##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 Commission File No.: 0-26192
 MakeMusic, Inc.
  Minnesota
    
    41-1716250(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification Number)
 (952) 937-9611
  Common Stock, $.01 par value
    
    Nasdaq Capital Market(Title of Class)
    
    (Name of Each Exchange on Which Registered)
  o
 Yes þ No o
 o
 Yes o No þ
    DOCUMENTS INCORPORATED BY REFERENCE
  Yes o No þ




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##### 



TABLE OF CONTENTS
 Page No.PART IItem 1.
    
    Description of Business
    
    
    2Item 2.
    
    Description of Property
    
    
    14Item 3.
    
    Legal Proceedings
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
    
    
    15Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    15Item 7.
    
    Financial Statements
    
    
    23Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    41Item 8a.
    
    Controls and Procedures
    
    
    41Item 8b.
    
    Other Information
    
    
    42PART IIIItem 9.
    
    Directors and Executive Officers of the Registrant
    
    
    43Item 10.
    
    Executive Compensation
    
    
    44Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    44Item 12.
    
    Certain Relationships and Related Transactions
    
    
    44Item 13.
    
    Exhibits
    
    
    44Item 14.
    
    Principal Accountant Fees and Services
    
    
    44Form of Specimen CertificateBoard Compensation PlanConsent of McGladrey & Pullen LLP302 Certification of Co-Chief Executive Officer302 Certification of Co-Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Co-Chief Executive Officer906 Certification of Co-Chief Executive Officer906 Certification of Chief Financial Officer
  1




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##### Table of Contents



PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Introduction
  ®
 ®
 SmartMusic
 Market Need
    The SmartMusic Solution
  2




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##### Table of Contents




 1.
    
    Teachers log in to SmartMusic Impact 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, orchestra or choir. This process takes the teacher
about one minute.2.
    
    Students log in to SmartMusic at home 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 Impact
grade book. 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 Impact 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.
 3




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##### Table of Contents




    
    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 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.
    
    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, 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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##### Table of Contents



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




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##### Table of Contents



SmartMusic Accessories
  SmartMusic Subscription Business
     
    
    Number of SmartMusic educator accounts
    
    Number of Impact teachers (those having issued assignments to 50+ students)
    
    Total number of SmartMusic subscriptions
  SmartMusic Site Licenses
  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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##### Table of Contents



®
   ®
 ® ®
 ®
 Finale Sales and Marketing
     8




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##### Table of Contents



Finale Competition
  Synergies between SmartMusic and Finale products
 ®
  General Information
 Customer Support
  Principal Sources and Suppliers
  9




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##### Table of Contents



Dependence on Major Customers
  Product Development
   Trademarks
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®         
 Technology Infrastructure
 ® ® ® ®
  MakeMusic Websites:
 www.smartmusic.com
 www.smartmusic.com/impact
 10




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##### Table of Contents



www.finalemusic.com
 www.makemusic.com www.smartmusic.com www.finalemusic.com
 Available Information
 www.sec.gov
 Cautionary Statements
   While we currently believe that we have sufficient capital, we may have other capital needs.
 We are dependent upon our new product development efforts.
 11




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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.
 A decline in general 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.
 12




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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.
 We are dependent upon proprietary technology and cannot assure protection of such technology.
 International development plans are subject to numerous risks.
 13




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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.
 
 ITEM 2. DESCRIPTION OF PROPERTY
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  14




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PART II
 
 ITEM 5.

    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
  2007

    


    2006High
    
    Low
    
    High
    
    LowCommon StockFirst Quarter
    
    $
    6.83
    
    
    $
    5.63
    
    
    $
    11.80
    
    
    $
    4.90Second Quarter
    
    
    6.94
    
    
    
    5.85
    
    
    
    5.75
    
    
    
    4.10Third Quarter
    
    
    7.33
    
    
    
    5.76
    
    
    
    5.96
    
    
    
    4.30Fourth Quarter
    
    
    10.80
    
    
    
    6.98
    
    
    
    6.85
    
    
    
    4.99
      
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Executive Overview
 ® ®
   15




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
    Critical Accounting Policies and Estimates
  16




---



##### Table of Contents



Revenue recognition. Software Revenue Recognition Revenue
Recognition When a Right of Return Exists
 Allowance for doubtful accounts.
  Sales returns and allowance reserves.
  Inventory valuation.
 17




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##### Table of Contents



Stock based compensation.
 Capitalized software costs. Accounting for the Costs of
Computer Software to Be Sold Leased, or Otherwise Marketed
 Post contract support. Software Revenue Recognition
 Impairment of goodwill.
 Deferred tax assets.
 18




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##### Table of Contents



Results of Operations
  12 Months Ended December 31,2007
    
    
    2006
    
    
    Incr (Decr)
    
    
    %($ in thousands)
    
    
    ($ in thousands)Notation revenue
    
    $
    10,980
    
    
    $
    10,267
    
    
    $
    713
    
    
    
    7
    %SmartMusic revenue
    
    
    2,900
    
    
    
    2,164
    
    
    
    736
    
    
    
    34
    %Other revenue
    
    
    700
    
    
    
    547
    
    
    
    153
    
    
    
    28
    %Net revenue
    
    
    14,580
    
    
    
    12,978
    
    
    
    1,602
    
    
    
    12
    %Cost of revenues
    
    
    2,228
    
    
    
    1,847
    
    
    
    381
    
    
    
    21
    %Gross profit
    
    
    12,352
    
    
    
    11,131
    
    
    
    1,221
    
    
    
    11
    %Percentage of net sales
    
    
    85
    %
    
    
    86
    %Development expense
    
    
    4,278
    
    
    
    3,474
    
    
    
    804
    
    
    
    23
    %Selling and marketing expense
    
    
    4,045
    
    
    
    4,114
    
    
    
    (69
    )
    
    
    2
    %General and administrative
expense
    
    
    3,504
    
    
    
    3,388
    
    
    
    116
    
    
    
    3
    %Total operating expense
    
    
    11,827
    
    
    
    10,976
    
    
    
    851
    
    
    
    8
    %Operating income
    
    
    525
    
    
    
    155
    
    
    
    370
    
    
    
    239
    %Other income
    
    
    127
    
    
    
    109
    
    
    
    18
    
    
    
    17
    %Net income before taxes
    
    $
    652
    
    
    $
    264
    
    
    $
    388
    
    
    
    147
    %Income tax provision
    
    
    (2
    )
    
    
    (9
    )
    
    
    7
    
    
    
    78
    %Net income
    
    $
    650
    
    
    $
    255
    
    
    $
    395
    
    
    
    155
    %
 Year ended December 31, 2007 compared to the year ended December 31, 2006
 Net revenue.
 ® ®
 
  19




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##### Table of Contents



Gross profit.
 Development expense.
 20




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##### Table of Contents



Selling and marketing expense.
 General and administrative expense.
 Interest income and expense, net.
 Other Income.
 Income tax.
 Liquidity and capital resources.
  21




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##### Table of Contents



Contractual Obligations and Commitments
  Capital Lease
    
    
    Operating Lease
    
    
    Total LeaseObligations
    
    
    Obligations
    
    
    Obligations(in thousands)2008
    
    $
    70
    
    
    $
    186
    
    
    $
    2562009
    
    
    66
    
    
    
    191
    
    
    
    2572010
    
    
    60
    
    
    
    192
    
    
    
    2522011
    
    
    20
    
    
    
    48
    
    
    
    68Thereafter
    
    
    0
    
    
    
    0
    
    
    
    0$
    216
    
    
    $
    617
    
    
    $
    833
  New accounting pronouncements.
 22




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ITEM 7. FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
 
    Accounting for Uncertainty in Income Taxes  an Interpretation
of FASB Statement 109 (FIN 48).
 
  Minneapolis, Minnesota
 23




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##### Table of Contents



MakeMusic, Inc.
Balance Sheets  (In thousands of U.S. dollars, except share and per share data)
 December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,041
    
    
    $
    3,130Accounts receivable (net of allowance of $38 and $149 in
2007 and 2006, respectively)
    
    
    1,491
    
    
    
    1,664Inventories
    
    
    332
    
    
    
    347Prepaid expenses and other current assets
    
    
    211
    
    
    
    199Total current assets
    
    
    8,075
    
    
    
    5,340Property and equipment, net
    
    
    730
    
    
    
    663Capitalized software products, net
    
    
    1,418
    
    
    
    954Goodwill
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    29
    
    
    
    39Total assets
    
    
    13,882
    
    
    
    10,626Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    
    57
    
    
    
    10Accounts payable
    
    
    427
    
    
    
    507Accrued compensation
    
    
    1,131
    
    
    
    1,066Other accrued liabilities
    
    
    184
    
    
    
    254Post contract support
    
    
    169
    
    
    
    181Reserve for product returns
    
    
    365
    
    
    
    429Current portion of deferred rent
    
    
    26
    
    
    
    25Deferred revenue
    
    
    1,702
    
    
    
    1,199Total current liabilities
    
    
    4,061
    
    
    
    3,671Capital lease obligations, net of current portion
    
    
    132
    
    
    
    15Deferred rent, net of current portion
    
    
    69
    
    
    
    96Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000
Issued and outstanding shares   4,517,803 and
3,971,229 in 2007 and 2006, respectively
    
    
    45
    
    
    
    40Additional paid-in capital
    
    
    65,017
    
    
    
    62,896Accumulated deficit
    
    
    (55,442
    )
    
    
    (56,092
    )Total shareholders equity
    
    
    9,620
    
    
    
    6,844Total liabilities and shareholders equity
    
    $
    13,882
    
    
    $
    10,626
 See accompanying notes.
 24




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##### Table of Contents



MakeMusic, Inc.
Statements of Income  (In thousands of U.S. dollars, except share and per share data)
 YearEnded December 31,2007
    
    
    2006Notation revenue
    
    $
    10,980
    
    
    $
    10,267Smart Music revenue
    
    
    2,900
    
    
    
    2,164Other revenue
    
    
    700
    
    
    
    547NET REVENUE
    
    
    14,580
    
    
    
    12,978COST OF REVENUES
    
    
    2,228
    
    
    
    1,847GROSS PROFIT
    
    
    12,352
    
    
    
    11,131OPERATING EXPENSES:Development expenses
    
    
    4,278
    
    
    
    3,474Selling and marketing expenses
    
    
    4,045
    
    
    
    4,114General and administrative expenses
    
    
    3,504
    
    
    
    3,388Total operating expenses
    
    
    11,827
    
    
    
    10,976INCOME FROM OPERATIONS
    
    
    525
    
    
    
    155Interest income
    
    
    151
    
    
    
    94Interest expense
    
    
    (18
    )
    
    
    (1
    )Other income (expense)
    
    
    (6
    )
    
    
    16Income before income tax
    
    
    652
    
    
    
    264Income tax expense
    
    
    2
    
    
    
    9Net income
    
    $
    650
    
    
    $
    255Income per common share:Basic
    
    
    0.16
    
    
    
    0.07Diluted
    
    
    0.15
    
    
    
    0.06Weighted average common shares outstanding:Basic
    
    
    4,164,544
    
    
    
    3,916,578Diluted
    
    
    4,464,585
    
    
    
    4,551,031
 See accompanying notes.
 25




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MakeMusic, Inc.
Statement of Shareholders Equity  (In thousands of U.S. dollars, except share data)
 Additional
    
    
    
    
    
    Other
    
    ShareholdersCommon Stock
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Capital
    
    Deficit
    
    Income
    
    (Deficit)Balance at December
31, 2005
    
    
    3,856,654
    
    
    $
    39
    
    
    $
    62,459
    
    
    $
    (56,347
    )
    
    $
    14
    
    
    $
    6,165Exercise of stock
options and
warrants
    
    
    114,575
    
    
    
    1
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    239Compensation under
FAS 123(R)
    
    
    
    
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    
    
    
    
    189Issuance of stocks,
stock options and
warrants for
services
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Change in other
comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    
    
    
    
    255Balance at December
31, 2006
    
    
    3,971,229
    
    
    $
    40
    
    
    $
    62,896
    
    
    $
    (56,092
    )
    
    $
    
    
    
    
    6,844Exercise of stock
options and
warrants
    
    
    546,574
    
    
    
    5
    
    
    
    1,722
    
    
    
    
    
    
    
    
    
    
    
    1,727Compensation under
FAS 123(R)
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    399Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    
    
    
    
    650Balance at December
31, 2007
    
    
    4,517,803
    
    
    $
    45
    
    
    $
    65,017
    
    
    $
    (55,442
    )
    
    $
    
    
    
    $
    9,620
 See accompanying notes.
 26




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##### Table of Contents



MakeMusic, Inc.
Statements of Cash Flows  (In thousands of U.S. dollars)
 Year Ended
    
    Year Ended2007
    
    2006Cash flows from operating activitiesNet income
    
    $
    650
    
    
    $
    255Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    599
    
    
    
    414Loss (gain) on disposal of property and equipment
    
    
    6
    
    
    
    (11
    )Compensation under FAS 123(R)
    
    
    399
    
    
    
    199Net change in assets and liabilities:Accounts receivable
    
    
    173
    
    
    
    (660
    )Inventories
    
    
    15
    
    
    
    88Prepaid expenses and other current assets
    
    
    (9
    )
    
    
    (33
    )Accounts payable
    
    
    (80
    )
    
    
    66Accrued liabilities and product returns
    
    
    (107
    )
    
    
    546Deferred revenue
    
    
    503
    
    
    
    283Net cash provided by operating activities
    
    
    2,149
    
    
    
    1,147Cash flows from investing activitiesPurchases of property and equipment
    
    
    (214
    )
    
    
    (552
    )Proceeds from disposal of property and equipment
    
    
    1
    
    
    
    3Capitalized development and other intangibles
    
    
    (713
    )
    
    
    (650
    )Net cash used in investing activities
    
    
    (926
    )
    
    
    (1,199
    )Cash flows from financing activitiesProceeds from stock options and warrants exercised
    
    
    1,727
    
    
    
    239Payments on long-term debt and capital leases
    
    
    (39
    )
    
    
    (9
    )Net cash provided by financing activities
    
    
    1,688
    
    
    
    230Net increase in cash and cash equivalents
    
    
    2,911
    
    
    
    178Cash and cash equivalents, beginning of year
    
    
    3,130
    
    
    
    2,952Cash and cash equivalents, end of year
    
    $
    6,041
    
    
    $
    3,130Supplemental disclosure of cash flow informationInterest paid
    
    $
    18
    
    
    $
    1Income taxes paid
    
    
    2
    
    
    
    9Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    203
    
    
    
    29
 See accompanying notes.
 27




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##### Table of Contents



Notes to Financial Statements
 1. Description of Business
 ® ®
 2. Summary of Significant Accounting Policies
 Revenue Recognition
 Software Revenue
Recognition
   Accounting
for Shipping and Handling Fees and Costs
  Net Income Per Common Share
  28




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Segment Reporting
  Cash and Cash Equivalents
  Fair Value of Financial Instruments
  Accounts Receivable
   Inventories
  Property and Equipment
   Capitalized Software Products
  29




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Product development.
 Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
   Goodwill
 Goodwill and
Other Intangible Assets
 Patents and Trademarks
  Impairment of Long-Lived Assets
  30




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Income Taxes
   Accounting for the Uncertainty
in Income Taxes  an Interpretation of FASB Statement 109 (FIN 48),
   Stock-Based Compensation
  31




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
    2007
    
    2006Risk-free interest rate
    
    
    4.5
    %
    
    
    3.2
    %Expected life, in years
    
    
    3.5
    
    
    
    3.7Expected volatility
    
    
    83.23
    %
    
    
    87.43
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  32




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Advertising and Promotion
  Deferred Rent
  Use of Estimates
  3. New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities Fair Value Measurements
  33




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##### Table of Contents



3. New Accounting Pronouncements (Continued)
  4. Supplemental Balance Sheet Information
 Inventories
  December 31,2007
    
    2006(In thousands)Components
    
    $
    347
    
    
    $
    330Finished goods
    
    
    65
    
    
    
    146Reserve for obsolescence
    
    
    (80
    )
    
    
    (129
    )$
    332
    
    
    $
    347
 Property and Equipment
  December 31,2007
    
    2006(In thousands)Computer equipment and software
    
    $
    2,804
    
    
    $
    2,614Office furniture and other
    
    
    619
    
    
    
    4043,423
    
    
    
    3,018Less accumulated depreciation
    
    
    (2,693
    )
    
    
    (2,355
    )$
    730
    
    
    $
    663
   34




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Capitalized Software Products
  December 31,2007
    
    2006(In thousands)Software translation
    
    $
    125
    
    
    $
    125SmartMusic website
    
    
    461
    
    
    
    461Impact development
    
    
    511
    
    
    
    403New products not yet introduced
    
    
    12
    
    
    
    0Repertoire development
    
    
    1,813
    
    
    
    1,2092,922
    
    
    
    2,198Less accumulated depreciation and amortization
    
    
    (1,504
    )
    
    
    (1,244
    )$
    1,418
    
    
    $
    954
  (In thousands)2008
    
    $
    3512009
    
    
    2872010
    
    
    2872011
    
    
    2862012
    
    
    1612013
    
    
    46$
    1,418
 Goodwill
  Other Non-current Assets
  December 31,2007
    
    2006(In thousands)Patents and trademarks
    
    $
    20
    
    
    $
    28Prepaid royalties
    
    
    9
    
    
    
    11$
    29
    
    
    $
    39
 35




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Deferred Revenue
  December 31,2007
    
    2006(In thousands)Deferred SmartMusic subscription revenue
    
    $
    1,630
    
    
    $
    1,094Deferred notation revenue
    
    
    10
    
    
    
    37Deposits
    
    
    62
    
    
    
    68$
    1,702
    
    
    $
    1,199
 Other Accrued Liabilities
  December 31,2007
    
    2006(In thousands)Accrued royalties
    
    
    40
    
    
    
    22Other
    
    
    144
    
    
    
    232$
    184
    
    
    $
    254
 5. Shareholders Equity
 Stock Options and Warrants
  36




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##### Table of Contents



5. Shareholders Equity (Continued)
  Weighted AverageShares Reserved for
    
    
    
    
    
    
    Weighted Average
    
    
    Remaining ContractGrant
    
    
    Plan Options
    
    
    Exercise Price
    
    
    LifeOutstanding at
December 31, 2006
    
    
    208,819
    
    
    
    671,495
    
    
    $
    3.81Granted
    
    
    (266,833
    )
    
    
    266,833
    
    
    $
    6.05Expired
    
    
    
    
    
    
    (7,800
    )
    
    $
    29.87Cancelled
    
    
    113,174
    
    
    
    (113,174
    )
    
    $
    4.16Exercised
    
    
    
    
    
    
    (104,586
    )
    
    $
    3.55Outstanding at
December 31, 2007
    
    
    55,160
    
    
    
    712,768
    
    
    $
    4.34
    
    
    3.2 YearsOutstanding
exercisable at
December 31, 2007
    
    
    
    
    
    
    356,849
    
    
    $
    3.96
    
    
    2.6 Years
   Range of Exercise Prices
    
    Options Outstanding
    
    Options ExercisableWeightedRemainingContractual
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Life
    
    Exercise
    
    Number
    
    ExerciseFrom
    
    
    
    
    
    to
    
    Outstanding
    
    (in Years)
    
    Price
    
    Outstanding
    
    Price$2.27
    
    to
    
    $
    2.27
    
    
    
    265,003
    
    
    
    2.52
    
    
    $
    2.27
    
    
    
    146,584
    
    
    $
    2.27$2.28
    
    to
    
    $
    3.50
    
    
    
    71,729
    
    
    
    1.86
    
    
    $
    2.35
    
    
    
    71,729
    
    
    $
    2.35$3.51
    
    to
    
    $
    6.00
    
    
    
    275,795
    
    
    
    3.51
    
    
    $
    5.66
    
    
    
    95,795
    
    
    $
    5.39$6.01
    
    to
    
    $
    10.00
    
    
    
    68,833
    
    
    
    6.08
    
    
    $
    6.25
    
    
    
    12,833
    
    
    $
    6.10$10.01
    
    to
    
    $
    11.00
    
    
    
    31,408
    
    
    
    2.08
    
    
    $
    10.59
    
    
    
    29,908
    
    
    $
    10.61Total
    
    
    
    
    
    
    712,768
    
    
    
    3.16
    
    
    $
    4.34
    
    
    
    356,849
    
    
    $
    3.96
   
  37




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6. Commitments
 Capital Lease Obligations
  2008
    
    $
    702009
    
    
    662010
    
    
    602011
    
    
    20Total minimum lease payments
    
    
    216Less amount representing interest
    
    
    27Present value of net minimum lease payments
    
    
    189Less current portion
    
    
    57Long-term portion
    
    $
    132
 Operating Leases
  2008
    
    $
    1862009
    
    
    1912010
    
    
    1922011
    
    
    48Total
    
    $
    617
  7. 401(k) Savings Plan
  38




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##### Table of Contents



8. Income Taxes
  December 31,2007
    
    
    2006(In thousands)Deferred tax assets:Loss carry-forwards
    
    $
    7,027
    
    
    $
    7,472Research and development credits
    
    
    1,033
    
    
    
    875Inventory
    
    
    29
    
    
    
    47Depreciation and amortization
    
    
    157
    
    
    
    116Deferred revenue
    
    
    590
    
    
    
    407Software development and prepaid royalties
    
    
    85
    
    
    
    89Accrued expenses
    
    
    386
    
    
    
    390Accounts receivable
    
    
    14
    
    
    
    53AMT credit carryforward
    
    
    17
    
    
    
    0Valuation allowance for deferred tax assets
    
    
    (8,791
    )
    
    
    (9,066
    )Net deferred tax assets
    
    
    547
    
    
    
    383Deferred tax liability:Software development costs
    
    
    547
    
    
    
    383Net deferred taxes
    
    $
    
    
    
    $
    
   December 31,2007
    
    
    2006(In thousands)Income tax expense computed at the statutory rate
    
    $
    222
    
    
    $
    90State tax expense, net of calculated federal income tax effects
    
    
    13
    
    
    
    5Change in deferred tax rate
    
    
    
    
    
    
    463True up of NOL
    
    
    76
    
    
    
    28R&D Credits
    
    
    (171
    )
    
    
    (139
    )Change in Valuation Allowance
    
    
    (275
    )
    
    
    (501
    )Permanent differences
    
    
    146
    
    
    
    56Other
    
    
    (9
    )
    
    
    7Income tax expense
    
    $
    2
    
    
    $
    9
 39




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##### Table of Contents



8. Income Taxes (Continued)
 Net Operating Losses
  Research andNet Operating Loss
    
    Development Credits2008
    
    $
    
    
    
    $
    722009
    
    
    548
    
    
    
    902010
    
    
    2,128
    
    
    
    472011
    
    
    2,192
    
    
    
    432012
    
    
    1,736
    
    
    
    382018
    
    
    770
    
    
    
    462019
    
    
    1,472
    
    
    
    362020
    
    
    4,414
    
    
    
    2021
    
    
    3,037
    
    
    
    722022
    
    
    1,375
    
    
    
    1162023
    
    
    2,056
    
    
    
    722024
    
    
    
    
    
    
    912025
    
    
    
    
    
    
    682026
    
    
    
    
    
    
    712027
    
    
    
    
    
    
    171$
    19,728
    
    
    $
    1,033
  9. Litigation
  10. Segment and Geographic Data
  40




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##### Table of Contents



10. Segment and Geographic Data (Continued)
  December 31,2007
    
    
    2006(In thousands)Net sales:North America
    
    $
    11,928
    
    
    $
    10,740Europe
    
    
    1,468
    
    
    
    1,165Japan
    
    
    723
    
    
    
    606Other foreign countries
    
    
    461
    
    
    
    467$
    14,580
    
    
    $
    12,978
 11. Liquidity
   
 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
   41




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Managements Report on Internal Control Over Financial Reporting
        Changes in Internal Controls
  
 ITEM 8B. OTHER INFORMATION
  42




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##### Table of Contents



PART III
 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionJohn W. Paulson
    
    
    59
    
    
    co-Chief Executive OfficerRonald B. Raup
    
    
    57
    
    
    co-Chief Executive OfficerKaren L. VanDerBosch
    
    
    44
    
    
    Chief Financial Officer and Treasurer
 John W. Paulson
 Ronald B. Raup,
 Karen L. VanDerBosch,
  43




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##### Table of Contents



ITEM 10. EXECUTIVE COMPENSATION
  
 ITEM 11.

    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
   Number ofsecuritiesremaining availablefor future issuanceNumber of
    
    
    
    
    
    under equitysecurities to be
    
    
    
    
    
    compensation plansissued upon
    
    Weighted average
    
    (excludingexercise of
    
    exercise price of
    
    securitiesoutstanding
    
    outstanding
    
    reflected in columnoptions.
    
    options.
    
    (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    712,768
    
    
    $
    4.34
    
    
    
    55,160Totals
    
    
    712,768
    
    
    $
    4.34
    
    
    
    55,160
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  44




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated: March 7, 2008
    By:
    /s/ John W. PaulsonJohn W. Paulson, co-Chief Executive OfficerDated: March 7, 2008
    By:
    /s/ Ronald RaupRonald Raup, co-Chief Executive Officer   
 Signature and Title
    
    Date/s/ John W. Paulson

John W. Paulson, co-Chief Executive Officer and Director
    
    March 7, 2008/s/ Ronald B. Raup

Ronal B. Raup, co-Chief Executive Officer and Director
    
    March 7, 2008/s/ Karen L. VanDerBosch

Karen L. VanDerBosch, Chief Financial Officer
    
    March 7, 2008/s/ Jeffrey A. Koch

Jeffrey A. Koch, Chairman of the Board, Director
    
    March 7, 2008/s/ Graham Richmond

Graham Richmond, Director
    
    March 7, 2008/s/ Michael R. Skinner

Michael R. Skinner, Director
    
    March 7, 2008/s/ Robert Morrison

Robert Morrison, Director
    
    March 7, 2008/s/ Keith A. Fenhaus

Keith A. Fenhaus, Director
    
    March 7, 2008
 45




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##### Table of Contents



MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 2007 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 dated December 6, 20074.1
    
    
    
    Form of specimen certificate representing common stock of MakeMusic,
Inc.  filed herewith10.1*
    
    
    
    Employment Agreement dated October 19, 2000 between the Registrant
and John W. Paulson  incorporated by reference to Exhibit 10.15 to
the Registrants Form 10-KSB for the year ended December 31, 200010.2
    
    
    
    MakeMusic 2003 warrant for private placement at $3.20 issued
February 28, 2003, with list of amounts purchased by directors,
officers and principal shareholders  incorporated by reference to
exhibit 10.15 to the Registrants Form 10-KSB for the year ended
December 31, 200210.3
    
    
    
    MakeMusic 2003 warrant for private placement at $0.50 issued
February 28, 2003, with list of amounts purchased by directors,
officers and principal shareholders  incorporated by reference to
exhibit 10.16 to the Registrants Form 10-KSB for the year ended
December 31, 200210.4*
    
    
    
    MakeMusic 2003 Equity Incentive Plan, as amended  incorporated by
reference to exhibit 10.17 to the Registrants Form 10-KSB for the
year ended December 31, 200310.5*
    
    
    
    Board Compensation Plan effective January 23, 2006 incorporated by
reference to Exhibit 10.20 to the Registrants Form 10-KSB for the
year ended December 31, 200510.6*
    
    
    
    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, 200410.7*
    
    
    
    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, 200410.8*
    
    
    
    Form of Restricted Stock Agreement under the MakeMusic 2003 Equity Incentive
Plan  incorporated by reference to Exhibit 10.23 to the Registrants Form 10-KSB
for the year ended December 31, 200410.9*
    
    
    
    Separation Agreement of Alan Shuler  incorporated by reference to Exhibit 10.1
to the Registrants Form 10-QSB for the quarter ended September 30, 200610.11*
    
    
    
    Separation Agreement and Release with William R. Wolff  incorporated by reference
to the Registrants Form 8-K filed on December 19, 200610.12*
    
    
    
    Board Compensation Plan effective February 15, 2007  filed herewith10.13*
    
    
    
    Employment Agreement dated February 26, 2007 between the Registrant and Ronald B.
Raup  incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K dated
February 26, 2007
 46




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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-KSB)31.1
    
    
    
    Certification by co-Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification by co-Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.3
    
    
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification by co-Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification by co-Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.3
    
    
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Indicates a management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-KSB. 47