
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® 
 Technology Infrastructure
 ® ®
  MakeMusic Websites:
 www.smartmusic.com
 www.finalemusic.com
 www.makemusic.com www.smartmusic.com www.finalemusic.com
 10




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Available Information
 www.sec.gov
 Cautionary Statements
   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.
 11




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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.
 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.
 12




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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 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.
 We will be exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
 13




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Significant management judgment is required for certain financial statement entries.
 
 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
  2010
    
    
    2009High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    6.82
    
    
    $
    4.06
    
    
    $
    4.50
    
    
    $
    1.86Common Stock
    
    Second Quarter
    
    
    6.28
    
    
    
    5.06
    
    
    
    3.90
    
    
    
    2.31Third Quarter
    
    
    6.16
    
    
    
    4.82
    
    
    
    4.05
    
    
    
    2.61Fourth Quarter
    
    
    7.00
    
    
    
    4.64
    
    
    
    5.00
    
    
    
    3.06
  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-09
    
    
    Mar-10
    
    
    Jun-10
    
    
    Sep-10
    
    
    Dec-10Total Subscriptions
    
    
    133,782
    
    
    
    139,363
    
    
    
    143,095
    
    
    
    158,574
    
    
    
    162,189Educator Accounts
    
    
    9,269
    
    
    
    9,368
    
    
    
    9,073
    
    
    
    9,312
    
    
    
    9,402Educators who have issued assignments*
    
    
    1,857
    
    
    
    2,340
    
    
    
    2,379
    
    
    
    1,085
    
    
    
    2,040Gradebook Teachers*
    
    
    886
    
    
    
    1,156
    
    
    
    1,172
    
    
    
    415
    
    
    
    1,019Site Agreements
    
    
    322
    
    
    
    356
    
    
    
    372
    
    
    
    466
    
    
    
    485Site Agreement Educator Subscriptions
    
    
    2,181
    
    
    
    2,458
    
    
    
    2,532
    
    
    
    3,403
    
    
    
    3,343
 
 *
    
    Annual statistics that restart on July 1 of each year reflecting the start of the
school-year cycle    17




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##### Table of Contents



QuarterlyQuarter End
    
    Beginning
    
    New
    
    Renewed
    
    Renewal
    
    Subscriptions
    
    Quarter End
    
    Net NewDate
    
    Subscriptions
    
    Subscriptions
    
    Subscriptions
    
    Rate
    
    Ended
    
    Subscriptions
    
    Subscriptions3/31/2009
    
    
    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
    
    
    
    11,2053/31/2010
    
    
    133,782
    
    
    
    11,590
    
    
    
    15,330
    
    
    
    72
    %
    
    
    21,339
    
    
    
    139,363
    
    
    
    5,5816/30/2010
    
    
    139,363
    
    
    
    5,391
    
    
    
    14,069
    
    
    
    89
    %
    
    
    15,728
    
    
    
    143,095
    
    
    
    3,7329/30/2010
    
    
    143,095
    
    
    
    23,826
    
    
    
    47,383
    
    
    
    85
    %
    
    
    55,730
    
    
    
    158,574
    
    
    
    15,47912/31/2010
    
    
    158,574
    
    
    
    20,453
    
    
    
    29,065
    
    
    
    63
    %
    
    
    45,903
    
    
    
    162,189
    
    
    
    3,615
   Critical Accounting Estimates
  Allowance for doubtful accounts.
  18




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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,
 Post contract support. Software  Software Revenue Recognition,
 19




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Impairment of goodwill.
 Income taxes. Income taxes
   Income taxes
  20




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Results of Operations
 Comparison of the year ended December 31, 2010 to the year ended December 31, 2009
 Net Revenue ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    10,712
    
    
    $
    11,060
    
    
    
    ($348
    )
    
    
    -3
    %SmartMusic
    
    
    6,436
    
    
    
    5,382
    
    
    
    1,054
    
    
    
    20
    %Total
    
    $
    17,148
    
    
    $
    16,442
    
    
    $
    706
    
    
    
    4
    %
        21




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Gross Profit ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    9,874
    
    
    $
    10,120
    
    
    
    ($246
    )
    
    
    -2
    %SmartMusic
    
    
    4,441
    
    
    
    3,724
    
    
    
    717
    
    
    
    19
    %Total
    
    $
    14,315
    
    
    $
    13,844
    
    
    $
    471
    
    
    
    3
    %
  Development expense ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,531
    
    
    $
    1,898
    
    
    $
    633
    
    
    
    33
    %SmartMusic
    
    
    1,957
    
    
    
    1,937
    
    
    
    20
    
    
    
    1
    %Other
    
    
    1,036
    
    
    
    1,246
    
    
    
    (210
    )
    
    
    -17
    %Total
    
    $
    5,524
    
    
    $
    5,081
    
    
    $
    443
    
    
    
    9
    %
     22




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Selling and marketing expense ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    1,778
    
    
    $
    1,816
    
    
    
    ($38
    )
    
    
    -2
    %SmartMusic
    
    
    1,728
    
    
    
    1,607
    
    
    
    121
    
    
    
    8
    %Other
    
    
    1,068
    
    
    
    716
    
    
    
    352
    
    
    
    49
    %Total
    
    $
    4,574
    
    
    $
    4,139
    
    
    $
    435
    
    
    
    11
    %
  General and administrative expense ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    81
    
    
    $
    77
    
    
    $
    4
    
    
    
    5
    %SmartMusic
    
    
    71
    
    
    
    70
    
    
    
    1
    
    
    
    1
    %Other
    
    
    3,589
    
    
    
    3,589
    
    
    
    0
    
    
    
    0
    %Total
    
    $
    3,741
    
    
    $
    3,736
    
    
    $
    5
    
    
    
    0
    %
  Income from operations ($ in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    5,484
    
    
    $
    6,329
    
    
    
    ($845
    )
    
    
    -13
    %SmartMusic
    
    
    685
    
    
    
    110
    
    
    
    575
    
    
    
    523
    %Other
    
    
    (5,693
    )
    
    
    (5,551
    )
    
    
    (142
    )
    
    
    3
    %Total
    
    $
    476
    
    
    $
    888
    
    
    
    ($412
    )
    
    
    -46
    %
   23




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Interest income and expense, net
  Income tax
   Liquidity and capital resources
    24




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Contractual Obligations and Commitments
  Capital Lease
    
    
    Operating Lease
    
    
    Total LeaseObligations
    
    
    Obligations
    
    
    Obligations(in thousands)2011
    
    $
    26
    
    
    $
    48
    
    
    $
    742012
    
    
    5
    
    
    
    0
    
    
    
    5Thereafter
    
    
    0
    
    
    
    0
    
    
    
    0$
    31
    
    
    $
    48
    
    
    $
    79
   Off-Balance Sheet Arrangements
  New accounting pronouncements.
 25




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
     
 26




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MakeMusic, Inc.
Balance Sheets  (In thousands of U.S. dollars, except share and per share data)
 December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,532
    
    
    $
    8,943Accounts receivable (net of allowance of $20 and $33 in
2010 and 2009, respectively)
    
    
    1,238
    
    
    
    1,277Inventories
    
    
    201
    
    
    
    386Deferred income taxes, net
    
    
    2,786
    
    
    
    2,070Prepaid expenses and other current assets
    
    
    252
    
    
    
    294Total current assets
    
    
    16,009
    
    
    
    12,970Property and equipment, net
    
    
    342
    
    
    
    533Capitalized software products, net
    
    
    2,424
    
    
    
    2,645Goodwill
    
    
    3,630
    
    
    
    3,630Long term deferred income taxes, net
    
    
    214
    
    
    
    494Other non-current assets
    
    
    2
    
    
    
    6Total assets
    
    $
    22,621
    
    
    $
    20,278Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    $
    25
    
    
    $
    61Accounts payable
    
    
    489
    
    
    
    726Accrued compensation
    
    
    1,372
    
    
    
    1,167Other accrued liabilities
    
    
    307
    
    
    
    297Post contract support
    
    
    150
    
    
    
    132Reserve for product returns
    
    
    380
    
    
    
    414Current portion of deferred revenue
    
    
    3,603
    
    
    
    2,913Total current liabilities
    
    
    6,326
    
    
    
    5,710Capital lease obligations, net of current portion
    
    
    4
    
    
    
    30Deferred revenue, net of current portion
    
    
    96
    
    
    
    0Other long term liabilities
    
    
    0
    
    
    
    8Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and outstanding shares  4,895,983 and 4,756,891
in 2010 and 2009, respectively
    
    
    49
    
    
    
    48Additional paid-in capital
    
    
    66,632
    
    
    
    65,980Accumulated deficit
    
    
    (50,486
    )
    
    
    (51,498
    )Total shareholders equity
    
    
    16,195
    
    
    
    14,530Total liabilities and shareholders equity
    
    $
    22,621
    
    
    $
    20,278
 See accompanying notes.
 27




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MakeMusic, Inc.
Statements of Income  (In thousands of U.S. dollars, except share and per share data)
 YearEnded December 31,2010
    
    
    2009Notation revenue
    
    $
    10,712
    
    
    $
    11,060SmartMusic revenue
    
    
    6,436
    
    
    
    5,382NET REVENUE
    
    
    17,148
    
    
    
    16,442COST OF REVENUES
    
    
    2,833
    
    
    
    2,598GROSS PROFIT
    
    
    14,315
    
    
    
    13,844OPERATING EXPENSES:Development expenses
    
    
    5,524
    
    
    
    5,081Selling and marketing expenses
    
    
    4,574
    
    
    
    4,139General and administrative expenses
    
    
    3,741
    
    
    
    3,736Total operating expenses
    
    
    13,839
    
    
    
    12,956INCOME FROM OPERATIONS
    
    
    476
    
    
    
    888Other, net
    
    
    75
    
    
    
    71Net income before income tax
    
    
    551
    
    
    
    959Income tax benefit
    
    
    (461
    )
    
    
    (2,494
    )Net Income
    
    $
    1,012
    
    
    $
    3,453Income per common share:Basic
    
    $
    0.21
    
    
    $
    0.74Diluted
    
    $
    0.21
    
    
    $
    0.72Weighted average common shares outstanding:Basic
    
    
    4,835,478
    
    
    
    4,685,480Diluted
    
    
    4,913,887
    
    
    
    4,771,734
 See accompanying notes.
 28




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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, 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
    )
    
    
    14,530Exercise of stock options
    
    
    76,179
    
    
    
    1
    
    
    
    180
    
    
    
    
    
    
    
    181Redemption of stock, net of cashless option
exercise
    
    
    6,980
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Issuance of restricted shares
    
    
    55,933
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    52Share based compensation
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    438Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012
    
    
    
    1,012BALANCE AT DECEMBER 31, 2010
    
    
    4,895,983
    
    
    $
    49
    
    
    $
    66,632
    
    
    $
    (50,486
    )
    
    $
    16,195
 See accompanying notes.
 29




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##### Table of Contents



MakeMusic, Inc.
Statements of Cash Flows  (In thousands of U.S. dollars)
 YearEnded December 31,2010
    
    
    2009Cash flows from operating activitiesNet income
    
    $
    1,012
    
    
    $
    3,453Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,069
    
    
    
    943Gain on disposal of assets
    
    
    (1
    )
    
    
    (7
    )Deferred income taxes, net
    
    
    (436
    )
    
    
    (2,564
    )Share based compensation
    
    
    438
    
    
    
    300Net changes in operating assets and liabilities:Accounts receivable
    
    
    39
    
    
    
    121Inventories
    
    
    185
    
    
    
    79Prepaid expenses and other current assets
    
    
    42
    
    
    
    (1
    )Accounts payable
    
    
    (237
    )
    
    
    353Accrued liabilities and product returns
    
    
    231
    
    
    
    (21
    )Deferred revenue
    
    
    786
    
    
    
    577Net cash provided by operating activities
    
    
    3,128
    
    
    
    3,233Cash flows from investing activitiesPurchases of property and equipment
    
    
    (143
    )
    
    
    (227
    )Proceeds from disposal of property and equipment
    
    
    1
    
    
    
    9Capitalized development
    
    
    (511
    )
    
    
    (570
    )Net cash used in investing activities
    
    
    (653
    )
    
    
    (788
    )Cash flows from financing activitiesProceeds from stock options exercised
    
    
    181
    
    
    
    86Payments for redemption of stock
    
    
    (6
    )
    
    
    (121
    )Payments on capital leases
    
    
    (61
    )
    
    
    (59
    )Net cash provided by (used in) financing activities
    
    
    114
    
    
    
    (94
    )Net increase in cash and cash equivalents
    
    
    2,589
    
    
    
    2,351Cash and cash equivalents, beginning of year
    
    
    8,943
    
    
    
    6,592Cash and cash equivalents, end of year
    
    $
    11,532
    
    
    $
    8,943Supplemental disclosure of cash flow informationInterest paid
    
    $
    6
    
    
    $
    10Income taxes paid
    
    
    136
    
    
    
    5Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    0
    
    
    
    18
 See accompanying notes.
 30




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##### 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
  31




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##### 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
  32




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##### 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
  33




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Income Taxes
    Balance at January 1, 2010
    
    $
    3,133Additions based on tax positions related to the current year
    
    
    99Net reductions for tax provisions of prior years
    
    
    (57
    )Settlements
    
    
    Balance at December 31, 2010
    
    $
    3,175
    34




---



##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Stock-Based Compensation
     2010
    
    
    2009Risk-free interest rate
    
    
    1.45
    %
    
    
    1.27
    %Expected life, in years
    
    
    3.8
    
    
    
    4.2Expected volatility
    
    
    79.71
    %
    
    
    76.61
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  Advertising and Promotion
  Use of Estimates
  Reclassification
  35




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##### Table of Contents



3. New Accounting Pronouncements
   4. Supplemental Balance Sheet Information
 Inventories
  December 31,2010
    
    2009(In thousands)Components
    
    $
    152
    
    
    $
    317Finished goods
    
    
    80
    
    
    
    138Reserve for obsolescence
    
    
    (31
    )
    
    
    (69
    )$
    201
    
    
    $
    386
 Property and Equipment
  December 31,2010
    
    2009(In thousands)Computer equipment and software
    
    $
    2,453
    
    
    $
    2,551Office furniture and other
    
    
    483
    
    
    
    4822,936
    
    
    
    3,033Less accumulated depreciation
    
    
    (2,594
    )
    
    
    (2,500
    )$
    342
    
    
    $
    533
  36




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
  Capitalized Software Products
  December 31,2010
    
    2009(In thousands)Repertoire development
    
    $
    4,491
    
    
    $
    4,032Software translation
    
    
    125
    
    
    
    125SmartMusic website
    
    
    461
    
    
    
    461SmartMusic Gradebook development
    
    
    511
    
    
    
    5115,588
    
    
    
    5,129Less accumulated depreciation and amortization
    
    
    (3,164
    )
    
    
    (2,484
    )$
    2,424
    
    
    $
    2,645
  (In thousands)2011
    
    $
    8182012
    
    
    6992013
    
    
    5012014
    
    
    2682015
    
    
    138$
    2,424
 Goodwill
  37




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Deferred Revenue
  December 31,2010
    
    2009(In thousands)Deferred SmartMusic subscription revenue, current
    
    $
    3,537
    
    
    $
    2,834Deferred notation revenue
    
    
    28
    
    
    
    42Deposits
    
    
    38
    
    
    
    37Current Deferred Revenue
    
    
    3,603
    
    
    
    2,913Deferred SmartMusic subscription revenue, long-term
    
    
    96
    
    
    
    0$
    3,699
    
    
    $
    2,913
 Other Accrued Liabilities
  December 31,2010
    
    2009(In thousands)Accrued royalties
    
    $
    119
    
    
    $
    82Other
    
    
    188
    
    
    
    223$
    307
    
    
    $
    305
 5. Shareholders Equity
 Stock Options and Warrants
  38




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##### 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, 2009
    
    
    586,047
    
    
    
    24,116
    
    
    
    445,755
    
    
    $
    5.09Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (309,433
    )
    
    
    55,933
    
    
    
    253,500
    
    
    $
    4.79Expired
    
    
    1,250
    
    
    
    
    
    
    
    (1,250
    )
    
    $
    2.35Cancelled
    
    
    83,239
    
    
    
    
    
    
    
    (83,239
    )
    
    $
    4.72Exercised
    
    
    
    
    
    
    
    
    
    
    (110,230
    )
    
    $
    2.77At December 31, 2010
    
    
    361,103
    
    
    
    80,049
    
    
    
    504,536
    
    
    $
    5.51
    
    
    3.7 YearsOutstanding
Exercisable Options
at December 31,
2010
    
    
    
    
    
    259,201
    
    
    $
    6.2
    
    
    1.8 Years
   Options OutstandingRange of Exercise Prices
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted Remaining
    
    
    
    
    
    
    Options ExercisableContractual Life
    
    
    Weighted Exercise
    
    
    
    
    
    
    Weighted ExerciseFrom
    
    
    
    
    
    to
    
    
    Number Outstanding
    
    
    (in Years)
    
    
    Price
    
    
    Number Outstanding
    
    
    Price$0.00
    
    to
    
    $
    3.50
    
    
    
    60,392
    
    
    
    4.24
    
    
    $
    3.21
    
    
    
    27,750
    
    
    $
    2.92$3.51
    
    to
    
    $
    6.00
    
    
    
    329,313
    
    
    
    3.88
    
    
    $
    5.12
    
    
    
    129,995
    
    
    $
    5.64$6.01
    
    to
    
    $
    10.00
    
    
    
    84,833
    
    
    
    2.68
    
    
    $
    6.96
    
    
    
    76,458
    
    
    $
    7.02$10.01
    
    to
    
    $
    11.00
    
    
    
    29,998
    
    
    
    3.37
    
    
    $
    10.21
    
    
    
    24,998
    
    
    $
    10.22Total
    
    
    504,536
    
    
    
    3.69
    
    
    $
    5.51
    
    
    
    259,201
    
    
    $
    6.20
   39




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##### Table of Contents



6. Commitments
 Capital Lease Obligations
  2011
    
    $
    262012
    
    
    5Total minimum lease payments
    
    
    31Less amount representing interest
    
    
    (2
    )Present value of net minimum lease payments
    
    
    29Less current portion
    
    
    (25
    )Long-term portion
    
    $
    4
 Operating Leases
  2011
    
    $
    48Total
    
    $
    48
  7. 401(k) Savings Plan
  40




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##### Table of Contents



8. Income Taxes
  December 31,2010
    
    
    2009(In thousands)Deferred tax assets:Loss carry-forwards
    
    $
    5,747
    
    
    $
    6,474Research and development credits
    
    
    1,164
    
    
    
    1,069Alternative minimum tax credit
    
    
    36
    
    
    
    0Minnesota research and development credits
    
    
    490
    
    
    
    0Inventory
    
    
    16
    
    
    
    26Depreciation and amortization
    
    
    131
    
    
    
    114Deferred revenue
    
    
    1,370
    
    
    
    1,087Software development and prepaid royalties
    
    
    69
    
    
    
    55Accrued expenses
    
    
    586
    
    
    
    420Accounts receivable
    
    
    7
    
    
    
    13Valuation allowance for deferred tax assets
    
    
    (5,690
    )
    
    
    (5,690
    )Deferred tax assets
    
    $
    3,926
    
    
    $
    3,568Deferred tax liability:Software development costs
    
    
    926
    
    
    
    1,004Net deferred tax assets
    
    $
    3,000
    
    
    $
    2,564
  December 31,2010
    
    
    2009(In thousands)Current assets
    
    $
    2,786
    
    
    $
    2,070Long-term assets
    
    
    214
    
    
    
    494Net deferred tax assets
    
    $
    3,000
    
    
    $
    2,564
  December 31,2010
    
    
    2009(In thousands)Current tax expense (benefit)
    
    $
    (25
    )
    
    $
    70Deferred tax benefit
    
    
    (436
    )
    
    
    (2,564
    )Total tax benefit
    
    
    ($461
    )
    
    
    ($2,494
    )
 41




---



##### Table of Contents



8. Income Taxes (continued)
   December 31,2010
    
    
    2009(In thousands)Income tax expense computed at the statutory rate
    
    $
    187
    
    
    $
    326State tax expense, net of calculated federal income tax effects
    
    
    19
    
    
    
    37R&D Credits
    
    
    (140
    )
    
    
    (10
    )Change in Valuation Allowance
    
    
    (621
    )
    
    
    (2,922
    )Permanent differences
    
    
    77
    
    
    
    80Other
    
    
    17
    
    
    
    (5
    )Income tax benefit
    
    $
    (461
    )
    
    $
    (2,494
    )
 Net Operating Losses
  Federal
    
    
    Research andNet Operating Loss
    
    
    Development Credits(In thousands)2011
    
    $
    910
    
    
    $
    432012
    
    
    1,736
    
    
    
    382018
    
    
    770
    
    
    
    462019
    
    
    491
    
    
    
    362020
    
    
    
    
    
    
    2021
    
    
    1,474
    
    
    
    722022
    
    
    1,275
    
    
    
    1162023
    
    
    9,115
    
    
    
    722024
    
    
    
    
    
    
    912025
    
    
    
    
    
    
    682026
    
    
    
    
    
    
    722027
    
    
    
    
    
    
    1682028
    
    
    
    
    
    
    1012029
    
    
    
    
    
    
    1002030
    
    
    
    
    
    
    141$
    15,771
    
    
    $
    1,164
  42




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##### Table of Contents



9. Litigation
   10. Segment and Geographic Data
      43




---



##### Table of Contents



10. Segment and Geographic Data (Continued)
  For the Year Ended December 31, 2010
    
    
    For the Year Ended December 31, 2009Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    TotalNET REVENUE
    
    $
    10,712
    
    
    $
    6,436
    
    
    $
    0
    
    
    $
    17,148
    
    
    $
    11,060
    
    
    $
    5,382
    
    
    $
    0
    
    
    $
    16,442COST OF REVENUES
    
    
    838
    
    
    
    1,995
    
    
    
    0
    
    
    
    2,833
    
    
    
    940
    
    
    
    1,658
    
    
    
    0
    
    
    
    2,598GROSS PROFIT
    
    
    9,874
    
    
    
    4,441
    
    
    
    0
    
    
    
    14,315
    
    
    
    10,120
    
    
    
    3,724
    
    
    
    0
    
    
    
    13,844Percentage of Net Revenue
    
    
    92
    %
    
    
    69
    %
    
    
    0
    %
    
    
    83
    %
    
    
    92
    %
    
    
    69
    %
    
    
    0
    %
    
    
    84
    %OPERATING EXPENSES:Development expenses
    
    
    2,531
    
    
    
    1,957
    
    
    
    1,036
    
    
    
    5,524
    
    
    
    1,898
    
    
    
    1,937
    
    
    
    1,246
    
    
    
    5,081Selling and marketing
expenses
    
    
    1,778
    
    
    
    1,728
    
    
    
    1,068
    
    
    
    4,574
    
    
    
    1,816
    
    
    
    1,607
    
    
    
    716
    
    
    
    4,139General and
administrative expenses
    
    
    81
    
    
    
    71
    
    
    
    3,589
    
    
    
    3,741
    
    
    
    77
    
    
    
    70
    
    
    
    3,589
    
    
    
    3,736Total Operating Expenses
    
    
    4,390
    
    
    
    3,756
    
    
    
    5,693
    
    
    
    13,839
    
    
    
    3,791
    
    
    
    3,614
    
    
    
    5,551
    
    
    
    12,956Income/(Loss) from
Operations
    
    
    5,484
    
    
    
    685
    
    
    
    (5,693
    )
    
    
    476
    
    
    
    6,329
    
    
    
    110
    
    
    
    (5,551
    )
    
    
    888Other Expense
    
    
    0
    
    
    
    0
    
    
    
    536
    
    
    
    536
    
    
    
    0
    
    
    
    0
    
    
    
    2,565
    
    
    
    2,565NET INCOME/(LOSS)
    
    $
    5,484
    
    
    $
    685
    
    
    
    ($5,157
    )
    
    $
    1,012
    
    
    $
    6,329
    
    
    $
    110
    
    
    
    ($2,986)
    
    
    
    $3,453
  December 31,2010
    
    
    2009(In thousands)Net sales:North America
    
    $
    14,525
    
    
    $
    13,921Europe
    
    
    1,220
    
    
    
    1,314Japan
    
    
    890
    
    
    
    716Other foreign countries
    
    
    513
    
    
    
    491$
    17,148
    
    
    $
    16,442
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  44




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##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES
   Managements Report on Internal Control Over Financial Reporting
       45




---



##### Table of Contents



Changes in Internal Controls
  
 ITEM 9B. OTHER INFORMATION
  46




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Directors and Executive Officers
  Name
    
    Age
    
    PositionRobert B. Morrison
    
    
    49
    
    
    Chairman of the BoardTrevor A. DSouza
    
    
    45
    
    
    DirectorKeith A. Fenhaus (1)
    
    
    53
    
    
    DirectorJeffrey A. Koch
    
    
    46
    
    
    Interim Chief Executive OfficerGraham Richmond
    
    
    38
    
    
    DirectorMichael Skinner
    
    
    60
    
    
    DirectorKaren L. VanDerBosch
    
    
    47
    
    
    Chief Financial Officer, Chief
Operating Officer and Treasurer
 
 (1)
    
    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, ChairTrevor A. DSouza
    
    Keith A. Fenhaus
    
    Robert B. MorrisonGraham Richmond
    
    Robert B. Morrison
    
    Trevor A. DSouza
 Jeffrey A. Koch
 Trevor DSouza
 47




---



##### Table of Contents



Keith A. Fenhaus
 Robert B. Morrison
 Graham Richmond
 48




---



##### Table of Contents



Michael Skinner
 Karen L. VanDerBosch
 Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics and Business Conduct
  49




---



##### Table of Contents



Audit Committee
  
 ITEM 11. EXECUTIVE COMPENSATION
 Overview
  Employment Agreements and Termination of Employment Agreements
    50




---



##### Table of Contents



Base Salaries
  
    
    the Chief Executive Officers recommendation 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
    51




---



##### Table of Contents



Material Terms of Non-Equity Incentive Plan Awards
    Long-Term Incentive Compensation
   Material Terms of Option Grants
   52




---



##### Table of Contents



Material Terms of Restricted Stock Awards
    Summary Compensation Table
  53




---



##### Table of Contents



Change in PensionValue andNon-Equity
    
    
    NonqualifiedStock
    
    
    Option
    
    
    Incentive Plan
    
    
    DeferredBonus
    
    
    Awards
    
    
    Awards
    
    
    Compensation
    
    
    Compensation
    
    
    All OtherSalary
    
    
    (1)
    
    
    (2)
    
    
    (2)
    
    
    (1)
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Jeffrey A. Koch
    
    
    2010
    
    
    $
    31,233
    
    
    
    
    
    
    
    
    
    
    $
    122,083
    (3)
    
    $
    17,007
    
    
    
    
    
    
    $
    31,875
    (4)
    
    $
    202,198Interim Chief Executive Officer
    
    
    2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    60,956
    (5)
    
    $
    60,965Karen L. VanDerBosch
    
    
    2010
    
    
    $
    191,954
    
    
    
    
    
    
    $
    96,873
    
    
    $
    186,142
    (6)
    
    $
    77,257
    
    
    
    
    
    
    
    
    
    
    $
    552,226Chief Financial Officer, Chief Operating Officer, Treasurer
    
    
    2009
    
    
    $
    185,000
    
    
    
    
    
    
    $
    10,008
    
    
    $
    32,170
    
    
    $
    77,700
    
    
    
    
    
    
    
    
    
    
    $
    304,878Ronald B. Raup
    
    
    2010
    
    
    $
    210,786
    
    
    
    
    
    
    $
    150,802
    
    
    
    113,978
    (7)
    
    $
    112,510
    
    
    
    
    
    
    $
    250,047
    (8)
    
    $
    838,120Former Chief Executive Officer
    
    
    2009
    
    
    $
    216,000
    
    
    
    
    
    
    $
    16,175
    
    
    $
    45,039
    
    
    $
    120,960
    
    
    
    
    
    
    $
    1,000
    
    
    $
    399,174
 
 (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 were
made in 2010 for services and performance during 2009, and payments under the Executive
Incentive Compensation Plan have been made in 2011 for services and performance during 2010.(2)
    
    Represents the grant date fair value of options awarded during the fiscal years ended
December 31, 2010 and December 31, 2009, 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 2010 awards are discussed in Note 5 to our consolidated financial statements. See the
table entitled Outstanding Equity Awards at 2010 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 2009 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.(3)
    
    Mr. Koch was issued an option to purchase 50,000 shares upon his appointment as the Companys
Interim Chief Executive Officer.(4)
    
    Includes $25,875 in Director Fees paid while Mr. Koch was the Chairman of the Board of
Directors from January 1, 2010 to November 1, 2010 and $6,000 in temporary housing and travel
expenses paid from November 10, 2010 to December 31, 2010.(5)
    
    Fee for consulting services provided to the Company by Mr. Koch.(6)
    
    Includes an option to purchase 25,000 shares, issued in recognition of Ms. VanDerBosch
assuming the additional duties of Chief Operating Officer and an option to purchase 40,000
shares issued in 2010 for performance in the 2009 fiscal year.(7)
    
    Includes 40,000 options awarded during the 2010 fiscal year, 31,670 of which were forfeited
upon Mr. Raups separation from the Company.(8)
    
    Includes the following compensation paid in accordance with the Separation Agreement and
Release between Mr. Raup and the Company dated November 10, 2010: $222,480 in severance
compensation ($9,270 of which was paid in 2010 and $213,210 of which will be paid in 2011) and
$27,567 of accrued but unused vacation time. 54




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##### Table of Contents



Outstanding Equity Awards at 2010 Fiscal Year End
 Option Awards
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orIncentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    PayoutAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Unearned
    
    ValueNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of
    
    Shares,
    
    of UnearnedNumber of
    
    Number of
    
    Securities
    
    
    
    
    
    
    
    
    
    Number of
    
    Shares of
    
    Units or
    
    Shares, UnitsSecurities
    
    Securities
    
    Underlying
    
    
    
    
    
    
    
    
    
    Shares or
    
    Units of
    
    Other
    
    or otherUnderlying
    
    Underlying
    
    Unexercised
    
    Option
    
    
    
    
    
    Units of
    
    Stock that
    
    Rights that
    
    Rights thatUnexercised
    
    Unexercised
    
    Unearned
    
    Exercise
    
    Option
    
    Stock that
    
    Have not
    
    have not
    
    have notOptions
    
    Options
    
    Options
    
    Price
    
    Expiration
    
    have not Vested
    
    Vested
    
    Vested
    
    VestedName
    
    (#) Exercisable
    
    (#) Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    ($)Jeffrey A. Koch
    
    
    8,332
    
    
    
    41,668
    (1)
    
    
    
    
    
    $
    5.35
    
    
    
    11/10/2015Karen L. VanDerBosch
    
    
    30,000
    
    
    
    0
    (2)
    
    
    
    
    
    $
    6.14
    
    
    
    12/7/2013
    
    
    
    2,224
    (3)
    
    $
    11,698.24
    (9)14,976
    
    
    
    5,024
    4)
    
    
    
    
    
    $
    10.15
    
    
    
    1/2/2015
    
    
    
    12,009
    (10)
    
    $
    63,167.34
    (9)7,488
    
    
    
    7,512
    (5)
    
    
    
    
    
    $
    3.50
    
    
    
    1/7/20169,163
    
    
    
    30,837
    (6)
    
    
    
    
    
    $
    4.56
    
    
    
    1/31/20171,040
    
    
    
    23,960
    (7)
    
    
    
    
    
    $
    5.00
    
    
    
    11/29/2017Ronald B. Raup
    
    
    2,664
    
    
    
    0
    (8)
    
    
    
    
    
    $
    4.90
    
    
    
    2/1/201285,000
    
    
    
    0
    (8)
    
    
    
    
    
    $
    6.00
    
    
    
    2/15/20118,330
    
    
    
    0
    (8)
    
    
    
    
    
    $
    4.56
    
    
    
    1/31/2007
 
 (1)
    
    Monthly vesting 4,166 options for 3 months and 4,167 for 9 months beginning February 10, 2011.(2)
    
    Options are fully vested.(3)
    
    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.(4)
    
    Monthly vesting 416 options for 47 months and 448 for 1 month beginning January 31, 2008.(5)
    
    Monthly vesting 312 for 47 months and 336 for 1 month beginning January 31, 2009(6)
    
    Monthly vesting 833 for 47 months and 849 for 1 month beginning February 28, 2010.(7)
    
    Monthly vesting 520 options for 47 months and 560 for 1 month beginning November 30, 2010.(8)
    
    Options are fully vested.(9)
    
    The amounts reflect the value based on the closing price of our Common Stock on December 31,
2010 of $5.26.(10)
    
    On March 15, 2010, Ms. VanDerBosch was awarded 16,012 shares of restricted stock under the
Executive Plan for exceeding the target level of operating margins for the 2009 fiscal year.
The risks of forfeiture lapse as to 25% of the award each year beginning on March 15, 2011,
and ending on March 15, 2014, provided that Ms. VanDerBosch does not voluntarily terminate her
employment without good reason and is not terminated for cause. 55




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##### Table of Contents



Director Compensation
    56




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##### Table of Contents



2010 Director Compensation Table
  Change in PensionValue andFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonqualifiedEarned or
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    DeferredPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherCash(1)
    
    Awards
    
    Awards(2)
    
    Compensation
    
    Earnings
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Michael Cahr(3)
    
    $
    17,250
    
    
    
    
    
    
    $
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,344Trevor A. DSouza(4)
    
    $
    16,667
    
    
    
    
    
    
    $
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,667Keith Fenhaus
    
    $
    30,000
    
    
    
    
    
    
    $
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,108Robert Morrison
    
    $
    30,000
    
    
    
    
    
    
    $
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,108Graham Richmond
    
    $
    30,000
    
    
    
    
    
    
    $
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,108Michael Skinner
    
    $
    30,000
    
    
    
    
    
    
    $
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,108Andrew C. Stephens(5)
    
    $
    13,917
    
    
    
    
    
    
    $
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,917
 
 (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.(2)
    
    Represents the grant date fair value of options awarded during the fiscal year ended
December 31, 2010, 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, contained in Part II, Item 8 of this Annual Report. At fiscal year end the
aggregate number of option awards outstanding for each non-employee director named in the
table above was as follows: Michael Cahr, 6,999; Trevor DSouza, 0; Keith Fenhaus, 15,333;
Robert Morrison, 14,000; Graham Richmond, 18,000; and Michael Skinner, 16,000; Andrew
Stephens, 0.(3)
    
    Michael Cahr resigned from his position as a director on November 10, 2010.(4)
    
    Trevor DSouza joined the Board of Directors on March 2, 2010 pursuant to an
agreement between MakeMusic, LaunchEquity Partners, LLC and LaunchEquity Acquisition Partners,
LLC  Designated Series Education Partners. Mr. DSouza was not eligible for an annual stock
option grant at the time he joined the Board due to his status as a representative of the
LaunchEquity entities. As a result, following the January 1, 2011 amendment to the Board
Compensation Policy, Mr. DSouza was granted an additional option to purchase $3,333 shares on
January 11, 2011 in recognition of his service during the 2010 fiscal year.(5)
    
    Andrew Stephens joined the Board of Directors on March 2, 2010 pursuant to an
agreement between MakeMusic, Launch Equity Partners, LLC and LaunchEquity Acquisition
Partners, LLC  Designated Series Education Partners. Mr. Stephens resigned from his
position as director on November 10, 2010. 57




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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)
    
    
    27.9
    %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 2, 2010. LEAP is solely managed by
LaunchEquity Partners, LLC, an Arizona limited liability company, which is solely managed by
Andrew C. Stephens. LaunchEquity Partners, LLC and Andrew C. Stephens, as manager, 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)Jeffrey A. Koch
    
    
    89,915
    (2)
    
    
    1.84
    %Karen L. VanDerBosch
    
    
    91,451
    (3)
    
    
    1.87
    %Trevor A. DSouza
    
    
    5,333
    (4)
    
    
    *Keith A. Fenhaus
    
    
    17,333
    (4)
    
    
    *Robert B. Morrison
    
    
    16,000
    (4)
    
    
    *Graham Richmond
    
    
    20,000
    (4)
    
    
    *Michael Skinner
    
    
    18,000
    (4)
    
    
    *All current executive officers and directors
as a group (7 persons)
    
    
    258,032
    (5)
    
    
    5.28
    %
 
 *
    
    Less than 1%(1)
    
    Based on 4,890,191 shares of Common Stock issued and outstanding as of March 4,
2011. Shares not outstanding but deemed beneficially owned by virtue of the right of a person
to acquire them as of March 4, 2011, 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.(2)
    
    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. Includes 24,996 shares that may be purchased upon exercise of
options that are exercisable as of March 4, 2011 or within 60 days of such date.(3)
    
    Includes 70,991 shares that may be purchased upon exercise of options that are
exercisable as of March 4, 2011 or within 60 days of such date. 58




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##### Table of Contents



(4)
    
    Represents shares that may be purchased upon exercise of options that are
exercisable as of March 4, 2011 or within 60 days of such date.(5)
    
    Includes 172,653 shares that may be purchased by all officers and directors as a
group upon exercise of options exercisable as of March 4, 2011 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
    
    
    504,536
    
    
    $
    5.51
    
    
    
    361,103Total
    
    
    504,536
    
    
    $
    5.51
    
    
    
    361,103
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Relationships and Related Transactions
  Director Independence
  59




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  December 312009
    
    
    2010Audit Fees (1)
    
    $
    202,000
    
    
    $
    160,000Audit-Related Fees
    
    
    
    
    
    
    Tax Fees (2)
    
    
    78,000
    
    
    
    49,000All Other Fees
    
    
    
    
    
    
    $
    280,000
    
    
    $
    209,000
    Pre-Approval of Audit Fees
   60




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    Documents filed as part of this report.
 (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, 2010 and December 31, 2009Balance Sheets as of December 31, 2010 and 2009Statements of Income for the years ended December 31, 2010 and 2009Statements of Shareholders Equity for the years ended December 31, 2010 and 2009Statements of Cash Flows for the years ended December 31, 2010 and 2009Notes 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.
 
 61




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated:  March 4, 2011
    By:
    /s/ Jeffrey A. KochJeffrey A. Koch, Interim Chief Executive Officer   
 Signature and Title
    
    Date/s/ Jeffrey A. Koch

Jeffrey A. Koch, Interim Chief Executive Officer and Director
    
    March 4, 2011/s/ Karen L. VanDerBosch

Karen L. VanDerBosch, Chief Operating Officer and Chief Financial Officer
    
    March 4, 2011/s/ Robert Morrison

Robert Morrison, Chairman of the Board, Director
    
    March 4, 2011/s/ Trevor A. DSouza

Trevor A. DSouza, Director
    
    March 4, 2011/s/ Keith A. Fenhaus

Keith A. Fenhaus, Director
    
    March 4, 2011/s/ Graham Richmond

Graham Richmond, Director
    
    March 4, 2011/s/ Michael R. Skinner

Michael R. Skinner, Director
    
    March 4, 2011
 62




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##### Table of Contents



MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-K FOR 2010 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 Incentive Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan as amended March 15, 2007  incorporated by reference to Exhibit 10.4 to the Registrants Form 10-QSB for the quarter ended March 31, 200710.4*
    
    Form of Nonqualified Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan as amended March 15, 2007  filed herewith10.5*
    
    Form of Restricted Stock Agreement under the MakeMusic 2003 Equity Incentive Plan, as amended March 15, 2010  incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended March 31, 201010.6*
    
    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, 200810.7*
    
    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, 2008.10.8*
    
    Board Compensation Plan effective February 15, 2007, as amended January 31, 2008, January 28, 2009, and January 1, 2011  filed herewith10.9*
    
    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, 200910.12*
    
    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, 200910.15*
    
    2009 Executive Compensation Plan  incorporated by reference to Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended March 31, 200910.16
    
    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 Registrants 8-K filed March 3, 201010.17*
    
    Employment Agreement between the Registrant and Jeffrey Koch dated November 10, 2010  filed herewith.
 63




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##### Table of Contents



ExhibitNumber
    
    Description10.18*
    
    Separation Agreement and Release between the Registrant and Ron Raup dated November 10, 2010  filed herewith.23.1
    
    Consent of McGladrey & Pullen LLP, independent registered
public accounting firm  filed herewith.24.1
    
    Power of Attorney (included on the Signatures page of this Form 10-K)
 filed herewith.31.1
    
    Certification by Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002  filed herewith.31.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 filed herewith.32.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 filed herewith.32.2
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 filed herewith.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. 64