##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2001

Commission File No.: 0-26192Net4Music Inc.
(Name of Small Business Issuer as specified in its charter)

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

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

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

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

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X IN BALLOT BOX

Issuers revenues for its most recent fiscal
year:  $7,229,000

The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 18, 2002 was approximately $9,178,000 based upon the
closing price of the Registrants Common Stock on such date.

There were 21,675,112 shares of Common Stock outstanding as of March 18, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Annual Report to Shareholders for the fiscal year
ended December 31, 2001 are incorporated into Part II and portions of the
Registrants definitive Proxy Statement for its 2002 Annual Meeting are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one). Yes   OPEN BALLOT BOXNo  X IN BALLOT BOX





---

TABLE OF CONTENTS



|                                                                                                                        |          |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------- | -------- |  |  |  |  |  |  | 
|                                                                                                                        | PART I  
|Item 1. Business                                                                                                       
|Item 2. Description of Property                                                                                        
|Item 3. Legal Proceedings                                                                                              
|Item 4. Submission of Matters to a Vote of Security Holders                                                            
|                                                                                                                        | PART II.
|Item 5. Market for Common Equity and Related Stockholder Matters                                                       
|Item 6. Managements Discussion and Analysis or Plan of Operation                                                      
|Item 7. Financial Statements                                                                                           
|Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                           
|                                                                                                                        | Part III
|Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|Item 10. Executive Compensation                                                                                        
|Item 11. Security Ownership of Certain Beneficial Owners and Management                                                
|Item 12. Certain Relationships and Related Transactions                                                                
|Item 13. Exhibits and Reports on Form 8-K                                                                              
|Employment Agreement                                                                                                   
|Form of Warrant                                                                                                        
|Consent of Ernst & Young LLP                                                                                           



---



##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                                                 |  |         
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                 |  | Page No.
|        
|         |  | Part I                                                                                                          |  |         
|Item 1.  |  | Business                                                                                                        |  | 2       
|Item 2.  |  | Description of Properties                                                                                       |  | 13      
|Item 3.  |  | Legal Proceedings                                                                                               |  | 13      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 13      
|        
|         |  | Part II                                                                                                         |  |         
|        
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 13      
|Item 6.  |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 14      
|Item 7.  |  | Financial Statements                                                                                            |  | 17      
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure                            |  | 45      
|        
|         |  | Part III                                                                                                        |  |         
|        
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act |  | 45      
|Item 10. |  | Executive Compensation                                                                                          |  | 46      
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                                                  |  | 46      
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 46      
|Item 13. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                 |  | 46      

1



---



##### Table of Contents






PART I




ITEM 1. DESCRIPTION OF BUSINESS

Recently, we announced plans to change our corporate name from Net4Music
Inc. to MakeMusic! Inc. While we have commenced doing business as MakeMusic!
Inc., the formal legal name change is subject to shareholder approval at our
2002 annual meeting in May.

General

Net4Music Inc. (Net4Music or the Company), a Minnesota corporation, is
a global supplier of software, services and integrated solutions for musicians.
Providing music notation software, intelligent accompaniments and immediate
access to digital sheet music, the Company enhances music publishing,
education, distribution and performance for musicians around the globe.

Transaction with Net4Music S.A.

The Company, formerly known as Coda Music Technology, Inc., changed its
name in October 2000 in connection with a transaction that resulted in the
combination of the Companys business with that of Net4Music S.A., a French
company. As a result of the transaction, Net4Music S.A. is now a
majority-owned subsidiary of Net4Music Inc.

Prior to its acquisition of Net4Music S.A., the Company was itself an
established company providing a wide range of music notation software, music
practice tools, accompaniments and education software and content that enhance
the music-making experience and make learning music more fun and interactive.
The Company believes its acquisition of Net4Music S.A. helped it build upon its
established competitive position by improving and diversifying its product
offerings and improving the content offered in its software and education
products, improving its Internet technology and creating strategic
relationships with major music publishers.

The Companys goal is to provide products and services that establish new
standards in the music industry for music makers in education, distribution,
performance and music publishing. The Company provides products that enhance
the processes of composing, distributing, teaching, learning and playing music.
The Company is combining music rights and technologies to create compelling
online music making and music education products and services that will be as
useful and instructive as they are fun and entertaining. These related product
and service offerings will be marketed under the name SmartMusic®. SmartMusic
is a comprehensive interactive music practice system that listens to students
sing or play and follows their spontaneous tempo changes.

Strategy

The Companys objective is to serve the community of music makers with
appropriate and innovative technology solutions that meet their needs. We
will strive to enlarge the number of music makers through accessibility of
music and help them reach their potential. We will do this by working with
teachers and publishers in proactive collaboration. Key elements of this
strategy are:


2Table of ContentsMaintain and strengthen Finale market leadership and revenues.Finale®
music notation software is accepted worldwide as the industry standard. The
Company will seek to maintain its revenues by continuing to introduce
innovative upgrades to its products. The Company intends to grow revenues by
expanding coverage throughout the world and more aggressively pursuing the
marketing of products outside the U.S.Prove the acceptance of the SmartMusic Studio Subscription model for both
educators and the home user.The Company has recently introduced a
subscription model for educators and will introduce a similar model for the
home user. This distribution method will enable a musician to have access to
all of the Companys accompaniments available for use for an annual or monthly
subscription fee.Demonstrate the promise of new products based on current technologies.
The Company is working on additional products utilizing current technologies
that will be marketable to music educators.Obtain additional financing to bring the Company to a break-even level.
The Company has spent considerable time and effort bringing products to high
levels of technology. The Company will pursue additional financing necessary
to run the Company at a break-even level, while further increasing revenues.Seek strategic alliance opportunities.The Company will pursue alliances
which enhance its technology base. Further, the Company plans to establish
alliances with companies that can help it expand into profitable educational or
music markets.ProductsSmartMusic.The SmartMusic Studio (formerly Vivace®) technology is
currently offered in a CD-ROM format, with optional hardware accessories
available to enable the technology to work on older, slower computers.
Effective for educators in November 2001, it became available in a subscription
format where all accompaniments are available for the price of an annual
subscription. This same technology service will be available later in 2002 for
home users for the price of a monthly subscription. The prototype technology
upon which the SmartMusic Studio system is based was patented by Carnegie
Mellon University and licensed to the Company. The Company then significantly
enhanced the prototype technology with its own proprietary technology and
additional patented features, producing a marketable product.The Intelligent Accompaniment® software allows the user to start playing
at any point in a musical piece, repeat difficult-to-play segments, change
instrumentation and adjust the degree to which the accompaniment follows the
musician. In addition, the musician can control tempo, transpose the music into
any key, play with or without repeats and designate sections of the music to
cut. Intelligent Accompaniments are available for over 50,000 skill-development
exercises based on scales, intervals, arpeggios and twisters. The products also
feature warm-up exercises for vocalists, the ability to tap in tempo changes
with variations in speed, and the ability to insert breath marks and cues to
wait for a particular tone. These variables can be saved with the music,
creating a personally customized version of the accompaniment.Our Intelligent Accompaniment technology is available for 17 standard band
instruments, such as flutes, clarinets, saxophones, trumpets, trombones and
tubas. It is also available for vocal applications.3Table of ContentsAccompaniments can be purchased or accessed through a subscription
program. The current accompaniment delivery system consists of a computer
floppy disk, which typically retails for $24.95 and usually contains more than
one musical accompaniment. The digital delivery system commenced late in 2001
for educators and will be available for home users later in 2002.The Company has entered into license agreements with top music publishers.
These license agreements allow us to produce synthesized versions of musical
arrangements for use with the SmartMusic Studio system. The Company has also
received the exclusive rights from certain major publishers to all solo
classical works for voice, wind, brass, percussion, string and keyboard for the
purpose of musical accompaniment products, which respond in real time to the
musician. The Company has created over 5,000 individual classical and jazz
accompaniments contained on approximately 500 computer floppy disks or one
CD-ROM for its SmartMusic Intelligent Accompaniment product as well as
accompaniments for the Belwin 21st Century Elementary Band Methods I, II and
III. The Company made its accompaniment selection based on a review of the most
frequently performed titles in American academic solo contests as well as
popular titles of sheet music sold at retail in the United States. These
accompaniments vary in complexity from easy to challenging and cover a broad
range of musical genres for almost all band instruments and voices. The
Company intends to use its relationships with key publishers and other sources
to select the most popular titles for development as accompaniments for
SmartMusic Studio products. Further, we plan to expand our library of
accompaniments to cover a broad spectrum of music genres, instruments and skill
levels as well as international preferences for music performance. Further,
users of the Companys latest notation software (see below) can create their
own accompaniments which can be played by SmartMusic subscribers.Finale Notation Family.The Company believes it is a market leader in
music notation software with its Finale family of products for use with
Macintosh® and Windows® PC operating systems. Music notation software enables
a musician to enter musical data into a computer using either the computer
keyboard, a MIDI (Musical Instrument Digital Interface) equipped electronic
music keyboard or other MIDI- equipped instruments and contemporaneously
display the data on a computer screen as a musical score. The dramatic
improvements in speed and flexibility provided by programs like Finale software
have made such software the dominant method for composers, arrangers,
publishers and music teachers to create printed music.The Finale product is generally recognized as one of the most powerful and
comprehensive notation software products in the world. Finale music notation
software retails for $600. Finale software is differentiated from other music
notation software by its breadth and depth of features, including patented
capabilities such as its hyperscribe feature. HyperScribe® allows users to
freely play music with varying tempos via a MIDI keyboard while the software
interpolates the rhythms and accurately notates the music in real time.The Company also produces an Academic/Theological Edition of the Finale
product that is sold exclusively to schools, schoolteachers, college students
and churches at a suggested retail price of $300. This edition has also been a
key source of revenue and registered user base growth for us and it represents
a market that is continually being replenished with new student users.The product is currently translated into German, French, Spanish, Italian
and Japanese. Related manuals are currently available in German, French,
Spanish, Italian, Swedish, Dutch and Japanese. The Company believes the
international market is a key growth opportunity as computer penetration
increases worldwide. International revenues, primarily from the sale of Finale
products, represented 22.8% and 21.5% of the Companys sales in 2001 and 2000,
respectively.4Table of ContentsFinale Allegro® product, a value version of the powerful Finale music
notation software product, was introduced in 1993. The Finale Allegro music
notation software product retails for $199 and contains a subset of the
notation tools contained in the Finale product. With extensive MIDI
capabilities, Allegro is targeted to an audience that may not read music but
needs to create lead sheets for other musicians, and is therefore known as,
The MIDI Users choice for music notation. This product is regularly updated
to remain capable of exchanging files with the latest versions of Finale and
Finale PrintMusic!®.We introduced the Finale PrintMusic! product for Windows in April 1999, an
entry-level powerful music notation software product. The PrintMusic! music
notation software product retails for $69.95 and contains a subset of the
notation tools contained in the Finale and Finale Allegro products. The
PrintMusic! product allows us to offer an entry-level product to the retail
customer, thereby expanding the base of registered users and increasing the
potential for sales of notation software upgrades. The product, which is also
kept current to exchange files with Finale and Allegro, is currently sold as a
platform hybrid for Macintosh and Windows and is targeted to a broader audience
in the education and general consumer marketplace.In November 2000 the Company introduced Finale® NotePad, a downloadable
freeware introduction to the Finale notation family. To date, over 280,000
NotePad files have been downloaded to registered users.Intonation Trainer.The Company introduced Intonation Trainer in
February 2000 at a retail price of $149.95. Intonation Trainer is an easy yet
powerful program that actually teaches woodwind and brass students how to play
in tune by listening for and eliminating intonation beats within intervals and
chords.www.net4music.com.The site offers customers digital sheet music.www.codamusic.com.The Coda Music website promotes products and e-commerce with mail-order
fulfillment for upgrades and SmartMusic accessories and also downloads of
Finale NotePad.www.smartmusic.com.Launched December 2001 to distribute our new SmartMusic subscription
product.Digital Copyright Protection System.This system is a proprietary
technology developed to create a Digital Right Management (DRM) system
capable of enhancing copyright protection. With respect to the DRM, the
Company has two pending patent applications with the INPI and the U.S. Patent
and Trademark Office relating to the System and process for the digital
musical files publishing and the Process for the remote publishing of musical
scores.Large database of digitized sheet music.The Companys database of
digitized sheet music includes music from all genres. The music industry
knowledge of the Companys team ensures the quality of both the sheet music and
the selection of titles.Technology Infrastructure.The Company utilizes both Compaq and SUN
industry standard servers running Microsoft Windows and Solaris operating
systems. Websites are run on Microsoft IIS and Apache server. A combination of
Microsoft SQL and Oracle are used for database applications. All of the server
technologies used are scalable and allow for future upgrades.5Table of ContentsSecure Website.The Net4Music®® and SmartMusic websites are hosted by
UUNet, one of the global market leaders of web-hosting and connectivity, which
puts the Company directly on the largest Internet Backbone and provides total
bandwidth scalability. The Company system administrators use an external
real-time supervision system that sends SMS messages in the event of any
failure of the Companys front office systems. All disks use fault tolerant
RAID 5 technology and daily back-ups are operated with tape and CD-ROMs kept in
multiple locations. The Coda website is hosted internally, backups are
completed nightly and stored offsite.Marketing, Sales and DistributionSmartMusic Studio subscription products are currently being sold on our
www.smartmusic.com website. In addition, the SmartMusic Studio products are sold through domestic
and international distributors. Distributors service the music instrument
retailers, college bookstore and educational software markets. The Company is
also selling SmartMusic Studio products directly through its customer service
department and the Coda Music web site. Finale products are sold through
distributors, music instrument retailers, mail order software retailers and
computer dealers. And, Finale upgrades are available on our Coda Music
website.The Company believes it can significantly build on its Finale, Finale
Allegro and PrintMusic! software business by continuously expanding the
installed base of users, regularly providing them with upgrades, broadening
retail distribution, producing additional international versions of the
products and establishing the products as a means for electronic transmission
of music. Finale upgrades were introduced on both the Windows platform and
Macintosh platform in each of the last seven years.Digital sheet music products are marketed on our Net4Music website and
through distributor partners.A key marketing strategy of the Company is to deploy SmartMusic at key
partner sites that already have customers frequenting their sites. SmartMusic
creates the opportunity to strengthen their music makers community while
sharing in the revenues from SmartMusic sheet music sales and the recurring
SmartMusic Studio subscription fees. Offering SmartMusic is extremely easy for
a partner site since the Company projects SmartMusic on to their site from its
own servers and handles all transactions including back office functions.The Company currently sells its products in over 125 countries around the
world. The products are distributed over our three Internet sites (www.net4music.com.,
www.smartmusic.com and www.codamusic.com.) and by leading music software distributors in each of
the international markets that are responsible for sales, marketing and
technical support.Product DevelopmentThe Company intends to continue to expand its current product offerings by
developing products for new applications and markets.Website.Website development expense consists primarily of expenses
required for design and development of the Net4Music and SmartMusic websites
and underlying technology infrastructure. These expenses mainly include
payments to third-party service vendors and personnel costs.6Table of ContentsContent.Content development consists primarily of payroll and payments
to a third party for the engraving of digital sheet music. In 2000, the
payroll and payments to third parties for the development of repertoire for
SmartMusic accompaniments were added to content development.In general, the Company plans to continue developing the SmartMusic
Subscription model for distribution on its Internet and other Internet web
sites. We will also continue adding to the existing SmartMusic accompaniment
and sheet music catalogs, creating additional digital sheet music and
accompaniments. In 2001, sheet music development has transitioned to a variable
component and outside contractors are being utilized on an as-needed basis.
SmartMusic Accompaniment development has limited risk and short development
cycles that typically range from one to four months. We have created
procedures to synthesize classical music and mark music sequences.
Additionally, the Company has automated some of the process and developed a
technical specification that is used to standardize both quality and process.
Unlike a game manufacturer, which must continually invent new games, we need
only look to the most popular titles in the large and growing supply of musical
compositions to develop additional SmartMusic Accompaniments.Finale.Product development costs, or its related sales, are not included
in the Companys financial results prior to the reverse acquisition transaction
on October 19, 2000. However, prior to that date, Coda maintained its
competitive position in the music notation marketplace in part by focusing its
improvement efforts over the past eight years on developing upgrades of the
Finale product on a regular basis for the Macintosh and Windows platforms. The
Company expects to make annual releases of such upgrades. After an
announcement of an upgrade release, but prior to the actual release, purchasers
of a Finale product are offered this upgrade at no charge for a limited period
of time. Other Finale users are required to purchase the upgrade product at
prices ranging from $79.95 to $149.95.In 2002, we are continuing to invest in product development to improve the
feature set of Finale.Finale Allegro and PrintMusic!In 2001, the Company released new versions
of Finale Allegro and Finale PrintMusic!, both of which are based on Finale.Finale NotePad.The Company also has a free, downloadable introductory
version of the Finale family of notation products.Intonation Trainer.In early 2000, the Company released Intonation
Trainer, a product designed to help school band directors teach their students
to play better in tune. We intend to continue developing music education
products with our proprietary music technologies.CompetitionThe Company knows of no other musical accompaniment product for band
instruments and vocalists that responds to the musician with the exception of
In Concert by Cakewalk, which is an interactive product for MIDI keyboards.
The Company expects that SmartMusic products will also compete with
conventional music accompaniment products by Music Minus One by MMO Music
Group, Inc. and MTS 120 by Roland Corporation. These products offer students
the ability to play along with prerecorded songs. They differ from the
SmartMusic Studio product in that they do not automatically adjust in real time
to the musicians changes in tempo. The Company believes its SmartMusic system
is unique because this product listens to wind instruments and voice. In
addition, the Company sells accompaniments, while competitors sell only the
applications. However, there can be no assurance that competitors will not
enter the market.7Table of ContentsThe notation market is highly competitive and continues to have
competitors such as Cakewalk, NoteHeads Musical Expert Systems and Sibelius
Software LTD.Principal competitive factors in marketing The Companys SmartMusic and
Finale products include product features, quality, brand recognition, ease of
use, merchandising, access to distribution channels, retail shelf space and
price. We believe we compete effectively in these areas.The Company currently competes with a few other specialized online sheet
music publication companies.
Sheet Music Direct has developed an Internet-based, purchase-on-demand delivery
system for digital sheet music with a strong emphasis on popular music. This
website is affiliated with sheet music distributors Hal Leonard Publishing
Corporation and Music Sales Corporation. Music Notes is a digital sheet music
store and sheet music mail order company based in Wisconsin. Digital rights
include Warner Bros. Publications and Mel Bay Publications. Today,
approximately 100 websites offer sheet music in hard copy sold by mail order.
They range in titles offered from less than 20,000 to over 200,000.PatentsThe Company has licensed, on a worldwide basis for the life of the patent,
from Carnegie Mellon University (CMU) the use of the U.S. patent that covers
the automated accompaniment that listens to and follows tempo changes from a
live performance. The Company has further developed this technology and
patented additional features. The Company has obtained five patents, in
addition to the CMU patent, that protect improvements to the user control of
the software and that contain certain aspects of the repertoire file which
enhance the following capabilities of the software: enhancements to the
algorithms, accompaniment controls and repertoire data files and miscellaneous
interface features of the product. As a result of the additional patented
features developed by the Company and the ability of the Company to develop an
extensive library of repertoire over the next several years, the Company does
not believe that it will be materially adversely affected by the expiration of
the CMU patent in 2005.The Companys Finale product is covered by three separate patents, which
protect the data structure, the ability to enter music into the product by
tapping tempo with a pedal device or computer keyboard, and the method of
automatically assigning guitar fingerboards to a notated chord. These patents
are licensed from Wenger Corporation on a royalty-free, exclusive, worldwide
basis for the life of the patents.The Company has also filed in France with worldwide extension applications
for two patents directly linked with its Internet distribution activities. The
first patent application is for a process that provides for the instantaneous
availability of musical scores in all locations, with the possibility of
personalizing the published score while the second patent application concerns
an interactive system based on a network which permits three categories of
people (arrangers, authors and music players) to collaborate and to create
together a musical work.8Table of ContentsTrademarksThe Company owns the registered trademarks in the United States for
Net4Music®, Coda®, Finale®, Finale® Allegro®, Finale® PrintMusic!®,
HyberScribe®, Perceive®, Practice Studio®, SmartMusic®, SmartMusic
Accompaniments®, SmartMusic Studio®,The Art of Music Notation®, Vivace®,
Intelligent Accompaniment®, Intelligent Accompanist® and Personal Accompanist®.
In addition, the names Net4Music and Finale have been protected in some
foreign countries. The Company has applied for trademark registration in the
U.S. for the name Finale® MusicViewer, Finale® NotePad, Intonation Trainer,
MakeMusic!, MicNotator, QuickScribe, SmartMusic Studio Online. In
addition, this report contains references to trademarks owned by third parties.ManufacturingPrinting of user manuals and packaging and the manufacture of related
materials are performed to our specifications by outside subcontractors.
Currently, BBI Computer Systems, Inc. (BBI) provides key-disk protection for
accompaniment products. While BBI is not the only seller of copy disk
protection, the Company has a significant investment in incorporating their
protection mechanism into the accompaniment product inventory. No other
products are vendor specific. The Company currently uses Advanced Duplication
Services, Inc. to perform standard copying and assembling services, including
copying the accompaniment floppy disks and other product software CD-ROM disks,
and assembling the product manuals, disks and other product literature into
packages.EmployeesAs of December 31, 2001, the Company employed 79 full-time employees. Of
these, 20 resided in Europe and 59 in the United States. Those based in Europe
and the U.S. included the following positions: 7 in management positions, 12 in
website development, 12 in product development area, 15 in product testing and
end-user support, 16 in sales and marketing, and 17 in general and
administrative. The Company believes that its relations with its employees are
good. None of our employees are covered by a collective bargaining agreement.
In addition, the Company relies on independent contractors to develop its
repertoire and sheet music. We have had no difficulty contracting with these
individuals and believe that our relationships are good. Should the Company
have difficulty securing the services of such persons in the future, it could
adversely affect operations.Legal ProceedingsThe Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
financial condition or results of operations.Cautionary StatementsThe Private Securities Litigation Reform Act of 1995 (the Reform Act)
provides a safe harbor for forward-looking statements made by us or on our
behalf. We have made, and may continue to make, various written or verbal
forward-looking statements with respect to business and financial matters,
including statements contained in this document, other filings with the
Securities and Exchange Commission, and reports to stockholders.
Forward-looking statements provide current expectations or forecasts of future
events and can be identified by the use of terminology such as believe,
estimate, expect, intend, may, could, will, and similar words or
expressions.9Table of ContentsThe Companys forward-looking statements generally relate to its growth
strategy, financial results, product development and sales efforts.
Forward-looking statements cannot be guaranteed and actual results may vary
materially due to the uncertainties and risks, known and unknown, associated
with such statements. The Company undertakes no obligations to update any
forward-looking statements. The Company wishes to caution investors that the
following important factors, among others, in some cases have affected and in
the future could affect the Companys actual results of operations and cause
such results to differ materially from those anticipated in forward-looking
statements made in this document and elsewhere by or on behalf of the Company.
It is not possible to foresee or identify all factors that could cause actual
results to differ from expected or historic results. As such, investors should
not consider any list of such factors to be an exhaustive statement of all
risks, uncertainties or potentially inaccurate assumptions.We may need additional capital.The Company believes that it has capital,
or access to capital, sufficient to meet its needs through the first quarter of
2003. Additional capital may be needed sooner if there is a significant change
in our business plan or operating results. There is no assurance that
additional capital will be available on terms favorable to us or at all.We are dependent upon our new product development efforts.Additional
development work is required to increase the breadth of our Internet business
and our repertoire for SmartMusic Studio products. There can be no assurance
that our timetable for any of our development plans will be achieved, that
sufficient development resources will be available or that development efforts
will be successful.We are dependent upon our Internet business and accompaniment sales.We
believe our ability to increase our revenues is substantially related to our
ability to increase ongoing accompaniment sales through the Internet. As a
result, our success depends on continued growth in Internet use. A number of
uncertainties related to the Internet exist. If the Internet develops more
slowly than projected or we experience problems developing and maintaining our
Internet operations, our sales, operating results and financial condition could
be adversely affected.We are dependent upon obtaining and maintaining license agreements with
music publishers, of which there is a limited number.The world market for
sheet music is highly concentrated among a limited number of publishers. The
Company has entered into license agreements with leading music publishers that
provide access to certain musical titles for digital sheet music sales and
accompaniment development. Our contracts with several major publishers are not
all exclusive, which means that similar agreements may be made with competitors
or that the publishers themselves may sell the same titles. While we believe
that our relationships with these publishers are good, there can be no
assurance that we will be able to maintain or expand these relationships. The
lack of a sufficient number and variety of musical arrangements would greatly
limit the ability to market our products and services.Certain of our products have limited and fluctuating sales.Sale of our
Internet and SmartMusic Studio products have not achieved, and may not achieve,
significant levels. The Company has experienced limited sales in sheet music
and restructured this business in 2001. Further, Internet sales have
fluctuated, as have sales of Finale products, which are historically higher
following the release of product upgrades. We believe that results of
operations may fluctuate as a result of, among other things, the purchasing
cycle of the education market and the timing of releases of new products and
product upgrades. Certain states have had education funding cuts, which could
potentially negatively impact sales of academic products to the education
market.10Table of ContentsWe have incurred operating losses in the past and expect such losses to
continue.The Company has incurred operating losses since inception, and will
continue to incur such losses in the future, such losses will include non-cash
expenses due to the amortization of other intangible assets to be recorded as a
result of the transaction with Net4Music S.A. In order to continue to develop
our business and planned product and service offerings, we will be required to
devote additional amounts of capital to our development and marketing efforts,
among other things. There can be no assurance that we will ever operate
profitably or provide an economic return to the investors.We face intense competition.While competition for the SmartMusic Studio
products is limited, there can be no assurance that others, such as large
electronic and musical instrument manufacturers, will not enter this market.
Competition for the Companys notation products could potentially impact future
sales levels. Competition in the digital sheet music distribution is strong
and may increase, particularly if the few major traditional music distributors
and publishers decide to become Internet providers of digital sheet music.
Some of the companies with which we compete, and may compete in the future,
have significantly greater financial and other resources than our resources.
Our ability to continue to compete effectively will be substantially dependent
upon our ability to continue to improve our product offerings and Internet
resources. If such improvements and development efforts do not materialize as
intended, we may lose our ability to differentiate our products from those of
our competitors. In addition, increasing competition in the music software
market could cause prices to fall and the volume of transactions to decline,
either of which could adversely affect our business, operating results and
financial condition.Rapid technological changes and obsolescence may adversely affect our
business.We operate in an industry greatly affected by technological changes.
While we are not currently aware of any significant technological changes that
may affect our current technology base, continued advancements in computer
software, hardware and network designs and formats may impact our ability to
effectively maintain our Internet-based sales efforts in a workable and
user-friendly format. For example, many of the PDFs (portable document files)
in our database may not be usable without modification if an incompatible
international format is adopted. Further, we could face market share losses
depending on the growth of the use of alternative technologies that transcribe
MIDI files into sheet music. Finally, the proprietary technology we license
for use in securing transactions (secure music distribution engine) with end
users will be effective for only a limited period by reason of technological
change. The Company must, therefore, devote new resources to improve or modify
this security system, which is a critical aspect of our ability to establish
and maintain relationships with music publishers. While we currently believe
that we have sufficient resources to address technological changes that may
affect our business, there can be no assurance that any such technological
changes will not prove too much for us to overcome in a cost-effective manner.Additional government regulation of the Internet may impair our ability to
fully develop and utilize the Internet as a marketing and distribution medium.
Today, there are relatively few enacted laws specifically directed toward
online services, and the applicability and scope of such laws is still
uncertain as court interpretations are few. Currently, we do not believe their
impact materially affects the nature of our Internet operations. Applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. In addition, because our services are
accessible worldwide, foreign jurisdictions may claim that we are required to
comply with their laws. Laws regulating Internet companies outside of the U.S.
may be less favorable then those in the U.S.11Table of ContentsCompliance with foreign laws may require us to change our business
practices or restrict our service offerings to an extent that may harm our
financial results. Further, changes to existing laws or the passage of new
laws affecting the Internet could directly affect the way we do business,
create uncertainty on the Internet, reduce demand for our services, increase
the cost of doing business, or otherwise harm our business. Our failure to
comply with domestic or foreign laws could also subject us to penalties ranging
from fines to bans on our ability to offer our services.We are dependent upon certain key personnel.The Company is highly
dependent on a limited number of key management, including Sean Lafleur and
John Paulson, and key technical personnel. The loss of key personnel, or
inability to hire and retain qualified personnel, could have an adverse effect
on our business, financial condition and results of operations.We are dependent upon proprietary technology and cannot assure protection
of such technology.There can be no assurance that our proprietary technology
will provide us with significant competitive advantages, that other companies
will not develop substantially equivalent technology or that we will be able to
protect our technologies. The Company could incur substantial costs in seeking
enforcement of its patents or in defending itself against patent infringement
claims by others. Further, there can be no assurance that we will be able to
obtain or maintain patent protection in the markets in which we intend to offer
products.International development plans are subject to numerous risks.There can
be no guarantee that our international expansion efforts will be successful or
that we will be able to offset the cost of the resources allocated to such
efforts. Moreover, the Company could be faced with the risks inherent in any
international development, such as unpredictable changes in export
restrictions, barriers and customs rates; currency risks; the difficulty of
managing foreign operations; the differences in technological standards,
payment terms and labor laws and practices among countries; collection
problems; political instabilities; seasonal reductions in business, and
unforeseen taxes. Such risk factors could harm our international operations
and, therefore, our business, operating results and financial condition.The market price of our stock may experience volatility.We cannot
speculate as to the future market price of our Common Stock. Our Common Stock
has experienced, and may continue to experience, substantial price volatility
due to a number of factors, including fluctuations in operating results;
changes in recommendations by stock market analysts regarding us or our
competitors; developments in the industry; and general market conditions that
may be unrelated to our performance.Potential market delisting.Shares of the Companys common stock are
currently listed on the Nasdaq SmallCap Market. In order for shares of the
Companys common stock to remain listed for trading on the SmallCap Market,
Nasdaq requires that we meet certain criteria, including maintenance of a
minimum $1.00 per share bid price. Failure to maintain a minimum $1.00 per
share bid price for more than 30 consecutive business days could result in
Nasdaq delisting shares of our common stock unless such listing deficiency is
corrected.The Nasdaq recently adopted new rules that extend the grace period for
companies listed on the SmallCap Market to regain compliance with the $1.00
per share minimum bid price requirement. Effective February 14, 2002, the
Nasdaq has extended its grace period from 90 days to 180 days. If necessary,
upon the expiration of this 180-day grace period, companies with securities
listed on the SmallCap Market will be granted an additional 180-day period to
regain compliance with the $1.00 per share minimum bid price standard if such
companies satisfy the requirements for initial listing on the SmallCap Market
at the expiration of the initial 180-day period.12Table of ContentsOn February 14, 2002, the Company received notification from the Nasdaq
that it has until August 13, 2002 (180 days from February 14, 2002) to regain
compliance with the $1.00 per share minimum bid price. Currently, the Company
meets the requirements for receiving an additional 180-day period to regain
compliance with such listing standard, although there is no assurance that we
will meet such requirements on August 13, 2002. If shares of the Companys
common stock are ineligible for quotation on the Nasdaq SmallCap Market, you
may find it more difficult to resell shares of our common stock. Management
cannot assure you that the Company will be successful in regaining compliance
with the $1.00 per share bid price requirement in the future.
ITEM 2. DESCRIPTION OF PROPERTYThe Paris location leases approximately 3,000 square feet of office space
at 24, Rue du Président Wilson, 92300 Levallois-Perret, France, for current
annual net rent of approximately $56,000. This lease expires in June 2005.
The New York location leases approximately 2,500 square feet of office space at
130 William Street, Suite 503, New York, NY 10038, for current annual net rent
of approximately $62,000. This lease expires in October 2004. New York
operations ceased in 2001 and the Company has been attempting to sublease the
location. The Minnesota location leases approximately 12,150 square feet of
office and warehouse space at 6210 Bury Drive, Eden Prairie, Minnesota 55346,
for current annual net rent of approximately $120,000. This lease expires in
May 2003.
ITEM 3. LEGAL PROCEEDINGSManagement is not aware of any pending or threatened litigation that would
have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS(a)  A special meeting of the Companys shareholders was held on Wednesday,
December 19, 2001.(b)  At the special meeting the shareholders approved the sale of up to
2,341,592 shares of Common Stock of the Company by a vote of
10,483,920 shares in favor, with 165,731 shares against, 7,625 shares
abstaining and no shares representing broker non-votes.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThere were no sales of unregistered securities during the quarter ended December 31, 2001.13Table of ContentsThe Companys Common Stock traded on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol COMT until October 19, 2000. As of
October 19, 2000, it trades under the symbol NMUS.

|       |  |                |  |   |      |      |  |   |      |  |  |      |      |  |     |   |      |  |  | 
|------ |  | -------------- |  | - | ---- | ---- |  | - | ---- |  |  | ---- | ---- |  | --- | - | ---- |  |  | 
|       |  |                |  |   |      | 2001 |  |   | 2000 | 
|       |  |                |  |   |      |      |  |   |      | 
|       |  |                |  |   |      | High |  |   | Low  |  |  | High |      |  | Low |  
|       |  |                |  |   |      |      |  |   |      |  |  |      |      |  |     |  
|       |  | First Quarter  |  | $ | 3.25 |      |  | $ | 1.06 |  |  | $    | 5.41 |  |     | $ | 2.50 | 
|Common |  | Second Quarter |  |   | 1.49 |      |  |   | 0.91 |  |  |      | 4.25 |  |     |   | 3.38 | 
|Stock  |  | Third Quarter  |  |   | 1.10 |      |  |   | 0.40 |  |  |      | 4.17 |  |     |   | 3.50 | 
|       |  | Fourth Quarter |  |   | 0.55 |      |  |   | 0.32 |  |  |      | 3.50 |  |     |   | 2.25 | 

As of December 31, 2001, there were approximately 200 shareholders of
record of the Companys Common Stock. In addition, the Company estimates that
an additional 1,500 shareholders own stock held for their accounts at brokerage
firms and financial institutions. The Company has never paid cash dividends on
any of its securities. The Company currently intends to retain any earnings
for use in its operations and does not anticipate paying cash dividends in the
foreseeable future.




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

Net4Music Inc., doing business as MakeMusic! Inc., is a global supplier of
software, services and integrated solutions for musicians. Providing music
notation software, intelligent accompaniments and immediate access to digital
sheet music, the Company enhances music publishing, education, distribution and
performance for musicians across the globe.

On October 19, 2000, Coda Music Technology, Inc. changed its name to
Net4Music Inc. in connection with its acquisition of Net4Music S.A. The
Net4Music S.A. and Coda business combination was deemed to be a reverse
acquisition of Coda by Net4Music S.A. Codas results are only included in the
Companys financial statements from the acquisition date (See Notes 2 and 3 to
the Financial Statements.)

The Companys critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Note 2 to the Consolidated
Financial Statements. These policies have been consistently applied in all
material respects and address such matters as revenue recognition, depreciation
and amortization methods, asset impairment recognition, deferred tax valuation
allowance, and business combination accounting. While the estimates and
judgments associated with the application of these policies may be affected by
different assumptions or conditions, the Company believes the estimates and
judgments associated with the reported amounts are appropriate in the
circumstances.

Results of Operations

In order to provide the reader with more meaningful analysis the following
discussion includes comparisons of December 31, 2001 results to the December
31, 2000 proforma results (Please refer to the December 31, 2000 proforma
results in Note 14 to the Financial Statements).

For the year ended December 31, 2001 compared to the year ended December 31, 2000

Net Revenue.Net revenues for the year ended December 31, 2001 were $7,229,000
as compared to $1,454,000 for the year ended December 31, 2000. Net revenue
for 2001 consists of software sales of $7,135,000 and the remainder consists
primarily of sheet music sales through the Companys website. As a result of
the reverse acquisition completed on October 19, 2000, revenues for the Coda
operations,

14



---



##### Table of Contents



previously called Coda Music Technology, Inc., were included in the 2000
results only after October 19, 2000. If the Coda operation revenues had been
included in the 2000 results, revenues on a pro forma basis for the year 2000
would have been $7,294,000.

Net revenues were $7,229,000 for the year ended December 31, 2001, a
$65,000 or 0.9% decrease from pro forma revenues results for the year ended
December 31, 2000. Net revenues remained fairly flat throughout 2001 despite a
one-month delay in the release of Finale 2002 and a slowed economy exasperated
by the September 11 terrorist attack. Fourth quarter revenues were $2,202,000,
$581,000 or 36%, higher than pro forma fourth quarter 2000 sales. This
increase offsets the revenue shortfall during the year.

Until early 2000, before the reverse acquisition the Company generated
most of its revenue from the rental of interactive kiosks and the sale of
prepaid cards to purchase sheet music. In 1999, Management decided to stop this
activity and the last card for use at the kiosks was sold in the 4th quarter of
2000.

Currently, the Company is developing its software and Internet businesses.
The Company started to generate revenues from Internet operations in 2000.
Website revenue includes the sale of digital sheet music and MIDI files through
the Company website, the sale of music books through the Partitor website and
the sale of software through the Coda Music website. The Company recognizes
product sales and shipping revenues when the product is shipped. The Company
is currently focusing on growing its Internet operations and anticipates a
growing trend for its online product sales.

Gross Profit (Loss).Gross profit was $5,732,000 for the year ended
December 31, 2001 as compared to gross profit of $1,125,000 for the year ended
December 31, 2000. This reflects the Companys addition of Coda software sales
after the date of the reverse acquisition as described above and increased
Internet emphasis. Cost of sales for software sales include product costs,
royalties paid to publishers and amortization of capitalized repertoire
development cost.

Website Development.Website development expenses were $600,000 for the
year ended December 31, 2001 as compared to actual and proforma website
development expenses of $1,106,000 for the year ended December 31, 2000. Prior
year expenses reflect initial website development of the Net4Music sheet music
website, which has slowed since the website has been in operation. Website
development expenses consist primarily of expenses required to improve the
design and develop additional features for the Net4Music and SmartMusic
websites and other underlying technology infrastructure. During the first nine
months of 2001, the Company announced two restructures of its operations, which
resulted in a significant reduction of expenses in website development and a
shift of personnel in the European operation into the SmartMusic Internet
operation. The SmartMusic operation is currently being capitalized.

Content and Product Development.Content and product development expenses
totaled $2,373,000 for the year ended December 31, 2001 as compared to content
and product development expenses of $1,226,000 for the year ended December 31,
2000. Development costs increased due to the personnel costs for software
development and SmartMusic repertoire development at Coda incurred after the
completion of the reverse acquisition on October 19, 2000 (See Note 4 of the
financial statements). Content & product development expenses on a pro forma
basis for the year ended December 31, 2000 were $2,323,000. Content
development expenses also include personnel costs and payments to a third party
for the engraving of digital sheet music, which increased in level from 2000 to
2001, however expenditure levels were reduced for engraving of digital sheet
music as a result of the second


15Table of Contentsrestructuring and were at much lower levels at the end of 2001.Selling and Marketing Expenses.Selling and marketing expenses were
$4,555,000 for the year ended December 31, 2001 as compared to selling and
marketing expenses of $6,165,000 for the year ended December 31, 2000. Selling
and marketing expenses on a pro forma basis for the year ended December 31,
2000 were $7,865,000. The significant decrease in selling and marketing
expenses relates to the reduced workforce due to the restructuring efforts
announced in March 2001 and August 2001 and reduced advertising expenditures.
The remainder of the decrease reflects the Companys strong commitment to
expense reductions primarily relating to the promotion of digital sheet music
activities. Total selling and marketing expenses primarily consist of
marketing, advertising and promotion expenses, business development and
customer service activities and payroll.General and Administrative Expenses.General and administrative expenses
were $8,319,000 for the year ended December 31, 2001 as compared to general and
administrative expenses of $4,692,000 for the year ended December 31, 2000. The
increase in expense is the result of the reverse acquisition effective October
19, 2000 and the costs of being a global public company (See Note 3 of the
financial statements). General and administrative expenses consist primarily
of payroll and related expenses for executive and administrative personnel,
professional services expenses relating to financing activities, other general
corporate expenses and goodwill amortization. Amortization of goodwill for
2001 is $2,042,000 as compared to $464,000 for 2000. Amortization of goodwill
in 2001 reflects the full year amortization as opposed to two and a half month
of amortization in 2000. General and administrative expenses on a pro forma
basis for the year ended December 31, 2000 were $8,969,000. The $650,000
decrease in general and administrative expenses in 2001 as compared to proforma
2000 relates to overhead reductions as a result of the restructurings which
occurred in 2001 and $426,000 of acquisition costs included in 2000.Interest Income and Expense.Net interest income was $125,000 for the
year ended December 31, 2001 in comparison to a net interest income of $289,000
for the year ended December 31, 2000. The decrease relates to reduction in
interest income earned due to lower investment levels of available cash and
cash equivalents.Foreign Exchange Loss.The Company did not recognize a foreign exchange
loss in 2001 and incurred $55,000 in 2000 due to its international operations.Income Tax.Due to operating losses the Company recorded $4,000 and
$1,000 minimum state tax for the years ended December 31, 2001 and 2000,
respectively.Liquidity and capital resources.Net cash used in operating activities
totaled $6,372,000 and $9,981,000 for the years ended December 31, 2001 and
2000 respectively. Net cash used in operating activities for both periods
consisted primarily of net losses of $5,800,000 and $10,422,000 for the years
ended December 2001 and 2000, respectively, net of depreciation, amortization,
cash items in the restructuring charge and the impairment of intangibles. Cash
utilized by net losses was reduced by the reduction to accounts payable and
accrued liabilities as result of the closing of New York facility, reduction of
European operations and the receipt of a $1,000,000 VAT receivable refund from
the French government.Net cash used by investing activities was $15,000 for the year ended
December 31, 2001. Net cash used in investing activities for this period
consisted of purchases of property and equipment, capitalized development
costs, intangibles, and other assets ($932,000), offset by $917,000 in16Table of Contentsredemptions of short-term investments. Net cash used in investing
activities for the year ended December 31, 2000 was $1,354,000, virtually all
of which related to purchases of property and equipment and intangibles.Cash provided by financing activities during the year ended December 31,
2001 totaled $751,000 as compared to $16,477,000 for the year ended December
31, 2000. The Company successfully raised $1.5 million by issuing shares of
stock in the 3rd quarter of 2001, while in 2000, the funds raised through
private sales of securities by Net4Music S.A totaled $16,855,000. Funds raised
were offset by payments on long-term debt and capital leases in both 2001 and
2000.The Company has significantly reduced future monthly cash outflows as of
the end of 2001. Management anticipates additional capital expenditures in
connection with its expected growth in operations and infrastructure. The
Company will also need to continue to spend significant amounts for sales and
marketing, advertising and promoting its brands, content development and
technology and infrastructure development. Management has taken steps to
manage expenses and believes that existing cash, together with cash flows
generated by product sales and the private placement, will be sufficient to
fund operations through the end of 1st quarter of 2003. Management expects to
seek additional equity financing or further reduce expenses to provide cash
resources beyond that date.As of December 31, 2001, the Company had cash and short-term investments
of $3,258,000 and a VAT receivable of $172,000.New Accounting Pronouncements.Refer to Note 3 in the audited financial
statements.
ITEM 7. FINANCIAL STATEMENTS17Table of ContentsReport of Independent AuditorsThe Board of Directors and Shareholders

Net4Music Inc.We have audited the accompanying consolidated balance sheets of Net4Music
Inc. and subsidiaries, as of December 31, 2001 and 2000 and the related
consolidated statements of operations, shareholders equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Net4Music Inc.
and subsidiaries as of December 31, 2001 and 2000 and the consolidated results
of their operations and their cash flows for the years ended, in conformity
with accounting principles generally accepted in the United States./s/ Ernst & Young LLPMinneapolis, Minnesota



March 1, 200218Table of ContentsNet4Music Inc.
Consolidated Balance Sheets(In thousands of U.S. dollars, except per share data)

|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |   |        |       |         |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | ------ | ----------- | ------- | - | ------ | ----- | ------- | -
|                                                                                                |                                                                                                        |                                                                                                                         |        | December 31 |        
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |        
|                                                                                                |                                                                                                        |                                                                                                                         |        | 2001        |         |   | 2000   |      
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|Assets                                                                                          |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|Current assets:                                                                                 |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|                                                                                                | Cash and cash equivalents                                                                              |                                                                                                                         | $      | 3,258       |         |   | $      | 9,090 |        
|                                                                                                | Short-term investments                                                                                 |                                                                                                                         |        |            |         |   |        | 917   |        
|                                                                                                | Accounts receivable (net of allowance of $151
and $118 as of December 31, 2001 and 2000,
respectively) |                                                                                                                         |        | 640         |         |   |        | 580   |        
|                                                                                                | Inventories                                                                                            |                                                                                                                         |        | 391         |         |   |        | 312   |        
|                                                                                                | Prepaid expenses                                                                                       |                                                                                                                         |        | 294         |         |   |        | 452   |        
|                                                                                                | Other current assets                                                                                   |                                                                                                                         |        | 219         |         |   |        | 965   |        
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|Total current assets                                                                            |                                                                                                        |                                                                                                                         | 4,802  |             |         |   | 12,316 |      
|                                                                                               
|Property and equipment, net                                                                     |                                                                                                        |                                                                                                                         | 1,099  |             |         |   | 1,710  |      
|Goodwill, net of amortization of $2,360 and $250
as of December 31, 2001 and 2000, respectively |                                                                                                        |                                                                                                                         | 17,330 |             |         |   | 19,428 |      
|Intangible assets, net                                                                          |                                                                                                        |                                                                                                                         | 4,380  |             |         |   | 7,320  |      
|Other non-current assets                                                                        |                                                                                                        |                                                                                                                         | 981    |             |         |   | 491    |      
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|Total assets                                                                                    |                                                                                                        | $                                                                                                                       | 28,592 |             |         | $ | 41,265 |      
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|                                                                                               
|Liabilities and shareholders equity                                                            |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|Current liabilities:                                                                            |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|                                                                                                | Accounts payable                                                                                       |                                                                                                                         | $      | 749         |         |   | $      | 1,427 |        
|                                                                                                | Accrued expenses and other current liabilities                                                         |                                                                                                                         |        | 1,095       |         |   |        | 1,781 |        
|                                                                                                | Current portion of long-term debt                                                                      |                                                                                                                         |        | 254         |         |   |        | 230   |        
|                                                                                                | Current portion of capital lease obligations                                                           |                                                                                                                         |        | 172         |         |   |        | 572   |        
|                                                                                                | Reserve for product returns                                                                            |                                                                                                                         |        | 167         |         |   |        | 169   |        
|                                                                                                | Deferred revenue                                                                                       |                                                                                                                         |        | 63          |         |   |        | 42    |        
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|Total current liabilities                                                                       |                                                                                                        |                                                                                                                         | 2,500  |             |         |   | 4,221  |      
|                                                                                               
|Long-term debt, net of current portion                                                          |                                                                                                        |                                                                                                                         | 354    |             |         |   | 501    |      
|Capital lease obligations, net of current portion                                               |                                                                                                        |                                                                                                                         | 10     |             |         |   | 208    |      
|                                                                                               
|Shareholders equity:                                                                           |                                                                                                        |                                                                                                                         |        |             |         |   |        |      
|                                                                                                | Common stock, $0.01 par value:                                                                         |                                                                                                                         |        |             |         |   |        |       |        
|                                                                                                |                                                                                                        | Authorized
shares  65,000,000
Issued and outstanding shares  20,860,022
and 18,384,275 in 2001 and 2000, respectively |        |             | 209     |   |        |       | 184     |  
|                                                                                                |                                                                                                        | Additional paid-in capital                                                                                              |        |             | 57,686  |   |        |       | 55,642  |  
|                                                                                                |                                                                                                        | Share subscription receivable                                                                                           |        |             | (73     | ) |        |       |        |  
|                                                                                                |                                                                                                        | Accumulated deficit                                                                                                     |        |             | (31,067 | ) |        |       | (18,656 | )
|                                                                                                |                                                                                                        | Accumulated other comprehensive income                                                                                  |        |             | (277    | ) |        |       | 83      |  
|                                                                                                |                                                                                                        | Deferred compensation                                                                                                   |        |             | (750    | ) |        |       | (918    | )
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|Total shareholders equity                                                                      |                                                                                                        |                                                                                                                         | 25,728 |             |         |   | 36,335 |      
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  
|Total liabilities and shareholders equity                                                      |                                                                                                        | $                                                                                                                       | 28,592 |             |         | $ | 41,265 |      
|                                                                                                |                                                                                                        |                                                                                                                         |        |             |         |  

See accompanying notes.

19



---



##### Table of Contents



Net4Music Inc.
Consolidated Statements of Operations(In thousands of U.S. dollars, except per share data)

|                                           |                                          |   |                        |       |  |      |            |       | 
|------------------------------------------ | ---------------------------------------- | - | ---------------------- | ----- |  | ---- | ---------- | ----- | 
|                                           |                                          |   | Year ended December 31 |      
|                                           |                                          |   |                        |      
|                                           |                                          |   | 2001                   |       |  | 2000 |           
|                                           |                                          |   |                        |       |  |      |           
|Net revenues                               |                                          | $ | 7,229                  |       |  | $    | 1,454      |      
|                                           | Cost of revenues                         |   |                        | 1,497 |  |      |            | 329   | 
|                                           |                                          |   |                        |       |  |     
|Gross profit                               |                                          |   | 5,732                  |       |  |      | 1,125      |      
|                                          
|Operating expenses                         |                                          |   |                        |       |  |      |            |      
|                                           | Website development expenses             |   |                        | 600   |  |      |            | 1,106 | 
|                                           | Content and product development expenses |   |                        | 2,373 |  |      |            | 1,226 | 
|                                           | Selling and marketing expenses           |   |                        | 4,555 |  |      |            | 6,165 | 
|                                           | General and administrative expenses      |   |                        | 8,319 |  |      |            | 4,692 | 
|                                           | Restructuring charges                    |   |                        | 1,172 |  |      |            |      | 
|                                           | Impairment of long lived assets          |   |                        | 1,304 |  |      |            |      | 
|                                           |                                          |   |                        |       |  |     
|                                           |                                          |   | 18,323                 |       |  |      | 13,189     |      
|                                           |                                          |   |                        |       |  |     
|Loss from operations                       |                                          |   | (12,591                | )     |  |      | (12,064    | )    
|                                          
|Other income and expense, net              |                                          |   | 184                    |       |  |      | 289        |      
|Foreign exchange loss                      |                                          |   |                       |       |  |      | (55        | )    
|Loss before income tax                     |                                          |   | (12,407                | )     |  |      | (11,830    | )    
|                                          
|Income tax                                 |                                          |   | (4                     | )     |  |      | (1         | )    
|                                           |                                          |   |                        |       |  |     
|Net loss                                   |                                          | $ | (12,411                | )     |  | $    | (11,831    | )    
|                                           |                                          |   |                        |       |  |     
|                                          
|Basic and diluted loss per common share    |                                          | $ | (0.58                  | )     |  | $    | (0.96      | )    
|Weighted average common shares outstanding |                                          |   | 21,465,848             |       |  |      | 12,297,527 |      

See accompanying notes.

20



---



##### Table of Contents



Net4Music Inc.
Consolidated Statement of Shareholders Equity(In thousands of U.S. dollars, except share data)



|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |         |             |   |         |   |         |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------- | ---------- | ------------ | - | - | ---------- | ------ | - | ------- | ------- | ------ | ------------ | ----- | --- | ------- | ----------- | - | ------- | - | ------- | -
|                                                                            |                                                                             |                        |            | Common Stock |   |   | Additional |        |   |         |         |        |              |       |     |        
|                                                                            |                                                                             |                        |            | Total        |   |   |            |        |   |         | Paid-In |        |              | Share |     |         | Accumulated |  
|                                                                            |                                                                             |                        |            | Shares       |   |   | Amount     |        |   | Capital |         |        | Subscription |       |     | Deficit |            
|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |         |            
|Balance at December 31, 1999                                                |                                                                             |                        | 7,441,044  |              |   | $ | 1,617      |        |   | $       | 8,191   |        |              |       |    |         |             | $ | (6,825  | )
|                                                                            | Issuance of common shares                                                   |                        |            | 6,421,809    |   |   |            | 1,138  |   |         |         | 16,481 |              |       |     |        |             |   |         |  |        
|                                                                            | Reverse acquisition with Coda                                               |                        |            | 6,428,264    |   |   |            | (2,552 | ) |         |         | 29,316 |              |       |     |        |             |   |         |  |        
|                                                                            | Shares related to put and call
agreements and reverse
acquisition with Coda |                        |            | (2,483,823   | ) |   |            | (25    | ) |         |         | 25     |              |       |     |        |             |   |         |  |        
|                                                                            | Deferred compensation 
unvested Coda options at
October 19, 2000           |                        |            |             |   |   |            |       |   |         |         | 423    |              |       |     |        |             |   |         |  |        
|                                                                            | Exercise of stock options and
warrants                                      |                        |            | 552,581      |   |   |            | 6      |   |         |         | 633    |              |       |     |        |             |   |         |  |        
|                                                                            | Issuance of stocks, stock
options and warrants for
services                 |                        |            | 24,400       |   |   |            |       |   |         |         | 80     |              |       |     |        |             |   |         |  |        
|                                                                            | Deferred compensation 
options granted below fair
value                    |                        |            |             |   |   |            |       |   |         |         | 493    |              |       |     |        |             |   |         |  |        
|                                                                            | Amortization of deferred
compensation                                       |                        |            |             |   |   |            |       |   |         |         |       |              |       |     |        |             |   |         |  |        
|                                                                            | Comprehensive loss:                                                         |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |        |             |   |         |   |        
|                                                                            |                                                                             | Net loss               |            |              |  |   |            |        |  |         |         |        |             |       |     |         |            |   |         |   | (11,831 | )
|                                                                            |                                                                             | Translation adjustment |            |              |  |   |            |        |  |         |         |        |             |       |     |         |            |   |         |   |        |  
|                                                                            |                                                                             | Comprehensive loss     |            |              |   |   |            |        |   |         |         |        |              |       |     |         |            |   |         |   |         |  
|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |    
|Balance at December 31, 2000                                                |                                                                             |                        | 18,384,275 |              |   |   | 184        |        |   |         | 55,642  |        |              |       |    |         |             |   | (18,656 | )
|Shares related to put and call
agreements and reverse
acquisition with Coda |                                                                             |                        | 175,853    |              |   |   | 2          |        |   |         | (2      | )      |              |       |    |         |             |   |        |  
|Exercise of stock options and
warrants                                      |                                                                             |                        | 500        |              |   |   |           |        |   |         | 1       |        |              |       |    |         |             |   |        |  
|Issuance of stocks, stock
options and warrants for
services                 |                                                                             |                        | 1,000      |              |   |   |           |        |   |         | 289     |        |              |       |    |         |             |   |        |  
|Extension of employee stock
options related to
restructuring                |                                                                             |                        |           |              |   |   |           |        |   |         | 297     |        |              |       |    |         |             |   |        |  
|Private placement offering, net                                             |                                                                             |                        | 2,298,394  |              |   |   | 23         |        |   |         | 1,459   |        |              |       | (88 | )       |             |   |        |  
|Share subscription receivable
receipt                                       |                                                                             |                        |           |              |   |   |           |        |   |         |        |        |              |       | 15  |         |             |   |        |  
|Amortization of deferred
compensation                                       |                                                                             |                        |           |              |   |   |           |        |   |         |        |        |              |       |    |         |             |   |        |  
|Comprehensive loss:                                                         |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |         |             |   |         |  
|Net loss                                                                    |                                                                             |                        |           |              |   |   |           |        |   |         |        |        |              |       |    |         |             |   | (12,411 | )
|Translation adjustment                                                      |                                                                             |                        |           |              |   |   |           |        |   |         |        |        |              |       |    |         |             |   |        |  
|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |         |             |   |         |  
|Comprehensive loss                                                          |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |     |         |             |   |         |  
|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |    
|Balance at December 31, 2001                                                |                                                                             |                        | 20,860,022 |              |   | $ | 209        |        |   | $       | 57,686  |        |              | $     | (73 | )       |             | $ | (31,067 | )
|                                                                            |                                                                             |                        |            |              |   |   |            |        |   |         |         |        |              |       |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                            |                                                                             |                        |      |              |   |   |               |                   |    |           |               |        |         |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------- | ---- | ------------ | - | - | ------------- | ----------------- | -- | --------- | ------------- | ------ | ------- | -
|                                                                            |                                                                             |                        |      |              |   |   |               | Accumulated Other |    |           | Shareholders' |       
|                                                                            |                                                                             |                        |      | Deferred     |   |   | Comprehensive |                   |    | Equity    |              
|                                                                            |                                                                             |                        |      | Compensation |   |   | Income        |                   |    | (Deficit) |              
|                                                                            |                                                                             |                        |      |              |   |   |               |                   |    |           |              
|Balance at December 31, 1999                                                |                                                                             | $                      | (49  | )            |   | $ | 65            |                   |    | $         | 2,999         |       
|                                                                            | Issuance of common shares                                                   |                        |      |             |   |   |               |                  |    |           |               | 17,619 |        
|                                                                            | Reverse acquisition with Coda                                               |                        |      |             |   |   |               |                  |    |           |               | 26,764 |        
|                                                                            | Shares related to put and call
agreements and reverse
acquisition with Coda |                        |      |             |   |   |               |                  |    |           |               |       |        
|                                                                            | Deferred compensation 
unvested Coda options at
October 19, 2000           |                        |      | (423         | ) |   |               |                  |    |           |               |       |        
|                                                                            | Exercise of stock options and
warrants                                      |                        |      |             |   |   |               |                  |    |           |               | 639    |        
|                                                                            | Issuance of stocks, stock
options and warrants for
services                 |                        |      |             |   |   |               |                  |    |           |               | 80     |        
|                                                                            | Deferred compensation 
options granted below fair
value                    |                        |      | (493         | ) |   |               |                  |    |           |               |       |        
|                                                                            | Amortization of deferred
compensation                                       |                        |      | 47           |   |   |               |                  |    |           |               | 47     |        
|                                                                            | Comprehensive loss:                                                         |                        |      |              |   |   |               |                   |    |           |               |        |        
|                                                                            |                                                                             | Net loss               |      |              |  |   |               |                   |   |           |               |        | (11,831 | )
|                                                                            |                                                                             | Translation adjustment |      |              |  |   |               |                   | 18 |           |               |        | 18      |  
|                                                                            |                                                                             | Comprehensive loss     |      |              |   |   |               |                   |    |           |               |        | (11,813 | )
|                                                                            |                                                                             |                        |      |              |   |   |               |                   |   
|Balance at December 31, 2000                                                |                                                                             |                        | (918 | )            |   |   | 83            |                   |    |           | 36,335        |       
|Shares related to put and call
agreements and reverse
acquisition with Coda |                                                                             |                        |     |              |   |   |              |                   |    |           |              |       
|Exercise of stock options and
warrants                                      |                                                                             |                        |     |              |   |   |              |                   |    |           | 1             |       
|Issuance of stocks, stock
options and warrants for
services                 |                                                                             |                        |     |              |   |   |              |                   |    |           | 289           |       
|Extension of employee stock
options related to
restructuring                |                                                                             |                        |     |              |   |   |              |                   |    |           | 297           |       
|Private placement offering, net                                             |                                                                             |                        |     |              |   |   |              |                   |    |           | 1,394         |       
|Share subscription receivable
receipt                                       |                                                                             |                        |     |              |   |   |              |                   |    |           | 15            |       
|Amortization of deferred
compensation                                       |                                                                             |                        | 168  |              |   |   |              |                   |    |           | 168           |       
|Comprehensive loss:                                                         |                                                                             |                        |      |              |   |   |               |                   |    |           |               |       
|Net loss                                                                    |                                                                             |                        |     |              |   |   |              |                   |    |           | (12,411       | )     
|Translation adjustment                                                      |                                                                             |                        |     |              |   |   | (360          | )                 |    |           | (360          | )     
|                                                                            |                                                                             |                        |      |              |   |   |               |                   |    |           |              
|Comprehensive loss                                                          |                                                                             |                        |      |              |   |   |               |                   |    |           | (12,771       | )     
|                                                                            |                                                                             |                        |      |              |   |   |               |                   |   
|Balance at December 31, 2001                                                |                                                                             | $                      | (750 | )            |   | $ | (277          | )                 |    | $         | 25,728        |       
|                                                                            |                                                                             |                        |      |              |   |   |               |                   |   

See accompanying notes.

21



---



##### Table of Contents



Net4Music Inc.
Consolidated Statements of Cash Flows(In thousands of U.S. dollars)

|                                                 |                                                                             |                                                        |                                                         |                                         |   |                        |         |   |       |     |      |  
|------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------------------- | --------------------------------------- | - | ---------------------- | ------- | - | ----- | --- | ---- | -
|                                                 |                                                                             |                                                        |                                                         |                                         |   | Year ended December 31 |        
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                        |        
|                                                 |                                                                             |                                                        |                                                         |                                         |   | 2001                   |         |   | 2000  |    
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                        |         |   |       |    
|Operating activities                             |                                                                             |                                                        |                                                         |                                         |   |                        |         |  
|Net loss                                         |                                                                             | $                                                      | (12,411                                                 | )                                       |   | $                      | (11,831 | )
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                        |                                                         |                                         |   |                        |         |   |      
|                                                 |                                                                             |                                                        | Amortization of intangible assets                       |                                         |   | 3,562                  |         |   |       | 995 |     
|                                                 |                                                                             |                                                        | Depreciation and amortization of property and equipment |                                         |   | 929                    |         |   |       | 367 |     
|                                                 |                                                                             |                                                        | Impairment of Intangibles                               |                                         |   | 1,304                  |         |   |       |    |     
|                                                 |                                                                             |                                                        | Amortization of deferred compensation                   |                                         |   | 168                    |         |   |       | 47  |     
|                                                 |                                                                             |                                                        | Restructuring                                           |                                         |   | 647                    |         |   |       |     |     
|                                                 |                                                                             |                                                        | Issuance of stock, options and warrants for services    |                                         |   | 289                    |         |   |       | 80  |     
|                                                 |                                                                             |                                                        | Increase (decrease) in cash from:                       |                                         |   |                        |         |   |       |     |     
|                                                 |                                                                             |                                                        |                                                         | Accounts receivable                     |   |                        | (87     | ) |       |     | 99   |  
|                                                 |                                                                             |                                                        |                                                         | Inventories                             |   |                        | (79     | ) |       |     | (83  | )
|                                                 |                                                                             |                                                        |                                                         | Other current assets                    |   |                        | 712     |   |       |     | (462 | )
|                                                 |                                                                             |                                                        |                                                         | Prepaid expenses                        |   |                        | 180     |   |       |     | (201 | )
|                                                 |                                                                             |                                                        |                                                         | Accounts payable                        |   |                        | (759    | ) |       |     | 342  |  
|                                                 |                                                                             |                                                        |                                                         | Advances from shareholders              |   |                        |         |   |       |     | (1   | )
|                                                 |                                                                             |                                                        |                                                         | Accrued liabilities and product returns |   |                        | (855    | ) |       |     | 683  |  
|                                                 |                                                                             |                                                        |                                                         | Deferred revenue                        |   |                        | 28      |   |       |     | (16  | )
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|Net cash used in operating activities            |                                                                             |                                                        | (6,372                                                  | )                                       |   |                        | (9,981  | )
|                                                
|Investing activities                             |                                                                             |                                                        |                                                         |                                         |   |                        |         |  
|Purchases of property and equipment, net         |                                                                             |                                                        | (352                                                    | )                                       |   |                        | (750    | )
|Purchase of business                             |                                                                             |                                                        |                                                        |                                         |   |                        | (552    | )
|Capitalized development cost and other           |                                                                             |                                                        | (580                                                    | )                                       |   |                        | 22      |  
|Redemptions of short-term investments            |                                                                             |                                                        | 917                                                     |                                         |   |                        | (74     | )
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|Net cash used in investing activities            |                                                                             |                                                        | (15                                                     | )                                       |   |                        | (1,354  | )
|                                                
|Financing activities                             |                                                                             |                                                        |                                                         |                                         |   |                        |         |  
|Cash proceeds from issuance of shares            |                                                                             |                                                        | 1,394                                                   |                                         |   |                        | 16,855  |  
|Exercise of stock options                        |                                                                             |                                                        | 1                                                       |                                         |   |                        |        |  
|Payments received on share subscription notes    |                                                                             |                                                        | 15                                                      |                                         |   |                        |        |  
|Increase in long-term debt                       |                                                                             |                                                        |                                                        |                                         |   |                        | 571     |  
|Payments on long-term debt                       |                                                                             |                                                        | (93                                                     | )                                       |   |                        | (475    | )
|Payments on capital leases                       |                                                                             |                                                        | (566                                                    | )                                       |   |                        | (474    | )
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|Net cash provided by financing activities        |                                                                             |                                                        | 751                                                     |                                         |   |                        | 16,477  |  
|                                                
|Effect of exchange rate changes on cash          |                                                                             |                                                        | (196                                                    | )                                       |   |                        | (158    | )
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|Net decrease in cash and cash equivalents        |                                                                             |                                                        | (5,832                                                  | )                                       |   |                        | 4,984   |  
|Cash and cash equivalents, beginning of year     |                                                                             |                                                        | 9,090                                                   |                                         |   |                        | 4,106   |  
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|Cash and cash equivalents, end of year           |                                                                             | $                                                      | 3,258                                                   |                                         |   | $                      | 9,090   |  
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|                                                
|Supplemental disclosure of cash flow information |                                                                             |                                                        |                                                         |                                         |   |                        |         |  
|Interest paid                                    |                                                                             | $                                                      | 50                                                      |                                         |   | $                      | 83      |  
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|                                                
|Non-cash transactions:                           |                                                                             |                                                        |                                                         |                                         |   |                        |         |  
|                                                 |                                                                             | Issuance of common stock for music distribution rights |                                                         | $                                       |  |                        |         | $ | 1,403 |    
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       
|                                                 |                                                                             | Equipment purchased with capital leases                |                                                         | $                                       |  |                        |         | $ | 347   |    
|                                                 |                                                                             |                                                        |                                                         |                                         |   |                       

See accompanying notes.

22



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements
December 31, 2001

1. Business and Organization

Net4Music Inc., formerly known as Coda Music Technology, Inc. (Coda),
and subsidiaries (the Company) is the result of the October 2000 reverse
acquisition of Coda and Net4Music S.A. The acquisition was accounted for as a
reverse acquisition with Net4Music S.A. treated as the accounting acquirer (see
Note 4). The financial statements of Net4Music S.A. are presented as the
historical financial statements of the Company for all periods presented. The
results of operations for Coda are included under purchase accounting from the
October 19, 2000 acquisition date forward.

Net4Music S.A. was incorporated in France as a Société Anonyme or
corporation in 1995, under the name Interactive Musique Compagnie (IMC,
S.A.), to develop and distribute digital sheet music. As of July 28, 1999, but
effective January 1, 1999, the Company changed its name from IMC S.A. to
Net4Music S.A., and merged with its two 100%-owned subsidiaries, Euro Music
Systems S.A. (EMS) and Music Writer Europe S.A. (MWE).

In early 1999, Net4Music S.A. refocused its strategy toward distribution
of digitized sheet music through the Internet and developed its website
www.net4music.com that was officially launched in December 1999. Part of this
strategy was also the acquisition of its main European competitor Informusique,
and the negotiation of musical work distribution agreements with publishers.
In 2001, the Company restructured its Internet sheet music distribution
activity and decided to maintain its www.net4music.com website at a
low-maintenance level. New York and Lyon operations were closed and most of the
resources and effort of the Companys French operation were refocused toward
development of SmartMusic Studio.

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

In March 2002, the Company announced plans to change its corporate name to
MakeMusic! Inc. While the Company immediately commenced doing business as
MakeMusic! Inc., the formal legal name change is subject to shareholder
approval at the Companys 2002 annual meeting in May. After shareholder
approval of the new name, the Company expects to change its stock-trading
symbol on the Nasdaq Stock Market to MMUS.

2. Summary of Significant Accounting Policies

Consolidation

Through October 19, 2000, the consolidated financial statements include
the accounts of Net4Music S.A. (or Predecessors) and its wholly-owned
subsidiaries, Net4Music New York Inc. incorporated in the U.S.A. and Notmad
located in Madagascar. From October 20, 2000, the consolidated financial
statements include the accounts of Net4Music Inc. and its majority-owned
subsidiaries following the reverse acquisition of Coda and Net4Music S.A. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

23



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Foreign Currency Translation

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

Revenue Recognition

Software revenue is primarily derived from the sale of off the shelf
products, easily installed and used by the customer. Software revenue is
recognized in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition. Pursuant to SOP 97-2, software revenue is recognized when all of
the following conditions are met: there is evidence of an agreement with the
customer (normally a purchase order), delivery has occurred, the total sales
price is fixed and determinable, collectibility is probable and any
uncertainties with regard to customer acceptance are insignificant.

Customers are entitled an upgrade if the Company launches a new version of
a software product within a specified period after a customer originally
purchased their software. In this event, the Company defers all revenue
recognition for products that were sold within the upgrade replacement window,
until such time that the upgrade is shipped.

Revenues from sheet music sales are recognized at the time of delivery.

Restructuring Charges

The Company initiated in March 2001 a corporate restructuring plan to
eliminate redundant responsibilities and cut excess costs resulting from the
reverse acquisition of October 2000, and in August 2001 a restructuring of its
digital sheet music operation at its European and Madagascar locations.
Restructuring charges were recorded in the first and third quarters of 2001
totaling $1,172,000. The first restructuring affected 31 employees from the
sales and marketing department in New York and the engraving and sales and
marketing departments in France. The second restructuring allowed the Company
to reduce fixed costs relating to the production of digital sheet music and to
transition to the use of outside contractors. It affected 90 employees in
Europe and Madagascar and included closure of leased facilities in Lyon
(France) and the sale of the Madagascar operation. The restructuring activity
roll-forward as of December 31, 2000 and 2001 was as follows:

24



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

|                                         |  |              |        |  |             |   |           |       |  |   |           |              |  |   |         | 
|---------------------------------------- |  | ------------ | ------ |  | ----------- | - | --------- | ----- |  | - | --------- | ------------ |  | - | ------- | 
|                                         |  | December 31, |        |  | Additional  |   |           |       |  |   |           | December 31, | 
|                                         |  | 2000         |        |  | Restructure |   |           | Usage |  |   | 2001      |             
|                                         |  |              |        |  |             |   |           |       |  |   |           |             
|Non-Cash Items:                          |  |              |        |  |             |   |           |       |  |   |           |              |  |   |         | 
|Severance and related personnel
expenses |  | $            |       |  |             | $ | 297,000   |       |  | $ | 297,000   |              |  | $ |        | 
|Fixed asset write-off                    |  |              |       |  |             |   | 189,000   |       |  |   | 189,000   |              |  |   |        | 
|Cash Items:                              |  |              |        |  |             |   |           |       |  |   |           |              |  |   |         | 
|Severance and related personnel
expenses |  |              |       |  |             |   | 545,000   |       |  |   | 478,000   |              |  |   | 67,000  | 
|Lease termination                        |  |              | 33,000 |  |             |   | 130,000   |       |  |   | 69,000    |              |  |   | 94,000  | 
|Moving/Storage                           |  |              |       |  |             |   | 5,000     |       |  |   | 5,000     |              |  |   |        | 
|Other                                    |  |              |       |  |             |   | 6,000     |       |  |   | 6,000     |              |  |   |        | 
|                                         |  |              |        |  |             |   |           |       |  |   |           |             
|Total                                    |  | $            | 33,000 |  |             | $ | 1,172,000 |       |  | $ | 1,044,000 |              |  | $ | 161,000 | 

Net Loss Per Share

Basic and diluted net loss per share was computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
The effect of options and warrants are excluded as their effect is
anti-dilutive.

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

|                                                                           |  |      |            |  |      |  |            | 
|-------------------------------------------------------------------------- |  | ---- | ---------- |  | ---- |  | ---------- | 
|                                                                           |  | 2001 |            |  | 2000 | 
|                                                                           |  |      |            |  |      | 
|Weighted average shares outstanding                                        |  |      | 19,083,121 |  |      |  | 11,802,120 | 
|Weighted average effect of shares issuable
under put and call arrangements |  |      | 2,382,727  |  |      |  | 495,407    | 
|Net weighted average shares                                                |  |      | 21,465,848 |  |      |  | 12,297,527 | 

Segment Reporting

The Company operates in one industry segment, being the design,
development, support and marketing of digital solutions to music educators,
music makers and the music publishing industry.

Intangible Assets

Intangible assets consist primarily of capitalized development costs of
distribution methods, patent filing costs, goodwill and the identifiable
intangible assets acquired in the reverse acquisition. (See Note 5).

Website Development

Costs incurred in the development of the Companys web site are
capitalized in accordance with the Emerging Issues Task Force (EITF) No.
00-02, Accounting for Web Site Development Costs.

25



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Application development stage costs are capitalized and amortized on a
straight-line basis over the useful life of the website, which is estimated at
three years. The estimated useful life is based on planned or expected
significant modifications of the site in response to the rapid rate of change
in the Internet industry and technology in general. In 2001, the Company
capitalized $369,000 relating to the SmartMusic subscription service.

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

Content Development

Content development expenses for sheet music (the costs of entering and
engraving music under digital format) are expensed as incurred. Some
distribution agreements stipulate that the publisher pays for a portion of
these costs according to a contractual rate; these amounts are recorded as
engraving service revenues.

Software Development

Costs incurred in the development of software products are capitalized in
accordance with the Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed.The capitalized amount represents costs of producing
product masters for new songs as technological feasibility has been established
by the selling of previous titles. When a title is available for release,
expenditures related to that title are no longer capitalized and the
capitalized cost of the title is amortized over a period based on the current
and expected future revenue from the product or the straight-line method, not
to exceed three years. The Company periodically evaluates whether events and
circumstances have occurred that indicate the remaining balance of software
development expenses may not be recoverable.

Repertoire Development Costs

The costs incurred in the development of repertoire software are
capitalized in accordance with the Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed. As of December 31, 2001 and 2000, the Company
has capitalized, net of amortization and reserves, $313,000 and $362,000,
respectively, of costs related to the development of repertoire software. These
costs are amortized over the greater of an amount based on the current and
expected future revenues from the software or the straight-line method, not to
exceed three years, beginning when the repertoire products are released. The
Company periodically evaluates whether events and circumstances have occurred
that indicate the remaining balance of repertoire development costs may not be
recoverable.

Patents and Trademarks

Costs associated with obtaining patents, trademarks and Internet domain
names are capitalized. These costs are being amortized from 3 to 10 years
depending on their estimated useful lives.

26



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Goodwill and Acquired Identifiable Intangible Assets

Goodwill, which represents the cost in excess of fair value of the
tangible and identified intangible assets of businesses acquired, is being
amortized on a straight-line basis over 10 years. The identified intangible
assets acquired consist mainly of the value of software products, amortized
over 5 years; Coda trade name, amortized over 10 years; Coda website, amortized
over 3 years; distributor/dealer network, amortized over 5 years; acquired
workforce, amortized over 3 years; and customer lists, amortized over 5 years.
(See Note 3 for the potential effect of the adoption of FAS 142 in 2002.)

Property and Equipment

Property and equipment are stated at their acquisition costs. They are
depreciated using the straight-line method over the estimated useful life of
the assets as follows:

|                   |  |              |  | 
|------------------ |  | ------------ |  | 
|                   |  | Period       | 
|                   |  |              | 
|Purchased software |  | 3 years     
|Computer equipment |  | 3  5 years 
|Furniture          |  | 3  10 years

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

Inventories

Inventories are stated at the lower of weighted average cost or market and
consist of finished products and components.

Impairment of Long-Lived Assets

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

In connection with a restructuring of its digital sheet music operations
in France in the third quarter of 2001, the Company reevaluated the
recoverability of certain license rights. Management concluded from the results
of this evaluation that an impairment of license rights had occurred and
recorded a $1,304,000 non-cash impairment charge. In 2001 the Company also
evaluated the carrying value of the goodwill arising from its reverse
acquisition in 1999 in comparison to estimated undiscounted cash flows of Coda
and concluded there was no impairment as of December 31, 2001. (See Note 3 
New Accounting Pronouncements for the expected effect of the adoption of
Statement of Financial Accounting Standard No. 142 in 2002).

27



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents and Short-Term Investments

Cash equivalents consist of money market instruments with original
maturities of 90 days or less. Cash equivalents and short-term investments are
recorded at cost, which approximates fair value. Short-term investments
consisting of money market funds are considered to be available for sale.
Unrealized gains or losses were immaterial at December 31, 2000.

Fair Value of Financial Instruments

At December 31, 2001, and 2000, the carrying values of current financial
instruments such as cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, other current assets, accrued liabilities and
other current liabilities, as well as the current portion of long-term debt and
capital lease obligations, approximated their market values, based on the
short-term maturities of these instruments.

At December 31, 2001 and 2000, the market value of long-term debt
approximates its carrying value. Market value is determined using discounted
future cash flows at a market interest rate or other appropriate valuation
method.

Income Taxes

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

Stock-Based Compensation

The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation,but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of an employee stock option equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.

Use of Estimates

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

28



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Advertising

The Company expenses advertising costs as incurred. The Company expensed
$373,000 and $3,155,000 for the years ended December 31, 2001 and 2000,
respectively.

Reclassifications

Certain amounts in the 2000 consolidated balance sheet and consolidated
income statement of operations have been reclassified to conform to the 2001
presentation.

3. New Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity recognize all derivatives as either
assets or liabilities at fair value. This statement was effective for the
Company beginning January 1, 2001 and had no impact on the Companys financial
position or results of operations.

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations,and No. 142,
Goodwill and Other Intangible Assets. Statement No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising
from business combinations completed after June 30, 2001. Statement 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives.

The Company will apply Statement 142 beginning in the first quarter of
2002. Application of the nonamortization provisions of Statement 142 is
expected to result in an increase in net income of $2,152,000 ($0.10 per share)
in 2002. The Company will reclassify an acquired workforce intangible asset
with an unamortized balance of $330,000 to goodwill at the date of adoption.
The Company will test goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if
any. The Company expects to perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 in the
first quarter of 2002. Based on steps the Company has taken to prepare for the
adoption of Statement 142, it is likely that an approximately $11.5 million
non-cash charge for goodwill impairment will be recorded using the impairment
test required by Statement 142. The Company currently evaluates goodwill for
impairment by comparing the unamortized balance of goodwill to projected
undiscounted cash flows, which does not result in an indicated impairment. An
impairment that is required to be recognized when adopting Statement 142 will
be reflected as the cumulative effect of a change in accounting principle in
the first quarter of 2002. The Company plans to finalize the measurement of the
impairment loss in the first quarter of 2002.

29



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

4. Business Acquisitions

Informusique Acquisition

In October 1999, the Company acquired Informusique, a French company
focused on mail order distribution, for $244,000. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the purchase price
has been allocated to the acquired assets and liabilities based on fair values
as of the acquisition date. Capitalized site development costs were valued at
$234,480 and are being amortized over three years from the acquisition date.

Coda Reverse Acquisition

On October 19, 2000, the Company reorganized and completed a reverse
acquisition with Coda. From October 19, 2000, the consolidated financial
statements include the accounts of Coda and its subsidiaries.

In connection with the acquisition, Coda changed its name to Net4Music
Inc. (the Company). Although Net4Music S.A. and its subsidiaries became
subsidiaries of the Company as a result of this reverse acquisition, the
transaction has been accounted for as a purchase by Net4Music S.A. of the
Company, with the books and records of the Company being adjusted to reflect
the historical operating results of Net4Music S.A. and its subsidiaries.

In the transaction, certain shareholders of Net4Music S.A. received
approximately 11,379,000 shares of Coda common stock, certain Net4Music S.A.
option and warrant holders received Coda options and warrants, and the
remaining shareholders and option and warrant holders entered into a put and
call agreement. The put and call agreement provides that the parties to the
agreement can, at any time during the five-year period following the
acquisition, require the Company to acquire their shares of Net4Music S.A. in
exchange for the Companys stock based on the same conversion ratio applicable
to the Net4Music S.A. shares at the acquisition date. Additional paid-in
capital includes the shares held in the put and call agreement.

The purchase price of approximately $26,764,000, including the fair value
of Codas common stock and its vested options and warrants at the acquisition
date, and acquisition-related costs of $1,234,000 have been allocated based on
the estimated fair value of the assets and liabilities of Coda deemed for
accounting purposes to have been acquired by Net4Music S.A. The excess purchase
price deemed paid by Net4Music S.A. for the net assets of Coda over the fair
value of those assets was $25,204,000 and is being amortized using the
straight-line method over a range of 3 to 10 years. The excess purchase price
was allocated as follows: goodwill$19,690,000, software products$2,304,000,
Coda trade name$130,000, Coda website$310,000, distributor/dealer
network$1,440,000 and workforce and customer lists$1,330,000. In connection
with the reverse acquisition, the Company recorded $423,000 in deferred
compensation expense related to the intrinsic value of unvested Coda options at
the time of the reverse acquisition.

30



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

4. Business Acquisitions (continued)

Business Combinations  Pro Forma Results

The pro forma unaudited results below assume the reverse acquisition
occurred at the beginning of the period ended December 31, 2000 (in thousands,
except share and per share data):

|                                                 |                                          |   |                   |       | 
|------------------------------------------------ | ---------------------------------------- | - | ----------------- | ----- | 
|                                                 |                                          |   | Year ended        |      
|                                                 |                                          |   | December 31, 2000 |      
|                                                 |                                          |   |                   |      
|Net revenues                                     |                                          | $ | 7,294             |      
|                                                 | Cost of revenues                         |   |                   | 1,619 | 
|                                                 |                                          |   |                  
|Gross Profit                                     |                                          |   | 5,675             |      
|Operating expenses                               |                                          |   |                   |      
|                                                 | Website development expenses             |   |                   | 1,106 | 
|                                                 | Content and product development expenses |   |                   | 2,323 | 
|                                                 | Selling and marketing expenses           |   |                   | 7,865 | 
|                                                 | General and administrative expenses      |   |                   | 8,969 | 
|                                                 |                                          |   |                  
|Total operating expense                          |                                          |   | 20,262            |      
|Loss from operation                              |                                          |   | (14,587           | )    
|Net loss                                         |                                          | $ | (14,303           | )    
|Basic and diluted net loss per share             |                                          | $ | (0.82             | )    
|Basic and diluted weighted average common shares |                                          |   | 17,366,024        |      

The pro forma statements of operations reflect incremental amortization of
goodwill, interest expense and provisions for federal and state income taxes.

The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisitions had been completed as of the beginning
of the period presented, nor are they necessarily indicative of future
consolidated results.

5. Supplemental Balance Sheet Information

Inventories

Inventories consist of the following:

|                         |  |                |     |   |      |   |      |  
|------------------------ |  | -------------- | --- | - | ---- | - | ---- | -
|                         |  | December 31,   |    
|                         |  |                |    
|                         |  | 2001           |     |   | 2000 |  
|                         |  |                |     |   |      |  
|                         |  | (In thousands) |    
|Components               |  | $              | 349 |   |      | $ | 420  |  
|Finished goods           |  |                | 123 |   |      |   | 138  |  
|Reserve for obsolescence |  |                | (81 | ) |      |   | (246 | )
|                         |  |                |     |   |      |  
|                         |  | $              | 391 |   |      | $ | 312  |  
|                         |  |                |     |   |      |  

31



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

5. Supplemental Balance Sheet Information (continued)

Property and Equipment

Property and equipment are as follows:

|                                               |  |                |       |  |      |   |       | 
|---------------------------------------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                                               |  | December 31,   |      
|                                               |  |                |      
|                                               |  | 2001           |       |  | 2000 |  
|                                               |  |                |       |  |      |  
|                                               |  | (In thousands) |      
|Computer equipment and software                |  | $              | 2,069 |  |      | $ | 1,705 | 
|Interactive kiosks                             |  |                |      |  |      |   | 1,191 | 
|Vehicles                                       |  |                |      |  |      |   | 34    | 
|Office furniture and other                     |  |                | 646   |  |      |   | 432   | 
|                                               |  |                |       |  |      |  
|                                               |  |                | 2,715 |  |      |   | 3,362 | 
|Less accumulated depreciation and amortization |  |                | 1,616 |  |      |   | 1,652 | 
|                                               |  |                |       |  |      |  
|                                               |  | $              | 1,099 |  |      | $ | 1,710 | 
|                                               |  |                |       |  |      |  

The Company has financed some of its equipment in Europe through capital
lease contracts. Capitalized lease costs in property and equipment accounted
for $412,000 and $1,651,000 as of December 31, 2001 and 2000, respectively.
Accumulated depreciation of capital lease assets at December 31, 2001 and 2000
was $230,000 and $1,332,000, respectively.

Intangible Assets

Intangible assets are as follows:

|                                      |  |                |       |  |      |   |       | 
|------------------------------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                                      |  | December 31,   |      
|                                      |  |                |      
|                                      |  | 2001           |       |  | 2000 |  
|                                      |  |                |       |  |      |  
|                                      |  | (In thousands) |      
|Capitalized website development costs |  | $              | 897   |  |      | $ | 822   | 
|Distributor/dealer network            |  |                | 1,440 |  |      |   | 1,440 | 
|License rights                        |  |                | 329   |  |      |   | 1,639 | 
|Software products                     |  |                | 2,304 |  |      |   | 2,304 | 
|Workforce and customer lists          |  |                | 1,330 |  |      |   | 1,330 | 
|Other intangible assets               |  |                | 130   |  |      |   | 611   | 
|                                      |  |                |       |  |      |  
|Total gross value                     |  |                | 6,430 |  |      |   | 8,146 | 
|Less accumulated amortization         |  |                | 2,050 |  |      |   | 826   | 
|                                      |  |                |       |  |      |  
|                                      |  | $              | 4,380 |  |      | $ | 7,320 | 
|                                      |  |                |       |  |      |  

In 2000, the Company entered into consulting, distribution and engraving
agreements recording a value of $1,639,000 paid for the rights granted. In
2001 the Company decided to restructure its digitized sheet music distribution
activity, these contracts were revaluated and management concluded that an
impairment of approximately $1,304,000 had occurred.

32



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

6. Debt

Line of Credit

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

Long-Term Debt

|                               |  |                |      |   |      |   |      |  
|------------------------------ |  | -------------- | ---- | - | ---- | - | ---- | -
|                               |  | December 31,   |     
|                               |  |                |     
|                               |  | 2001           |      |   | 2000 |  
|                               |  |                |      |   |      |  
|                               |  | (In thousands) |     
|Conditional advance from ANVAR |  | $              | 486  |   |      | $ | 510  |  
|Convertible bonds              |  |                | 122  |   |      |   | 128  |  
|Bank loans                     |  |                |     |   |      |   | 93   |  
|                               |  |                |      |   |      |  
|Total long-term debt           |  |                | 608  |   |      |   | 731  |  
|Less current portion           |  |                | (254 | ) |      |   | (230 | )
|                               |  |                |      |   |      |  
|                               |  | $              | 354  |   |      | $ | 501  |  
|                               |  |                |      |   |      |  

Conditional Advance from ANVAR

The outstanding balance from the Agence Nationale pour la Valorisation de
la Recherche (ANVAR), a French state-owned institution dedicated to the
financing of research and development activities of French companies, totaled
$486,000 and $510,000 at year-end 2001 and 2000, respectively. The agreement
with ANVAR contains repayment terms that have been used to classify the debt in
the financial statements. Although the Company anticipates receiving formal
forgiveness of the loans, such forgiveness will not be received until a study
by ANVAR that is currently being done and has not been taken into account in
determining debt classification.

Convertible Bonds

In September 1996, the Company issued 9,000 convertible bonds to EUREFI
for a total of $175,600 in order to reinforce its equity and finance its
growth. These bonds are convertible by the holder, seven bonds giving a right
on four shares of common stock, from January 1, 2000 through the term of the
debt at December 31, 2003. The debt bears interest at 6% a year payable each
half-year at June 30 and December 31. Debt can be reimbursed in three annual
payments of 3,000 bonds from December 31, 2001.

Maturities of long-term debt outstanding at December 31, 2001 are as
follows (in thousands):

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 254 | 
|2003 |  |   | 233 | 
|2004 |  |   | 121 | 
|     |  |   |    
|     |  | $ | 608 | 
|     |  |   |    

33



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

6. Debt (continued)

Bank Loans

The Company had two term loans bearing interest at fixed rates. The
average interest rate was 3.6% at December 31, 2000. These loans were repaid in
2001.

In 2000, Coda entered into a $250,000 note payable with its bank bearing
interest at a fixed rate of 10%. The note required monthly payments in the
amount of $8,085. As of December 31, 2001, the Company had repaid the loan.

7. Shareholders Equity

In January 2001 the Company issued 1,000 shares of common stock to a
consultant for services provided. In connection with this issuance the company
recognized expenses in the amount of $1,180.

In August 2001 the Company issued 65,000 options to purchase common stock
at $0.75 to third parties in exchange for advisory and promotional services.
40,000 of these options vested immediately and the remaining 25,000 shares vest
over 60 months as advisory services are received. In connection with these
issuances the Company has recognized expenses of $13,000. As the remaining
options vest the Company will recognize additional expenses.

In October 2001, the Company issued 150,000 warrants to purchase common
stock at $0.66 to a third party in exchange for advisory and promotional
services. The warrants vest over 60 months. At December 31, 2001, the Company
has recognized expenses in the amount of $3,000 in relation to the vested
portion of warrants. As the remaining warrants vest the Company will recognize
additional expenses.

In September 2001 the Company sold pursuant to a private placement,
2,298,394 shares of its common stock at a price of $0.66 per share, based on a
30-day average of the closing price of the company stock preceding the private
placement for proceeds of $1,517,000. Net of expenses, the total cash received
from the private placement was $1,394,000. In addition, with each share
purchased, investors received one warrant exercisable for three and one-half
years to purchase one common share for $0.66. Management and employees
purchased 207,210 shares of which a portion were made with non-interest bearing
loans to be paid from earned bonuses. As of December 31, 2001 $73,000 of the
management and employee purchases remained outstanding, any unpaid balances are
due fully by September 28, 2002. Shareholders approved the stock issuance for
those shares in excess of 20% of outstanding balances at a special shareholder
meeting on December 19, 2001.

Authorized Shares

The Companys Restated Articles of Incorporation authorized the issuance
of 65,000,000 shares of $.01 par value capital stock. Of such authorized
shares, 50,000,000 have been designated as common shares and 15,000,000 are
undesignated as of December 31, 2001.

34



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

As of December 31, 1999, the authorized, issued and outstanding share
capital of Net4Music S.A. consisted of 6,039,800 ordinary shares and 3,500,000
Class A shares at a nominal value of FRF 1. In April and May 2000,
respectively, Net4Music S.A. issued 905,290 shares of Class A and 5,357,100 of
Class B common stock. The additional Class A shares were issued in exchange for
licensing rights to distribute music works.

In July through October 2000, Net4Music, S.A. issued 449,501 shares of
Class B stock in exchange for cash, generating a share capital increase of
$1,200,000. In October 2000, the Company converted Class A and Class B shares
into ordinary shares. Also in October 2000, 1,521,649 warrants were exercised,
generating a share capital increase of $200,000. These shares of Net4Music
S.A. were converted to Net4Music Inc. shares at a rate of .78 shares of
Net4Music Inc. for each share of Net4Music S.A.:

|                                                     |  |                    |           |  |                          |                        |           | 
|---------------------------------------------------- |  | ------------------ | --------- |  | ------------------------ | ---------------------- | --------- | 
|                                                     |  |                    |           |  |                          | Net4Music converted    |          
|                                                     |  |                    |           |  |                          | shares prior to shares |          
|                                                     |  | Net4Music S.A. pre |           |  | affected by the put/call |                       
|Date of Issuance:                                    |  | acquisition shares |           |  | agreement                |                       
|April 2000                                           |  |                    | 905,290   |  |                          |                        | 706,126   | 
|May 2000                                             |  |                    | 5,357,100 |  |                          |                        | 4,178,577 | 
|July 2000                                            |  |                    | 349,501   |  |                          |                        | 272,220   | 
|October 2000                                         |  |                    | 100,000   |  |                          |                        | 78,000    | 
|October 2000                                         |  |                    | 1,521,649 |  |                          |                        | 1,186,886 | 
|                                                     |  |                    |           |  |                          |                        |          
|Total shares issued prior to the
reverse acquisition |  |                    |           |  |                          |                        | 6,421,809 | 
|                                                     |  |                    |           |  |                          |                        |          

In December 2000, the Company entered into an agreement in which it will
issue up to 150,827 warrants to purchase the Companys common stock at $.01 per
share to a strategic partner for the non-exclusive distribution rights of 2,500
of its titles. The warrants are earned based on the ratio of titles received by
the Company to 2,500. In December 2000, the Company issued 12,066 warrants and
recognized an expense in the amount of $37,000 pursuant to the contract. During
2001, the Company issued an additional 138,761 warrants related to this
contract and recognized an expense in the amount of $268,000 related to these
issuances.

Also in December 2000, the Company issued 24,400 shares of common stock
and 15,600 options to purchase common stock to certain third parties for
advisory services and distribution rights. Accordingly, the Company recognized
expenses of $43,000 related to these issuances.

35



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

Coda Reverse Acquisition

In connection with the October 19, 2000 reverse acquisition with Coda
Music Technology, Inc., certain Net4Music S.A. shareholders received 11,379,030
shares of Coda common stock in exchange for 14,588,500 shares of its ordinary
stock. Shareholders equity was reclassified as of that date to account for
this exchange in which Net4Music S.A. was treated as the acquiring company
under purchase accounting. Certain holders of Net4Music S.A. options and
warrants also converted their rights to comparable Coda options and warrants at
that time. The remaining Net4Music S.A. shareholders and option and warrant
holders retained their common stock interests in Net4Music S.A. with a put and
call agreement permitting conversion of those shares, options or warrants at
any time within five years into Coda common stock at the same conversion
ratio applicable at the acquisition date. Such remaining shares, options and
warrants, if converted, would be the equivalent of 3,328,347 shares of Coda
common stock. The shares subject to the put and call arrangement are
considered to be contingently issuable and are classified within shareholders
equity because the parent is considered to have retained the risks and rewards
of ownership.

The 6,428,264 existing shares of Coda outstanding immediately prior to the
acquisition date were valued at $3.75 per share for the purpose of applying
purchase accounting and are reflected as such in the Consolidated Statement of
Shareholders Equity. Also included in the purchase price was the fair value of
all vested Coda options. The intrinsic value of all unvested Coda options was
recorded as deferred compensation in shareholders equity and will be amortized
to compensation expense over the remaining vesting period.

Stock Options and Warrants

Prior to the Coda reverse acquisition, Net4Music S.A. had granted options
and warrants in 2000 and 2001, to employees, directors, external consultants
and licensors as follows:

|                             |                            |           |           |            |                |     |         |           |      |       |      |  |  | 
|---------------------------- | -------------------------- | --------- | --------- | ---------- | -------------- | --- | ------- | --------- | ---- | ----- | ---- |  |  | 
|                             |                            |           |           |            |                |     |         | Weighted- |     
|                             |                            |           |           | Ordinary   |                |     | Average |          
|Grantee                      |                            | Shares    |           |            | Exercise Price |    
|                             |                            |           |           |            |                |    
|Balance at December 31, 1999 |                            |           | 2,791,987 |            |                | FRF |         |           | 6.34 |      
|                             |                            | Granted   |           |            | 8,143,131      |     |         | FRF       |      |       | 5.47 | 
|                             |                            | Exercised |           |            | (1,521,649     | )   |         | FRF       |      |       | 1.00 | 
|                             | Canceled                   |           |           | (5,536,437 | )              |     | FRF     |           |      | 3.17  |     
|                             | Converted to Coda Options  |           |           | (705,475   | )              |     | FRF     |           |      | 8.19  |     
|                             | Converted to Coda Warrants |           |           | (905,290   | )              |     | FRF     |           |      | 25.00 |     
|                             |                            |           |           |            |                |     |         |           |      |       |     
|Balance at December 31, 2000 |                            |           | 2,266,267 |            |                | FRF |         |           | 7.51 |      
|Granted                      |                            |           |          |            |                | FRF |         |           |     |      
|Exercised                    |                            |           |          |            |                | FRF |         |           |     |      
|Canceled                     |                            |           | (180,489  | )          |                | FRF |         |           | 8.64 |      
|                             |                            |           |           |            |                |     |         |           |      |       |     
|Balance at December 31, 2001 |                            |           | 2,085,778 |            |                | FRF |         |           | 7.41 |      

36



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

In connection with the Coda reverse acquisition, certain option and
warrant holders converted their rights into Coda options or warrants based on
the acquisition conversion price rate of .78 and under the same terms as their
original rights. The remaining option and warrant holders retained their right
to purchase Net4Music S.A. shares with a put and call agreement as described
above. Options and warrants for 2,085,778 Net4Music S.A. shares at an average
exercise price of FRF 7.41 ($1.02) remain outstanding at December 31, 2001
under put and call agreements.

The Company has a stock option plan pursuant to which options for up to
2,675,000 shares of its common stock may be issued to its key employees and
directors. The options vest over periods of up to six years and are granted at
prices that must be at least equal to the stocks fair market value at the
grant date. The Company also has granted nonqualified stock options to certain
of its directors, European employees and consultants. These options vest over
periods of up to five years and have been granted at prices at least equal to
the stocks fair market value at the grant date.

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

|                                                                          |  |          |           |   |              |  |         |         |  |  |                |   |  |           |      | 
|------------------------------------------------------------------------- |  | -------- | --------- | - | ------------ |  | ------- | ------- |  |  | -------------- | - |  | --------- | ---- | 
|                                                                          |  |          |           |   |              |  |         |         |  |  |                |   |  | Weighted- |     
|Plan Options                                                              |  | Employee |           |   | Non-Employee |  |         | Total   |  |  | Average        |  
|                                                                          |  | Options  |           |   | Options      |  |         | Options |  |  | Exercise Price |  
|                                                                          |  |          |           |   |              |  |         |         |  |  |                |  
|Coda Options Outstanding at October
19, 2000, date of reverse acquisition |  |          | 738,033   |   |              |  |        |         |  |  | 738,033        |   |  | $         | 1.90 | 
|Granted                                                                   |  |          | 847,800   |   |              |  | 15,600  |         |  |  | 863,400        |   |  |           | 2.17 | 
|Exercised                                                                 |  |          | (12,500   | ) |              |  |        |         |  |  | (12,500        | ) |  |           | 1.38 | 
|Canceled                                                                  |  |          | (65,533   | ) |              |  |        |         |  |  | (65,533        | ) |  |           | 1.31 | 
|                                                                          |  |          |           |   |              |  |         |         |  |  |                |  
|Outstanding at December 31, 2000                                          |  |          | 1,408,800 |   |              |  | 114,600 |         |  |  | 1,523,400      |   |  |           | 2.08 | 
|Granted                                                                   |  |          | 696,500   |   |              |  | 66,500  |         |  |  | 763,000        |   |  |           | 0.96 | 
|Exercised                                                                 |  |          | (500      | ) |              |  |        |         |  |  | (500           | ) |  |           | 1.38 | 
|Canceled                                                                  |  |          | (109,300  | ) |              |  | (26,500 | )       |  |  | (135,800       | ) |  |           | 2.06 | 
|                                                                          |  |          |           |   |              |  |         |         |  |  |                |  
|Outstanding at December 31, 2001                                          |  |          | 1,995,500 |   |              |  | 154,600 |         |  |  | 2,150,100      |   |  | $         | 1.69 | 
|                                                                          |  |          |           |   |              |  |         |         |  |  |                |  

|                                                                               |  |          |         |   |              |  |         |         |  |  |                |   |  |           |      | 
|------------------------------------------------------------------------------ |  | -------- | ------- | - | ------------ |  | ------- | ------- |  |  | -------------- | - |  | --------- | ---- | 
|                                                                               |  |          |         |   |              |  |         |         |  |  |                |   |  | Weighted- |     
|Non Plan Options                                                               |  | Employee |         |   | Non-Employee |  |         | Total   |  |  | Average        |  
|                                                                               |  | Options  |         |   | Options      |  |         | Options |  |  | Exercise Price |  
|                                                                               |  |          |         |   |              |  |         |         |  |  |                |  
|Net4Music S.A. Options Converted
October 19, 2000, date of reverse
acquisition |  |          | 307,676 |   |              |  | 242,595 |         |  |  | 550,271        |   |  | $         | 1.35 | 
|                                                                               |  |          |         |   |              |  |         |         |  |  |                |  
|Outstanding at December 31, 2000                                               |  |          | 307,676 |   |              |  | 242,594 |         |  |  | 550,270        |   |  |           | 1.35 | 
|Canceled                                                                       |  |          | (17,550 | ) |              |  |        |         |  |  | (17,550        | ) |  |           | 1.81 | 
|                                                                               |  |          |         |   |              |  |         |         |  |  |                |  
|Outstanding at December 31, 2001                                               |  |          | 290,126 |   |              |  | 242,594 |         |  |  | 532,720        |   |  | $         | 1.33 | 
|                                                                               |  |          |         |   |              |  |         |         |  |  |                |  

The weighted-average fair value of options granted during 2001 and 2000
was $0.84 and $1.60, respectively.

37



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

The following summarizes information about stock options outstanding at
December 31, 2001:

|                |   |              |  |                     |  |                |                     |           |              |  |                |           |           |   |      |  |  | 
|--------------- | - | ------------ |  | ------------------- |  | -------------- | ------------------- | --------- | ------------ |  | -------------- | --------- | --------- | - | ---- |  |  | 
|                |   |              |  | Options Outstanding |  |                | Options Exercisable |          
|                |   |              |  |                     |  |                |                     |          
|                |   |              |  | Outstanding at      |  | Weighted-      |                     | Weighted- |              |  | Exercisable at |           | Weighted- |  
|Range of        |   | December 31, |  | Average             |  | Average        |                     |           | December 31, |  | Average        |          
|Exercise Prices |   | 2001         |  | Remaining Term      |  | Exercise Price |                     |           | 2001         |  | Exercise Price |          
|                |   |              |  |                     |  |                |                     |           |              |  |                |          
|$ .57          | $ | 1.00         |  | 571,348             |  | 2.88 years     |                     | $         | .84          |  |                | 418,723   |           | $ | .88  | 
|1.01           |   | 2.00         |  | 1,422,772           |  | 5.33 years     |                     |           | 1.37         |  |                | 588,143   |           |   | 1.53 | 
|2.01           |   | 3.00         |  | 567,500             |  | 5.24 years     |                     |           | 2.59         |  |                | 225,133   |           |   | 2.56 | 
|3.01           |   | 4.00         |  | 88,200              |  | 4.13 years     |                     |           | 3.37         |  |                | 61,202    |           |   | 3.31 | 
|4.00           |   | 4.50         |  | 33,000              |  | 3.32 years     |                     |           | 4.13         |  |                | 19,083    |           |   | 4.13 | 
|                |   |              |  |                     |  |                |                     |           |              |  |                |           |           |   |     
|Total           |   |              |  | 2,682,820           |  | 4.72 years     |                     | $         | 1.62         |  |                | 1,312,285 |           | $ | 1.62 | 
|                |   |              |  |                     |  |                |                     |           |              |  |                |           |           |  

The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. The fair
value of grants to the Companys employees and directors was estimated at the
grant date using the following assumptions for 2001 and 2000: no expected
dividend yield; risk-free interest rates of 4.75% and 6.0%, respectively;
expected lives of 7 and 5 years, respectively; and estimated volatility of
1.005. Had compensation cost for these options been determined consistent with
the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation,
the net loss and loss per share would have been increased to the following pro
forma amounts:

|                                  |             |                |              |         |   |      |   |         |  
|--------------------------------- | ----------- | -------------- | ------------ | ------- | - | ---- | - | ------- | -
|                                  |             |                | December 31, |        
|                                  |             |                |              |        
|                                  |             |                | 2001         |         |   | 2000 |  
|                                  |             |                |              |         |   |      |  
|Net loss:                         |             | (In thousands)
|                                  | As reported |                | $            | (12,411 | ) |      | $ | (11,831 | )
|                                  | Pro forma   |                |              | (13,353 | ) |      |   | (12,347 | )
|Basic and diluted loss per share: |             |                |              |         |   |      |   |        
|                                  | As reported |                | $            | (.58    | ) |      | $ | (.96    | )
|                                  | Pro forma   |                |              | (.64    | ) |      |   | (1.00   | )

In 2000, the Company granted options to purchase 585,000 shares at prices
between $1.64 and $2.63 per share when fair value of the Companys stock was
$2.81, resulting in deferred compensation of approximately $493,000.

In connection with certain financing and other transactions prior to the
Coda reverse acquisition, Coda had issued warrants to purchase shares of common
stock at prices between $1.25 and $4.50 per share, exercisable over periods of
five to seven years from the grant date. These warrants remained outstanding
after the Coda reverse acquisition. Warrants previously granted by Net4Music
S.A. to purchase 452,645 shares of common stock were converted to warrants for
353,063 Coda shares as part of the Coda reverse acquisition at the conversion
rate of 0.78.

38



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

7. Shareholders Equity (continued)

Total warrants of 2,699,221 are outstanding at December 31, 2001, of which
2,556,721 are exercisable at a weighted average exercise price of $0.73. The
warrants expire as follows: 2002  70,000, 2005  2,328,394, 2010  150,827,
2011  150,000.

8. Commitments

Capital Lease Obligations

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

|                                            |  |   |     | 
|------------------------------------------- |  | - | --- | 
|2002                                        |  | $ | 175 | 
|2003                                        |  |   | 5   | 
|2004                                        |  |   | 5   | 
|2005                                        |  |   | 4   | 
|                                            |  |   |    
|Total minimum lease payments                |  |   | 189 | 
|Less amount representing interest           |  |   | 7   | 
|                                            |  |   |    
|Present value of net minimum lease payments |  |   | 182 | 
|Less current portion                        |  |   | 172 | 
|                                            |  |   |    
|Long-term portion                           |  | $ | 10  | 
|                                            |  |   |    

Operating Leases

The Company leases office and warehouse space and certain equipment under
operating leases through 2005.

Future minimum lease payments under these leases for the year ending
December 31, 2001 are as follows (in thousands):

|                             |  |   |     | 
|---------------------------- |  | - | --- | 
|2002                         |  | $ | 234 | 
|2003                         |  |   | 113 | 
|2004                         |  |   | 47  | 
|2005                         |  |   | 24  | 
|                             |  |   |    
|Total minimum lease payments |  | $ | 418 | 
|                             |  |   |    

Rent expense for the years ended December 31, 2001 and 2000 was $308,000
and $230,000, respectively.

Licensing and Exclusivity Agreements

The Company has entered into license agreements for the distribution of
music publishing catalogs, which require payments based on the sale of its
products. The Companys Coda Division has entered into license and exclusivity
agreements that require payments based on sales of its software products and
accompaniments. Payments to licensors are included in cost of sales in the
consolidated statement of operations and were $138,000 and $33,350 for the
years ended December 31, 2001 and 2000, respectively.

39



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

8. Commitments (continued)

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

|      |  |   |     | 
|----- |  | - | --- | 
|2002  |  | $ | 77  | 
|2003  |  |   | 74  | 
|2004  |  |   | 72  | 
|2005  |  |   | 60  | 
|2006  |  |   | 56  | 
|      |  |   |    
|Total |  | $ | 339 | 
|      |  |   |    

Royalty expense, including amounts related to the agreement referred to
above, totaled approximately $210,000 in the year ended December 31, 2001 and
is reflected as a component of cost of sales in the accompanying statements of
operations.

9. Employee Benefit Plan

As required by French law, the Company contributes to mandatory pension
plans covering all French employees. Payments are based upon salaries and made
to state-owned institutions. In France, legislation also requires that lump sum
retirement benefits be paid to employees in service with the Company at their
retirement date, based upon their years of service and compensation at
retirement. The obligation related to these retirement benefits was immaterial
at December 31, 2001 and 2000.

401(k) Savings Plan

The Company has established a 401(k) savings plan for the benefit of
qualified U.S. employees. Under the plan, qualified employees may elect to
defer up to 20% of their compensation, subject to a maximum limit determined by
the Internal Revenue Service. The Company, at the discretion of the Board of
Directors, may elect to make additional contributions. The Company made no
contributions to the plan in fiscal 2001.

10. Income Taxes

Loss before income taxes includes the following components:

|              |  |                |         |   |      |   |         |  
|------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|              |  | December 31,   |        
|              |  |                |        
|              |  | 2001           |         |   | 2000 |  
|              |  |                |         |   |      |  
|              |  | (In thousands) |        
|France        |  | $              | (7,590  | ) |      | $ | (6,163  | )
|United States |  |                | (4,817  | ) |      |   | (5,667  | )
|              |  |                |         |   |      |  
|              |  | $              | (12,407 | ) |      | $ | (11,830 | )
|              |  |                |         |   |      |  

40



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

10. Income Taxes (continued)

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

|                               |                                             |   |                |         |   |      |       |        |  
|------------------------------ | ------------------------------------------- | - | -------------- | ------- | - | ---- | ----- | ------ | -
|                               |                                             |   | December 31,   |        
|                               |                                             |   |                |        
|                               |                                             |   | 2001           |         |   | 2000 |      
|                               |                                             |   |                |         |   |      |      
|                               |                                             |   | (In thousands) |        
|Loss carryforwards             |                                             | $ | 13,192         |         |   | $    | 9,700 |       
|                               | Research and development credits            |   |                | 385     |   |      |       | 367    |  
|                               | Inventory                                   |   |                | 94      |   |      |       | 428    |  
|                               | Depreciation and amortization               |   |                | 213     |   |      |       | 167    |  
|                               | Other accruals                              |   |                | 383     |   |      |       | 126    |  
|                               | Valuation allowance for deferred tax assets |   |                | (12,574 | ) |      |       | (9,240 | )
|                               |                                             |   |                |         |   |     
|Net deferred tax assets        |                                             |   | 1,693          |         |   |      | 1,548 |       
|                               | Deferred tax liability:                     |   |                |         |   |      |       |        |  
|                               | Software development costs                  |   |                | 138     |   |      |       | 138    |  
|                               | Intangible assets                           |   |                | 1,555   |   |      |       | 1,410  |  
|                               |                                             |   |                |         |   |     
|Total deferred tax liabilities |                                             |   | 1,693          |         |   |      | 1,548 |       
|                               |                                             |   |                |         |   |     
|Net deferred taxes             |                                             | $ |               |         |   | $    |      |       
|                               |                                             |   |                |         |   |     

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

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

|                                                          |  |                |        |   |      |   |        |  
|--------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                          |  | December 31,   |       
|                                                          |  |                |       
|                                                          |  | 2001           |        |   | 2000 |  
|                                                          |  |                |        |   |      |  
|                                                          |  | (In thousands) |       
|Income tax computed at the statutory rate                 |  | $              | (4,218 | ) |      | $ | (4,022 | )
|State taxes, net of calculated federal income tax benefit |  |                | (283   | ) |      |   | (237   | )
|Unused tax loss carryforwards and valuation reserve       |  |                | 3,429  |   |      |   | 4,120  |  
|Permanent differences                                     |  |                | 1,149  |   |      |   | 304    |  
|Effect of higher tax rates in France                      |  |                | (76    | ) |      |   | (164   | )
|Other                                                     |  |                | 3      |   |      |   |       |  
|                                                          |  |                |        |   |      |  
|Effective income tax expense                              |  | $              | 4      |   |      | $ | 1      |  
|                                                          |  |                |        |   |      |  

41



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

10. Income Taxes (continued)

Net Operating Losses

At December 31, 2001, the Company has net operating loss carryforwards
(NOLs) and research and development credits which may be used to offset
otherwise future taxable income with the following expiration dates:

|     |  |                    |        |  |             |   |        |      |         |              |     | 
|---- |  | ------------------ | ------ |  | ----------- | - | ------ | ---- | ------- | ------------ | --- | 
|     |  |                    |        |  |             |   |        |      |         | Research and |    
|     |  | Net Operating Loss |        |  | Development |  
|     |  |                    |        |  |             |  
|     |  | Net4Music          |        |  |             |   |        |      | Credits |             
|     |  | S.A. France        |        |  | U.S.        |   |        | U.S. |        
|     |  |                    |        |  |             |   |        |      |        
|     |  | (In thousands)     |        |  |             |   |        |      |         |              |    
|2002 |  | $                  | 17     |  |             |   |       |      |         |              |    | 
|2003 |  |                    | 26     |  |             |   |       |      |         |              |    | 
|2004 |  |                    | 4,035  |  |             |   |       |      |         |              |    | 
|2005 |  |                    | 5,870  |  |             |   |       |      |         |              |    | 
|2006 |  |                    | 4,122  |  |             |   | 38     |      |         |              |    | 
|2007 |  |                    |       |  |             |   | 243    |      |         |              | 13  | 
|2008 |  |                    |       |  |             |   | 825    |      |         |              | 72  | 
|2009 |  |                    |       |  |             |   | 1,586  |      |         |              | 90  | 
|2010 |  |                    |       |  |             |   | 2,128  |      |         |              | 47  | 
|2011 |  |                    |       |  |             |   | 2,192  |      |         |              | 43  | 
|2012 |  |                    |       |  |             |   | 1,736  |      |         |              | 38  | 
|2018 |  |                    |       |  |             |   | 770    |      |         |              | 46  | 
|2019 |  |                    |       |  |             |   | 1,478  |      |         |              | 36  | 
|2020 |  |                    |       |  |             |   | 4,414  |      |         |              |    | 
|2021 |  |                    |       |  |             |   | 2,969  |      |         |              |    | 
|     |  |                    |        |  |             |   |        |      |        
|     |  | $                  | 14,070 |  |             | $ | 18,379 |      |         | $            | 385 | 
|     |  |                    |        |  |             |   |        |      |        

Net4Music S.A. has additional operating loss carryforwards of $3.5 million
which can be carried forward indefinitely under French law.

Included in the U.S. NOLs are those of Net4Music S.A.s subsidiary with
federal and state NOLs of approximately $7.1 million which begin to expire in
2019. These loss carryforwards can only be used by the entity that has
generated the corresponding tax losses.

At December 31, 2001, approximately $9.5 million of the Companys NOLs
have a full valuation allowance and when realized will result in a reduction of
goodwill associated with the Coda acquisition. Section 382 of the Internal
Revenue Code restricts the annual utilization of these NOLs incurred prior to a
change in ownership. Such a change in ownership has occurred in connection with
the Coda reverse acquisition, thereby potentially restricting the NOLs
available to the Company. The Company has yet to determine whether any
limitation on these NOLs exists at December 31, 2001. The Companys subsidiary
in New York had also generated approximately $4.6 million in NOLs that may also
be subject to Section 382 limitations due to the significant changes in control
of Net4Music S.A. in the previous year. There can be no assurance that certain
of the Companys NOLs will be available for use in the future.

42



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

11. Litigation

In the ordinary course of business, the Company can be party to legal
actions, proceedings or claims. Corresponding costs are accrued when it is more
likely than not that loss will be incurred and the amount can be precisely or
reasonably estimated.

12. Related Party Transactions

On September 28, 2001 the Company sold pursuant to a private placement,
2,298,394 shares of its common stock at a price of $0.66 per share, based on a
30-day average of the closing price of the company stock preceding September
20, 2001. Management and employees purchased over 207,210 shares, with $88,000
of the purchases being made with non-interest bearing loans to be paid from
earned bonuses. As of December 31, 2001, the outstanding loan balance is
$73,000.

13. Segment and Geographic Data

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

During 2001 and 2000, the Company had sales of approximately $831,000 and
$183,000 respectively to a major customer. Accounts receivable from this
customer were approximately $108,000 at December 31, 2001.

Net revenues for 2001 and 2000 included software sales of $7,135,000 and
$1,286,000 respectively. Software sales began in October 2000 with the reverse
acquisition of Coda.

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

|                   |               |   |                |        |  |      |        |        | 
|------------------ | ------------- | - | -------------- | ------ |  | ---- | ------ | ------ | 
|                   |               |   | December 31,   |       
|                   |               |   |                |       
|                   |               |   | 2001           |        |  | 2000 |       
|                   |               |   |                |        |  |      |       
|                   |               |   | (In thousands) |       
|Net sales:         |               |   |                |        |  |      |        |       
|                   | North America |   | $              | 5,584  |  |      | $      | 1,142  | 
|                   | Europe        |   |                | 871    |  |      |        | 211    | 
|                   | Asia          |   |                | 689    |  |      |        | 66     | 
|                   | Other         |   |                | 85     |  |      |        | 35     | 
|                   |               |   |                |        |  |     
|                   |               | $ | 7,229          |        |  | $    | 1,454  |       
|                   |               |   |                |        |  |     
|Long-lived assets: |               |   |                |        |  |      |        |       
|                   | North America |   | $              | 22,845 |  |      | $      | 26,495 | 
|                   | Europe        |   |                | 945    |  |      |        | 2,659  | 
|                   |               |   |                |        |  |     
|                   |               | $ | 23,790         |        |  | $    | 29,154 |       
|                   |               |   |                |        |  |     

43



---



##### Table of Contents



Net4Music Inc.
Notes to Consolidated Financial Statements

14. Quarterly Results of Operations (Unaudited)

The following table summarizes the 2001 unaudited consolidated statement
of operations data compared to the pro forma 2000 statement of operations data
that shows the financial results as if the reverse acquisition completed on
October 19, 2000 had occurred prior to the beginning of 2000. The operating
results for any quarter are not necessarily indicative of results for any
future period.

|                                        |                     |          |        |       |         |   |        |              |               |   |             |       |  |   |        |       |  |  | 
|--------------------------------------- | ------------------- | -------- | ------ | ----- | ------- | - | ------ | ------------ | ------------- | - | ----------- | ----- |  | - | ------ | ----- |  |  | 
|                                        |                     |          |        |       |         |   |        |              | Quarter Ended |   |             |       |  |  
|                                        |                     |          |        |       |         |   |        |              |               |   |             |       |  |  
|(In thousands, except per share data)   |                     | March 31 |        |       | June 30 |   |        | September 30 |               |   | December 31 |      
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|2001 Actual                             |                     |          |        |       |         |   |        |              |               |   |             |       |  |   |        |      
|                                        |                     |          |        |       |         |   |        |              |               |   |             |       |  |   |        |      
|Net Revenues                            |                     | $        | 1,893  |       |         | $ | 1,184  |              |               | $ | 1,950       |       |  | $ | 2,202  |      
|                                        | Cost of revenues    |          |        | 412   |         |   |        | 298          |               |   |             | 354   |  |   |        | 433   | 
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|Gross profit                            |                     |          | 1,481  |       |         |   | 886    |              |               |   | 1,596       |       |  |   | 1,769  |      
|Operating expenses                      |                     |          | 5,013  |       |         |   | 3,933  |              |               |   | 3,748       |       |  |   | 3,153  |      
|Impairment  intangibles                |                     |          |       |       |         |   |       |              |               |   | 796         |       |  |   | 508    |      
|Restructuring                           |                     |          | 645    |       |         |   |       |              |               |   | 386         |       |  |   | 141    |      
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|                                        | Total Operating Exp |          |        | 5,658 |         |   |        | 3,933        |               |   |             | 4,930 |  |   |        | 3,802 | 
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|Loss from operations                    |                     | $        | (4,177 | )     |         | $ | (3,047 | )            |               | $ | (3,334      | )     |  | $ | (2,033 | )    
|Net Loss                                |                     | $        | (4,129 | )     |         | $ | (3,035 | )            |               | $ | (3,260      | )     |  | $ | (1,987 | )    
|Basic and diluted loss per common share |                     | $        | (0.20  | )     |         | $ | (0.15  | )            |               | $ | (0.16       | )     |  | $ | (0.09  | )    
|EBITDA                                  |                     | $        | (3,123 | )     |         | $ | (1,870 | )            |               | $ | (2,105      | )     |  | $ | (837   | )    
|                                       
|2000 Pro forma                          |                     |          |        |       |         |   |        |              |               |   |             |       |  |   |        |      
|                                        |                     |          |        |       |         |   |        |              |               |   |             |       |  |   |        |      
|Net Revenues                            |                     | $        | 1,839  |       |         | $ | 1,095  |              |               | $ | 2,739       |       |  | $ | 1,621  |      
|                                        | Cost of revenues    |          |        | 446   |         |   |        | 350          |               |   |             | 529   |  |   |        | 294   | 
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|Gross profit                            |                     |          | 1,393  |       |         |   | 745    |              |               |   | 2,210       |       |  |   | 1,327  |      
|Operating expenses                      |                     |          | 4,660  |       |         |   | 4,926  |              |               |   | 4,821       |       |  |   | 5,854  |      
|                                        |                     |          |        |       |         |   |        |              |               |   |             |      
|Loss from operations                    |                     | $        | (3,267 | )     |         | $ | (4,181 | )            |               | $ | (2,611      | )     |  | $ | (4,527 | )    
|Net Loss                                |                     | $        | (3,236 | )     |         | $ | (4,071 | )            |               | $ | (2,426      | )     |  | $ | (4,570 | )    
|Basic and diluted loss per common share |                     | $        | (0.24  | )     |         | $ | (0.25  | )            |               | $ | (0.13       | )     |  | $ | (0.23  | )    
|EBITDA                                  |                     | $        | (2,276 | )     |         | $ | (3,127 | )            |               | $ | (1,464      | )     |  | $ | (3,206 | )    

NOTE: EBITA-Represents Earnings (Loss) before interest, tax, depreciation and
amortization.

44



---



##### Table of Contents












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

None

PART III

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

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

|                    |  |     |    |  |          |                                                  
|------------------- |  | --- | -- |  | -------- | -------------------------------------------------
|Name                |  | Age |    |  | Position
|                    |  |     |    |  |         
|Philip Sean Lafleur |  |     | 38 |  |          | Chairman of the Board and Chief Executive
Officer
|John W. Paulson     |  |     | 54 |  |          | President                                        
|Barbara S. Remley   |  |     | 50 |  |          | Chief Financial Officer, Treasurer and
Secretary 

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

John W. Paulsonhas been President of the Company since October 2001 and a
director since December 1990. He was President of the Companys Coda division
from October 2000 to October 2001, and Chairman of the Board of Directors of
the Company from December 1990 to October 2000. From 1982 to 1990, Mr. Paulson
was Chairman of Springboard Software, Inc., a publicly held company he founded
to develop and market educational and consumer software products. Prior to
founding Springboard, Mr. Paulson was a public school music teacher for nine
years. He has a Master of Arts in Music Education from the Eastman School of
Music, is a published composer, and has performed as a professional musician
for over ten years. Mr. Paulson has served on the Board of Directors of the
National Association of Music Merchants and the St. Paul Chamber Orchestra.

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

45



---



##### Table of Contents



The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled Election of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance which appear in the Companys definitive Proxy
Statement for its 2002 Annual Meeting of Shareholders.




ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 10 is incorporated herein by reference to
the section labeled Executive Compensation which appears in the Companys
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 12 is incorporated by reference to the
section labeled Certain Transactions which appears in the Companys
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders.




ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits.                                                                                   
| | --- |  | --------------------------------------------------------------------------------------------
|
| |     |  | See Exhibit Index immediately following the signature page of this Form
10-KSB.           
|
| | (b) |  | Reports on Form 8-K.                                                                        
|
| |     |  | No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 2001.

46



---



##### Table of Contents



SIGNATURES

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

|                      |  |                                             
|--------------------- |  | --------------------------------------------
|                      |  | Net4Music Inc.                              
|                     
|Dated: March 27, 2002 |  | By:  s/Philip Sean Lafleur                  
|                      |  |                                             
|                      |  | Philip Sean Lafleur, Chief Executive Officer

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

(Power of Attorney)

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

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

Philip Sean Lafleur, Chairman of the Board and Chief
Executive Officer (principal executive officer) |  | March 27, 2002
|                                                                                                                            
|s/ Barbara S. Remley

Barbara S. Remley, Chief Financial Officer (principal
financial and accounting officer)                |  | March 27, 2002
|                                                                                                                            
|s/ Philippe Aubert

Philippe Aubert, Director                                                                                |  | March 27, 2002
|                                                                                                                            
|s/ Timothy P. Bajarin

Timothy P. Bajarin, Director                                                                          |  | March 27, 2002
|                                                                                                                            
|s/ Francois J. Duliège

Francois J. Duliège, Director                                                                        |  | March 27, 2002

47



---



##### Table of Contents





|                                                  |  |               
|------------------------------------------------- |  | --------------
|Signature and Title                               |  | Date          
|                                                 
|                                                  |  |               
|                                                 
|s/ Benoist Grossmann

Benoist Grossmann, Director |  | March 27, 2002
|                                                 
|S/ Patrick Revenu

Patrick Revenu, Director       |  | March 27, 2002
|                                                 
|s/ John W. Paulson

John W. Paulson, Director     |  | March 27, 2002
|                                                 
|s/ Martin Velasco

Martin Velasco, Director       |  | March 27, 2002
|                                                 
|s/ Benson K. Whitney

Benson K. Whitney, Director |  | March 27, 2002

48



---



##### Table of Contents



NET4MUSIC INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 2001 FISCAL YEAR

|        |  |                                                                                                                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                              
|Number  |  | Description                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                              
|       
|3.1     |  | Amended and Restated Articles of Incorporationincorporated by
reference to Exhibit 3(i) to the Registrants Form 8-K filed
November 3, 2000                                                                                                                 
|       
|2.1     |  | Stock Purchase Agreement, dated August 11, 2000, by and among the
Registrant, Net4Music S.A. and certain shareholders of Net4Music
S.A.  incorporated by reference to Exhibit 2.1 to the
Registrants Registration Statement on Form S-4, Reg. No. 333
43660
|       
|2.2     |  | Put and Call Agreement entered into by the Registrant and certain
shareholders and option and warrant holders of Net4Music S.A. 
incorporated by reference to Exhibit 2.2 to the Registrants
Registration Statement on Form S-4, Reg. No. 333-43660        
|       
|2.3     |  | Shareholder Voting Agreement entered into by the Registrant and
certain shareholders of the Registrantincorporated by reference
to Exhibit 2.3 to the Registrants Registration Statement on Form
S-4, Reg. No. 333-43660                                   
|       
|3.2     |  | Bylawsincorporated by reference to Exhibit 3.2 to the
Registrants Form SB-2 Registration Statement, Reg. No. 33-92212C                                                                                                                                     
|       
|10.1    |  | Lease dated October 23, 1992 between the Registrant and Jorandcor,
Inc.incorporated by reference to Exhibit 10.1 to the Registrants
Form SB-2 Registration Statement, Reg. No. 33-92212C                                                                   
|       
|10.2*   |  | 1992 Stock Option Planincorporated by reference to Exhibit 10.3
to the Registrants Form SB-2 Registration Statement, Reg. No.
33-92212C                                                                                                                    
|       
|10.3    |  | License Agreement dated June 10, 1992 between the Registrant and
Carnegie Mellon University, including Amendments 1 and
2incorporated by reference to Exhibit 10.11 to the Registrants
Form SB-2 Registration Statement, Reg. No. 33-92212C                
|       
|10.4    |  | License Agreement dated December 31, 1992 between the Registrant
and Wenger Corporationincorporated by reference to Exhibit 10.12
to the Registrants Form SB-2 Registration Statement, Reg. No.
33-92212C                                                  
|       
|10.5*   |  | Form of Nonqualified Stock Option Agreement for Options Granted
Outside the 1992 Stock Option Planincorporated by reference to
Exhibit 10.13 to the Registrants Form SB-2 Registration
Statement, Reg. No. 33-92212C                                       
|       
|10.6    |  | Educational Software Distribution Agreement dated July 26, 1991
between the Registrant and The Douglas Stewart
Companyincorporated by reference to Exhibit 10.17 to the
Registrants Form SB-2 Registration Statement, Reg. No. 33-92212C                   
|       
|10.8    |  | Amendment No. 3 to License Agreement between the Registrant and
Carnegie Mellon University dated August 28, 1996  incorporated by
reference to Exhibit 10.1 to the Registrants 10-QSB for the
quarter ended September 30, 1996                             

49



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                        
|Number  |  | Description                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                        
|       
|10.9    |  | Second Amendment to Lease by and between Jorandcor, Inc. and the
Registrantincorporated by reference to Exhibit 10.14 to the
Registrants Form 10-KSB for the year ended December 31, 1997                                            
|       
|10.10   |  | Amendment No. 4 to License Agreement between the Registrant and Carnegie
Mellon University dated December 30, 1998  incorporated by reference to
Exhibit 10.10 to the Registrants Form 10-KSB for the year ended
December 31, 1998   
|       
|10.11   |  | Loan Agreement dated February 14, 1999 between the Registrant and
Riverside Bank  incorporated by reference to Exhibit 10.11 to the
Registrants Form 10-KSB for the year ended December 31, 1998                                     
|       
|10.12   |  | Amendment dated February 14, 2000 to Loan Agreement dated February 14,
1999 between the Registrant and Riverside Bank  incorporated by
reference to Exhibit 10.12 to the Registrants Form 10-KSB for the year
ended December 31, 1999
|       
|10.13   |  | Third Amendment to Lease by and between Jorandcor, Inc. and the
Registrant  incorporated by reference to Exhibit 10.1 to the
Registrants Form 10-QSB for the quarter ended March 31, 2000                                            
|       
|10.14   |  | Amendment dated March 1, 2000 to Loan Agreement dated February 14, 1999
between the Registrant and Riverside Bank  incorporated by reference to
Exhibit 10.2 to the Registrants Form 10-QSB for the quarter ended March
31, 2000     
|       
|10.15*  |  | Employment Agreement dated October 19, 2000 between the Registrant and
John W. Paulson  incorporated by reference to Exhibit 10.15 to the
Registrants Form 10-KSB for the year ended December 31, 2000                               
|       
|10.16*  |  | Employment Agreement dated September 24, 2000 between Net4Music SA and
Philip Sean Lafleur                                                                                                                                             
|       
|10.17   |  | Form of warrant issued October 19, 2001 with list of amounts purchased
by directors, officers and principal shareholders                                                                                                               
|       
|21      |  | Subsidiaries of the Registrant:                                                                                                                                                                                                        
|       
|        |  | Net4Music S.A. (a French corporation)
Net4Music (New York) Inc. (a Delaware corporation)
Notmad SARL (a Madagascar corporation)
Musify Inc. (a Delaware corporation)                                                                   
|       
|23.1    |  | Consent of Ernst & Young LLP, independent public accountants                                                                                                                                                                           
|       
|24      |  | Power of Attorney (included on the Signatures page of this Form 10-KSB)                                                                                                                                                              



---

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

50