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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission File No.: 0-26192
 MakeMusic, Inc.
  Minnesota
    
    41-1716250(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 
 (952) 937-9611
  Common Stock $.01 par value
(Title of each class)
    
    NASDAQ Capital Market
(Name of each exchange on which registered)
  o þ
 o þ
 þ o
 o
  Large accelerated filer
o

    

  Accelerated filer
o

    

    Non-accelerated filer o
(Do not check if a smaller reporting company)

  

    Smaller reporting company
þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  Yes o No þ




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##### 



TABLE OF CONTENTS
 Page No.PART IItem 1. Business
    
    
    2Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    15Item 6.
Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    16Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    42Item 9A(T). Controls and Procedures
    
    
    42Item 9B. Other Information
    
    
    43PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    44Item 11. Executive Compensation
    
    
    45Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    45Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    45Item 14. Principal Accounting Fees and Services
    
    
    45PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    46EX-10.1EX-10.4EX-10.5EX-10.6EX-10.9EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  1




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




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




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




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SmartMusic Application Development
    Licensed Technology
  SmartMusic Patents
  5




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SmartMusic Website and Back Office Development
   SmartMusic Accessories
  SmartMusic Subscription Business
    
    
    Number of SmartMusic educator accounts
    
    Number of SmartMusic Gradebook teachers (those having issued assignments to 50+
students)
    
    Total number of SmartMusic subscriptions
  SmartMusic Site Licenses
  6




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SmartMusic Sales and Marketing
      www.smartmusic.com www.makemusic.com www.finalemusic.com
 SmartMusic Competition
  ®
 ®
 7




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Finale family of notation products
 ® ®
 ®
   ®
 ® ®
 ® 
 Finale Sales and Marketing
   8




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Finale Competition
  Synergies between SmartMusic and Finale products
 ®
  General Information
 Customer Support
 www.finalemusic.com www.smartmusic.com
 9




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Principal Sources and Suppliers
  Dependence on Major Customers
  Product Development
   Trademarks
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®   
 Technology Infrastructure
 ® ® ® ®
  10




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##### Table of Contents



MakeMusic Websites:
 www.smartmusic.com
 www.smartmusic.com/impact
 www.finalemusic.com
 www.makemusic.com www.smartmusic.com www.finalemusic.com
 Available Information
 www.sec.gov
 Cautionary Statements
   11




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While we currently believe that we have sufficient capital, we may have other capital needs.
 We are dependent upon our new product development efforts.
 We are dependent upon the Internet in our business.
 We are dependent upon obtaining and maintaining license agreements with music publishers, of
which there are a limited number.
 Certain of our products have limited and fluctuating sales.
 The continued decline in worldwide economic conditions may divert consumer spending from our
products.
 We have incurred operating losses in the past and may incur losses in the future.
 We face intense competition.
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Rapid technological changes and obsolescence may adversely affect our business.
 The success of our web-based products and services is dependent upon our ability to protect
user information and comply with data protection laws and regulations.
  We are dependent upon certain key personnel.
 We are dependent upon proprietary technology and cannot assure protection of such technology.
 International development plans are subject to numerous risks.
 13




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The market price of our stock may experience volatility.
 We will be exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
 
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  14




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2008
    
    2007High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    10.39
    
    
    $
    8.53
    
    
    $
    6.83
    
    
    $
    5.63Common
    
    Second Quarter
    
    
    9.50
    
    
    
    7.34
    
    
    
    6.94
    
    
    
    5.85Stock
    
    Third Quarter
    
    
    8.00
    
    
    
    6.10
    
    
    
    7.33
    
    
    
    5.76Fourth Quarter
    
    
    6.95
    
    
    
    2.02
    
    
    
    10.80
    
    
    
    6.98
  Dividends
  Recent Sales of Unregistered Equity Securities
    
 ITEM
6. SELECTED FINANCIAL DATA
  15




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




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Dec-07
    
    Mar-08
    
    Jun-08
    
    Sep-08
    
    Dec-08Total Subscriptions
    
    
    86,901
    
    
    
    92,776
    
    
    
    95,632
    
    
    
    98,119
    
    
    
    106,584Educator Accounts
    
    
    7,641
    
    
    
    8,161
    
    
    
    8,165
    
    
    
    9,165
    
    
    
    9,185Educators who have issued assignments*
    
    
    862
    
    
    
    1,159
    
    
    
    1,282
    
    
    
    827
    
    
    
    1,436Gradebook Teachers*
    
    
    357
    
    
    
    498
    
    
    
    538
    
    
    
    247
    
    
    
    601Site Licenses
    
    
    32
    
    
    
    47
    
    
    
    97
    
    
    
    189
    
    
    
    212
 
 *

    Annual statistics that restart on July 1 of each year reflecting the start of the
school-year cycle     QuarterlyBeginning
    
    New
    
    Renewed
    
    Subscriptions
    
    Quarter End
    
    Net NewSubscriptions
    
    Subscriptions
    
    Subscriptions
    
    Ended
    
    Subscriptions
    
    Subscriptions3rd Quarter
    
    
    95,632
    
    
    
    20,347
    
    
    
    20,017
    
    
    
    37,877
    
    
    
    98,119
    
    
    
    2,4874th Quarter
    
    
    98,119
    
    
    
    17,907
    
    
    
    17,942
    
    
    
    27,384
    
    
    
    106,584
    
    
    
    8,465
 17




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.
  Critical Accounting Estimates
  Allowance for doubtful accounts.
  Sales returns and allowance reserves.
  Inventory valuation.
 18




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Stock based compensation.
 Capitalized software costs. Accounting for the Costs of
Computer Software to Be Sold Leased, or Otherwise Marketed
 Post contract support. Software Revenue Recognition
 Impairment of goodwill.
 Deferred tax assets.
 19




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Results of Operations
  Year Ended December 31,Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    %(In $ thousands)
    
    
    (In $ thousands)Notation revenue
    
    $
    10,289
    
    
    $
    10,980
    
    
    ($
    691
    )
    
    
    -6
    %SmartMusic revenue
    
    
    4,070
    
    
    
    2,900
    
    
    
    1,170
    
    
    
    40
    %Other revenue
    
    
    797
    
    
    
    700
    
    
    
    97
    
    
    
    14
    %Net revenue
    
    
    15,156
    
    
    
    14,580
    
    
    
    576
    
    
    
    4
    %Cost of revenues
    
    
    2,380
    
    
    
    2,228
    
    
    
    152
    
    
    
    7
    %Gross profit
    
    
    12,776
    
    
    
    12,352
    
    
    
    424
    
    
    
    3
    %Percentage of net sales
    
    
    84
    %
    
    
    85
    %Development
    
    
    4,633
    
    
    
    4,278
    
    
    
    355
    
    
    
    8
    %Selling and marketing
    
    
    4,318
    
    
    
    4,045
    
    
    
    273
    
    
    
    7
    %General administrative
    
    
    3,385
    
    
    
    3,504
    
    
    
    (119
    )
    
    
    -3
    %Total operating expenses
    
    
    12,336
    
    
    
    11,827
    
    
    
    509
    
    
    
    4
    %Operating income
    
    
    440
    
    
    
    525
    
    
    
    (85
    )
    
    
    -16
    %Other income
    
    
    59
    
    
    
    127
    
    
    
    (68
    )
    
    
    -54
    %Net income before taxes
    
    $
    499
    
    
    $
    652
    
    
    ($
    153
    )
    
    
    -23
    %Income tax expense
    
    
    (8
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    300
    %Net income
    
    $
    491
    
    
    $
    650
    
    
    ($
    159
    )
    
    
    -24
    %
 Year ended December 31, 2008 compared to the year ended December 31, 2007
 Net revenue.
   20




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Gross profit.
 Development expense.
 21




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Selling and marketing expense.
 General and administrative expense. th
 Interest income and expense, net.
 Income tax.
 Liquidity and capital resources.
 22




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Contractual Obligations and Commitments
  Capital
    
    
    OperatingLease
    
    
    Lease
    
    
    Total LeaseObligations
    
    
    Obligations
    
    
    Obligations(in thousands)2009
    
    $
    66
    
    
    $
    191
    
    
    $
    2572010
    
    
    60
    
    
    
    192
    
    
    
    2522011
    
    
    20
    
    
    
    48
    
    
    
    68Thereafter
    
    
    0
    
    
    
    0
    
    
    
    0$
    146
    
    
    $
    431
    
    
    $
    577
  New accounting pronouncements.
 23




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
      Minneapolis, Minnesota
 24




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MakeMusic, Inc.
Balance Sheets  (In thousands of U.S. dollars, except share and per share data)
 December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,592
    
    
    $
    6,041Accounts receivable (net of allowance of $47 and $38 in
2008 and 2007, respectively)
    
    
    1,397
    
    
    
    1,491Inventories
    
    
    465
    
    
    
    332Prepaid expenses and other current assets
    
    
    293
    
    
    
    211Total current assets
    
    
    8,747
    
    
    
    8,075Property and equipment, net
    
    
    673
    
    
    
    730Capitalized software products, net
    
    
    2,631
    
    
    
    1,418Goodwill
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    10
    
    
    
    29Total assets
    
    
    15,691
    
    
    
    13,882Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    
    56
    
    
    
    57Accounts payable
    
    
    373
    
    
    
    427Accrued compensation
    
    
    1,170
    
    
    
    1,131Other accrued liabilities
    
    
    272
    
    
    
    184Post contract support
    
    
    146
    
    
    
    169Reserve for product returns
    
    
    382
    
    
    
    365Current portion of deferred rent
    
    
    30
    
    
    
    26Deferred revenue
    
    
    2,336
    
    
    
    1,702Total current liabilities
    
    
    4,765
    
    
    
    4,061Capital lease obligations, net of current portion
    
    
    76
    
    
    
    132Deferred rent, net of current portion
    
    
    39
    
    
    
    69Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000

Issued and outstanding shares  4,635,529 and 4,517,803

in 2008 and 2007, respectively
    
    
    46
    
    
    
    45Additional paid-in capital
    
    
    65,716
    
    
    
    65,017Accumulated deficit
    
    
    (54,951
    )
    
    
    (55,442
    )Total shareholders equity
    
    
    10,811
    
    
    
    9,620Total liabilities and shareholders equity
    
    $
    15,691
    
    
    $
    13,882
 See accompanying notes.
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MakeMusic, Inc.
Statements of Income  (In thousands of U.S. dollars, except share and per share data)
 YearEnded December 31,2008
    
    
    2007Notation revenue
    
    $
    10,289
    
    
    $
    10,980SmartMusic revenue
    
    
    4,070
    
    
    
    2,900Other revenue, primarily freight
    
    
    797
    
    
    
    700NET REVENUE
    
    
    15,156
    
    
    
    14,580COST OF REVENUES
    
    
    2,380
    
    
    
    2,228GROSS PROFIT
    
    
    12,776
    
    
    
    12,352OPERATING EXPENSES:Development expenses
    
    
    4,633
    
    
    
    4,278Selling and marketing expenses
    
    
    4,318
    
    
    
    4,045General and administrative expenses
    
    
    3,385
    
    
    
    3,504Total operating expenses
    
    
    12,336
    
    
    
    11,827INCOME FROM OPERATIONS
    
    
    440
    
    
    
    525Other, net
    
    
    59
    
    
    
    127Income before income taxes
    
    
    499
    
    
    
    652Income tax expense
    
    
    8
    
    
    
    2Net income
    
    $
    491
    
    
    $
    650Net income per common share:Basic
    
    $
    0.11
    
    
    $
    0.16Diluted
    
    
    0.10
    
    
    
    0.15Weighted average common shares outstanding:Basic
    
    
    4,620,651
    
    
    
    4,164,544Diluted
    
    
    4,779,235
    
    
    
    4,464,585
 See accompanying notes.
 26




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MakeMusic, Inc.
Statement of Shareholders Equity  (In thousands of U.S. dollars, except shares)
 AdditionalCommon Stock
    
    Paid-In
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    EquityBALANCE AT DECEMBER 31, 2006
    
    
    3,971,229
    
    
    $
    40
    
    
    $
    62,896
    
    
    $
    (56,092
    )
    
    $
    6,844Exercise of stock options and warrants
    
    
    546,574
    
    
    
    5
    
    
    
    1,722
    
    
    
    
    
    
    
    1,727Compensation under FAS123(R)
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    399Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    650BALANCE AT DECEMBER 31, 2007
    
    
    4,517,803
    
    
    
    45
    
    
    
    65,017
    
    
    
    (55,442
    )
    
    
    9,620Exercise of stock options and warrants
    
    
    117,726
    
    
    
    1
    
    
    
    299
    
    
    
    
    
    
    
    300Compensation under FAS123(R)
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    400Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    491BALANCE AT DECEMBER 31, 2008
    
    
    4,635,529
    
    
    $
    46
    
    
    $
    65,716
    
    
    $
    (54,951
    )
    
    $
    10,811
 See accompanying notes.
 27




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MakeMusic, Inc.
Statements of Cash Flows  (In thousands of U.S. dollars)
 Year Ended
    
    
    Year Ended2008
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    491
    
    
    $
    650Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    876
    
    
    
    599Loss on disposal of property and equipment
    
    
    21
    
    
    
    6Noncash stock based compensation
    
    
    400
    
    
    
    399Net changes in current assets and liabilities:Accounts receivable
    
    
    94
    
    
    
    173Inventories
    
    
    (133
    )
    
    
    15Prepaid expenses and other current assets
    
    
    (73
    )
    
    
    (9
    )Accounts payable
    
    
    (54
    )
    
    
    (80
    )Accrued liabilities and product returns
    
    
    95
    
    
    
    (107
    )Deferred revenue
    
    
    634
    
    
    
    503Net cash provided by operating activities
    
    
    2,351
    
    
    
    2,149Cash flows from investing activitiesPurchases of property and equipment
    
    
    (359
    )
    
    
    (214
    )Proceeds from disposal of property and equipment
    
    
    0
    
    
    
    1Capitalized development and other intangibles
    
    
    (1,684
    )
    
    
    (713
    )Net cash used in investing activities
    
    
    (2,043
    )
    
    
    (926
    )Cash flows from financing activitiesProceeds from stock options and warrants exercised
    
    
    300
    
    
    
    1,727Payments on capital leases
    
    
    (57
    )
    
    
    (39
    )Net cash provided by financing activities
    
    
    243
    
    
    
    1,688Net increase in cash and cash equivalents
    
    
    551
    
    
    
    2,911Cash and cash equivalents, beginning of year
    
    
    6,041
    
    
    
    3,130Cash and cash equivalents, end of year
    
    $
    6,592
    
    
    $
    6,041Supplemental disclosure of cash flow informationInterest paid
    
    $
    13
    
    
    $
    18Income taxes paid
    
    
    8
    
    
    
    2Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    
    
    
    
    203
 See accompanying notes.
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Notes to Financial Statements
 1. Description of Business
 ® ®
 2. Summary of Significant Accounting Policies
 Revenue Recognition
 Software Revenue
Recognition
   Accounting
for Shipping and Handling Fees and Costs
  Net Income Per Common Share
  29




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Segment Reporting
  Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Accounts Receivable
   Inventories
  Property and Equipment
   Capitalized Software Products
  30




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2. Summary of Significant Accounting Policies (Continued)
 Product development
 Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
   Goodwill
 Goodwill and Other Intangible Assets
 Patents and Trademarks
  Impairment of Long-Lived Assets
  31




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2. Summary of Significant Accounting Policies (Continued)
 Income Taxes
   Accounting for the Uncertainty
in Income Taxes  an Interpretation of FASB Statement 109 (FIN 48),
  Balance at January 1, 2008
    
    $
    3,133Additions based on tax positions related to the current year
    
    
    93Additions for tax positions of prior years
    
    
    7Reductions for tax provisions of prior years
    
    
    (91
    )Settlements
    
    
    Balance at December 31, 2008
    
    $
    3,142
   32




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Stock-Based Compensation
     2008
    
    2007Risk-free interest rate
    
    
    0.74
    %
    
    
    4.5
    %Expected life, in years
    
    
    1.5
    
    
    
    3.5Expected volatility
    
    
    79.57
    %
    
    
    83.23
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  33




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##### Table of Contents



2. Summary of Significant Accounting Policies (Continued)
 Advertising and Promotion
  Deferred Rent
  Use of Estimates
  3. New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 34




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##### Table of Contents



3. New Accounting Pronouncements (Continued)
  4. Supplemental Balance Sheet Information
 Inventories
  December 31,2008
    
    2007(In thousands)Components
    
    $
    391
    
    
    $
    347Finished goods
    
    
    123
    
    
    
    65Reserve for obsolescence
    
    
    (49
    )
    
    
    (80
    )$
    465
    
    
    $
    332
 Property and Equipment
  December 31,2008
    
    2007(In thousands)Computer equipment and software
    
    $
    2,458
    
    
    $
    2,804Office furniture and other
    
    
    657
    
    
    
    6193,115
    
    
    
    3,423Less accumulated depreciation
    
    
    (2,442
    )
    
    
    (2,693
    )$
    673
    
    
    $
    730
   35




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Capitalized Software Products
  December 31,2008
    
    2007(In thousands)Repertoire development
    
    $
    3,467
    
    
    $
    1,813Software translation
    
    
    125
    
    
    
    125SmartMusic website
    
    
    461
    
    
    
    461SmartMusic Impact development
    
    
    511
    
    
    
    511Other
    
    
    
    
    
    
    124,564
    
    
    
    2,922Less accumulated depreciation and amortization
    
    
    (1,933
    )
    
    
    (1,504
    )$
    2,631
    
    
    $
    1,418
  (In thousands)2009
    
    $
    6132010
    
    
    6132011
    
    
    6132012
    
    
    4952013
    
    
    297$
    2,631
 Goodwill
  Other Non-current Assets
  December 31,2008
    
    2007(In thousands)Patents and trademarks
    
    $
    10
    
    
    $
    20Prepaid royalties
    
    
    
    
    
    
    9$
    10
    
    
    $
    29
 36




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##### Table of Contents



4. Supplemental Balance Sheet Information (Continued)
 Deferred Revenue
  December 31,2008
    
    2007(In thousands)Deferred SmartMusic subscription revenue
    
    $
    2,235
    
    
    $
    1,630Deferred notation revenue
    
    
    51
    
    
    
    10Deposits
    
    
    50
    
    
    
    62$
    2,336
    
    
    $
    1,702
 Other Accrued Liabilities
  December 31,2008
    
    2007(In thousands)Accrued royalties
    
    $
    56
    
    
    $
    40Accrued general expenses
    
    
    216
    
    
    
    144$
    272
    
    
    $
    184
 5. Shareholders Equity
 Stock Options and Warrants
  37




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##### Table of Contents



5. Shareholders Equity (Continued)
  Weighted
    
    
    WeightedShares
    
    
    
    
    
    
    Average
    
    
    AverageReserved for
    
    
    Plan
    
    
    Exercise
    
    
    RemainingGrant
    
    
    Options
    
    
    Price
    
    
    Contract LifeOutstanding at December 31, 2007
    
    
    55,160
    
    
    
    712,768
    
    
    $
    4.34Authorized
    
    
    550,000Granted
    
    
    (274,500
    )
    
    
    274,500
    
    
    $
    3.98Expired
    
    
    29,000
    
    
    
    (44,410
    )
    
    $
    5.33Cancelled
    
    
    276,003
    
    
    
    (276,003
    )
    
    $
    3.46Exercised
    
    
    
    
    
    
    (7,000
    )
    
    $
    3.55Outstanding at December 31, 2008
    
    
    635,663
    
    
    
    659,855
    
    
    $
    4.50
    
    
    2.3 YearsExercisable at December 31, 2008
    
    
    
    
    
    
    497,390
    
    
    $
    4.09
    
    
    1.9 Years
   Range of Exercise Prices
    
    
    
    
    
    Options Outstanding
    
    
    
    
    
    Options ExercisableWeightedRemaining
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseFrom
    
    to
    
    Outstanding
    
    (in Years)
    
    Price
    
    Outstanding
    
    Price$  0.00
    
    to
    
    $
    2.27
    
    
    
    265,000
    
    
    
    1.31
    
    
    $
    2.27
    
    
    
    240,160
    
    
    $
    2.27$  2.27
    
    to
    
    $
    3.50
    
    
    
    41,729
    
    
    
    1.69
    
    
    $
    2.35
    
    
    
    41,729
    
    
    $
    2.35$  3.51
    
    to
    
    $
    6.00
    
    
    
    232,295
    
    
    
    2.36
    
    
    $
    5.66
    
    
    
    149,795
    
    
    $
    5.58$  6.01
    
    to
    
    $
    10.00
    
    
    
    84,833
    
    
    
    4.68
    
    
    $
    6.96
    
    
    
    44,708
    
    
    $
    7.56$10.01
    
    to
    
    $
    11.00
    
    
    
    35,998
    
    
    
    4.64
    
    
    $
    10.21
    
    
    
    20,998
    
    
    $
    10.25Total
    
    
    
    
    
    
    659,855
    
    
    
    2.32
    
    
    $
    4.50
    
    
    
    497,390
    
    
    $
    4.09
   
 38




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##### Table of Contents



5. Shareholders Equity (Continued)
  6. Commitments
 Capital Lease Obligations
  2009
    
    $
    662010
    
    
    602011
    
    
    20Total minimum lease payments
    
    
    146Less amount representing interest
    
    
    14Present value of net minimum lease payments
    
    
    132Less current portion
    
    
    56Long-term portion
    
    $
    76
 Operating Leases
  2009
    
    $
    1912010
    
    
    1922011
    
    
    48Total
    
    $
    431
  7. 401(k) Savings Plan
  39




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##### Table of Contents



8. Income Taxes
  December 31,2008
    
    
    2007(In thousands)Deferred tax assets:Loss carry-forwards
    
    $
    6,810
    
    
    $
    7,027Research and development credits
    
    
    1,055
    
    
    
    1,033Inventory
    
    
    18
    
    
    
    29Depreciation and amortization
    
    
    157
    
    
    
    157Deferred revenue
    
    
    823
    
    
    
    590Software development and prepaid royalties
    
    
    51
    
    
    
    85Accrued expenses
    
    
    486
    
    
    
    386Accounts receivable
    
    
    16
    
    
    
    14AMT credit carryforward
    
    
    0
    
    
    
    17Valuation allowance for deferred tax assets
    
    
    (8,467
    )
    
    
    (8,791
    )Net deferred tax assets
    
    $
    949
    
    
    
    547Deferred tax liability:Software development costs
    
    
    949
    
    
    
    547Net deferred taxes
    
    $
    
    
    
    $
    
   December 31,2008
    
    
    2007(In thousands)Income tax expense computed at the statutory rate
    
    $
    169
    
    
    $
    222State tax expense, net of calculated federal income tax effects
    
    
    10
    
    
    
    13Change in deferred tax rate
    
    
    
    
    
    
    True up of NOL
    
    
    
    
    
    
    76R&D Credits
    
    
    (22
    )
    
    
    (171
    )Change in Valuation Allowance
    
    
    (324
    )
    
    
    (275
    )Permanent differences
    
    
    151
    
    
    
    146Other
    
    
    24
    
    
    
    (9
    )Income tax expense
    
    $
    8
    
    
    $
    2
 40




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##### Table of Contents



8. Income Taxes (Continued)
 Net Operating Losses
  Research andNet Operating Loss
    
    Development Credits2009
    
    $
    
    
    
    $
    902010
    
    
    2,072
    
    
    
    472011
    
    
    2,192
    
    
    
    432012
    
    
    1,736
    
    
    
    382018
    
    
    770
    
    
    
    462019
    
    
    1,472
    
    
    
    362020
    
    
    4,414
    
    
    
    2021
    
    
    3,037
    
    
    
    722022
    
    
    1,375
    
    
    
    1162023
    
    
    2,056
    
    
    
    722024
    
    
    
    
    
    
    912025
    
    
    
    
    
    
    682026
    
    
    
    
    
    
    712027
    
    
    
    
    
    
    1712028
    
    
    
    
    
    
    93$
    19,124
    
    
    $
    1,054
  9. Litigation
  10. Segment and Geographic Data
  41




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##### Table of Contents



10. Segment and Geographic Data (Continued)
  December 31,2008
    
    
    2007(In thousands)Net sales:North America
    
    $
    12,775
    
    
    $
    11,928Europe
    
    
    1,334
    
    
    
    1,468Japan
    
    
    625
    
    
    
    723Other foreign countries
    
    
    442
    
    
    
    461$
    15,156
    
    
    $
    14,580
 11. Liquidity
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T). CONTROLS AND PROCEDURES
   42




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Managements Report on Internal Control Over Financial Reporting
        Changes in Internal Controls
  
 ITEM 9B. OTHER INFORMATION
  43




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Name
    
    Age
    
    PositionRonald B. Raup
    
    
    58
    
    
    Chief Executive OfficerKaren L. VanDerBosch
    
    
    45
    
    
    Chief Financial Officer and Treasurer
 Ronald B. Raup,
 Karen L. VanDerBosch,
  44




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
   Number of securities remainingavailable for future issuanceNumber of securities to be
    
    Weighted average
    
    under equity compensationissued upon exercise of
    
    exercise price of
    
    plans (excluding securitiesoutstanding options.
    
    outstanding options.
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    659,855
    
    
    $
    4.50
    
    
    
    330,660Totals
    
    
    659,855
    
    
    $
    4.50
    
    
    
    330,660
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
   ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  45




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)
    
    Documents filed as part of this report.
 (1)
    
    Financial Statements. The following financial statements are included in Part II,
Item 8 of this Annual Report on Form 10-K:Report of McGladrey & Pullen LLP on Consolidated Financial Statements as of and for
the periods ended December 31, 2008 and December 31, 2007Consolidated Balance Sheets as of December 31, 2008 and 2007Consolidated Statements of Income for the periods ended December 31, 2008 and 2007Consolidated Statements of Shareholders Equity for the periods ended December 31, 2008 and
2007Consolidated Statements of Cash Flows for the periods ended December 31, 2008 and 2007Notes to Consolidated Financial Statements(2)
    
    Financial Statement Schedules. The following consolidated financial statement
schedules are included in Item 8: Not applicable.(3)
    
    Exhibits. See Exhibit Index to Form 10-K immediately following the signature page
of this Form 10-K for a description of the documents that are filed as Exhibits to this
report or incorporated by reference herein.
 46




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated:  March 6, 2009
    By:
    /s/ Ronald B. RaupRonald B. Raup, Chief Executive Officer   
 Signature and Title
    
    Date/s/ Ronald B. RaupRonald B. Raup, Chief Executive Officer and Director
    
    March 6,
2009/s/ Karen L. VanDerBoschKaren L. VanDerBosch, Chief Financial Officer
    
    March 6, 2009/s/ Jeffrey A. KochJeffrey A. Koch, Chairman of the Board, Director
    
    March 6, 2009/s/ Michael E. CahrMichael E. Cahr, Director
    
    March 6, 2009/s/ Keith A. FenhausKeith A. Fenhaus, Director
    
    March 6, 2009/s/ Robert MorrisonRobert Morrison, Director
    
    March 6, 2009/s/ Graham RichmondGraham Richmond, Director
    
    March 6, 2009/s/ Michael R. SkinnerMichael R. Skinner, Director
    
    March 6, 2009
 47




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##### Table of Contents



MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-K FOR 2008 FISCAL YEAR
 ExhibitNumber
    
    Description3.1
    
    Restated Articles of Incorporation as amended  incorporated by reference to Exhibit 3.1 to the
Registrants Form 10-QSB for the quarter ended June 30, 20063.2
    
    Bylaws as amended  incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K dated
December 6, 20074.1
    
    Form of specimen certificate representing common stock of MakeMusic, Inc.  incorporated by
reference to Exhibit 4.1 to the Registrants Form 10-KSB for the year ended December 31, 200710.1*
    
    MakeMusic 2003 Equity Incentive Plan, as amended through November 24, 2008  filed herewith10.2*
    
    Form of Incentive Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan -
incorporated by reference to Exhibit 10.21 to the Registrants Form 10-KSB for the year ended
December 31, 200410.3*
    
    Form of Nonqualified Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan -
incorporated by reference to Exhibit 10.22 to the Registrants Form 10-KSB for the year ended
December 31, 200410.4*
    
    Form of Restricted Stock Agreement under the MakeMusic 2003 Equity Incentive Plan  filed herewith10.5*
    
    Form of Restricted Stock Unit Agreement under the MakeMusic 2003 Equity Incentive Plan  filed
herewith10.6*
    
    Board Compensation Plan effective February 15, 2007, as amended January 31, 2008 and as further
amended January 28, 2009  filed herewith10.7*
    
    Employment Agreement dated February 26, 2007 between the Registrant and Ronald B. Raup -
incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K dated February 26, 200710.8*
    
    Amendment No. 1 to Employment Agreement between the Registrant and John W. Paulson  incorporated
by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended September 30,
200810.9*
    
    Separation Agreement effective December 31, 2008 between the Registrant and John W. Paulson -
filed herewith10.10*
    
    2008 Executive Compensation Plan  incorporated by reference to Exhibit 10.1 to the Registrants
Form 10-Q for the quarter ended March 31, 200823.1
    
    Consent of McGladrey & Pullen LLP, independent registered public accounting firm  filed herewith24.1
    
    Power of Attorney (included on the Signatures page of this Form 10-K)31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002  filed herewith31.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002  filed herewith32.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002  filed herewith32.2
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002  filed herewith
 
 *
    
    Indicates a management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K. 48