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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 Commission File No.: 0-26192
 MakeMusic, Inc.
  Minnesota
(State or other jurisdiction of 
incorporation or organization)
    
    41-1716250
(IRS Employer
Identification Number)
 (952) 937-9611
 
 o
 Yes þ No o
 þ
 Yes o No þ
    DOCUMENTS INCORPORATED BY REFERENCE
  Yes o No þ
   1




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TABLE OF CONTENTS
 Page No.PART IItem 1.
    
    Description of Business
    
    
    2Item 2.
    
    Description of Property
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7.
    
    Financial Statements
    
    
    21Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    41Item 8a.
    
    Controls and Procedures
    
    
    41Item 8b.
    
    Other Information
    
    
    41PART IIIItem 9.
    
    Directors and Executive Officers of the Registrant
    
    
    42Item 10.
    
    Executive Compensation
    
    
    42Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    42Item 12.
    
    Certain Relationships and Related Transactions
    
    
    43Item 13.
    
    Exhibits
    
    
    43Item 14.
    
    Principal Accountant Fees and Services
    
    
    43Board Compensation PlanConsent of McGladrey & Pullen LLP302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 General
 ® ®
      Strategy
  2




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MakeMusics business strategy is characterized by the following principles:
 Focus on meeting the needs of a highly influential niche market.
 Deliver high-quality patented technologies and licensed content. ®
 Capitalize on fundamental shifts in the marketplace.
 Leverage an extensive customer database for targeted direct marketing.
 Grow the SmartMusic business by leveraging support of music educators.
 Build visibility and credibility by partnering with industry suppliers and associations
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Maintain and strengthen Finale market leadership and revenues.
 Partner with leading industry players.
 Grow the business step by step.
 Products
 SmartMusic® ®
  4




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SmartMusic Impact
 Finale notation family. ®
   5




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Synergy between Product Lines
   Technology Infrastructure
 ® ®
 www.smartmusic.com .
 www.finalemusic.com .
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www.makemusic.com .
 Marketing, Sales and Distribution
 SmartMusic.
    Essential Elements ® Essential Elements Book One
 www.smartmusic.com www.makemusic.com www.finalemusic.com
  7




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Finale notation family.
    Product Development
    Website.
  8




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Content and product.
   Competition
     Patents
  9




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Trademarks
  Manufacturing
  Employees
  Available Information
 www.sec.gov
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Cautionary Statements
   While we currently believe that we have sufficient capital, we may have other capital needs.
 We are dependent upon our new product development efforts.
 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.
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We have incurred operating losses in the past and may incur losses in the near future.
 We face intense competition.
 Rapid technological changes and obsolescence may adversely affect our business.
 Additional government regulation of the Internet may impair our ability to fully develop and
utilize the Internet as a marketing and distribution medium.
  We are dependent upon certain key personnel.
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We are dependent upon proprietary technology and cannot assure protection of such technology.
 International development plans are subject to numerous risks.
 The market price of our stock may experience volatility.
 We will be exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
 
 ITEM 2. DESCRIPTION OF PROPERTY
  
 ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
  2006
    
    
    2005High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    11.80
    
    
    $
    4.90
    
    
    $
    5.30
    
    
    $
    4.40Common Stock
    
    Second Quarter
    
    
    5.75
    
    
    
    4.10
    
    
    
    4.90
    
    
    
    3.15Third Quarter
    
    
    5.96
    
    
    
    4.30
    
    
    
    4.70
    
    
    
    3.37Fourth Quarter
    
    
    6.85
    
    
    
    4.99
    
    
    
    11.33
    
    
    
    3.01
     
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Executive Overview
 ® ®
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Critical Accounting Policies and Estimates
  Revenue recognition. Software Revenue
Recognition Revenue Recognition When a
Right of Return Exists
 Allowance for doubtful accounts.
  Sales returns and allowance reserve.
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Inventory valuation.
 Prepaid licensing reserves.
 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.
 Results of Operations
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12 Months Ended December 31,2006
    
    
    2005
    
    
    Incr (Decr)
    
    
    %(In $ thousands)
    
    
    (In $ thousands)Notation revenue
    
    $
    10,267
    
    
    $
    9,740
    
    
    $
    527
    
    
    
    5
    %SmartMusic revenue
    
    
    2,164
    
    
    
    1,567
    
    
    
    597
    
    
    
    38
    %Other revenue
    
    
    547
    
    
    
    510
    
    
    
    37
    
    
    
    7
    %Net revenue
    
    
    12,978
    
    
    
    11,817
    
    
    
    1,161
    
    
    
    10
    %Cost of revenues
    
    
    1,847
    
    
    
    2,185
    
    
    
    (338
    )
    
    
    -15
    %Gross profit
    
    
    11,131
    
    
    
    9,632
    
    
    
    1,499
    
    
    
    16
    %Percentage of net sales
    
    
    86
    %
    
    
    82
    %Development expenses
    
    
    3,474
    
    
    
    3,279
    
    
    
    195
    
    
    
    6
    %Selling and marketing expense
    
    
    4,114
    
    
    
    3,882
    
    
    
    232
    
    
    
    6
    %General and administrative
expense
    
    
    3,388
    
    
    
    3,000
    
    
    
    388
    
    
    
    13
    %Total operating expense
    
    
    10,976
    
    
    
    10,161
    
    
    
    815
    
    
    
    8
    %Operating income (loss)
    
    
    155
    
    
    
    (529
    )
    
    
    684
    
    
    
    129
    %Other income (expense)
    
    
    109
    
    
    
    32
    
    
    
    77
    
    
    
    241
    %Net income (loss) before taxes
    
    $
    264
    
    
    $
    (497
    )
    
    $
    761
    
    
    
    153
    %Income tax provision
    
    
    (9
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    800
    %Net income (loss)
    
    $
    255
    
    
    $
    (498
    )
    
    $
    753
    
    
    
    151
    %
 Year ended December 31, 2006, compared to the year ended December 31, 2005
 Net revenue.
    18




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Gross profit.
 Development expense.
 Selling and marketing expense.
 General and administrative expense.
 19




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Interest income and expense, net.
 Other Income.
 Income tax.
 Liquidity and capital resources.
    New accounting pronouncements.
 20




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ITEM 7. FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
 
    Share-Based Payment.
  Minneapolis, Minnesota
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MakeMusic, Inc.
Consolidated Balance Sheets  (In thousands of U.S. dollars, except share and per share data)
 December 312006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,130
    
    
    $
    2,952Accounts receivable (net of allowance of $149 and $15 in
2006 and 2005, respectively)
    
    
    1,664
    
    
    
    1,004Inventories
    
    
    347
    
    
    
    435Prepaid expenses and other current assets
    
    
    199
    
    
    
    161Total current assets
    
    
    5,340
    
    
    
    4,552Property and equipment, net
    
    
    663
    
    
    
    323Capitalized software products, net
    
    
    954
    
    
    
    471Goodwill, net
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    39
    
    
    
    66Total assets
    
    $
    10,626
    
    
    $
    9,042Liabilities and shareholders equityCurrent liabilities:Current portion of capital lease obligations
    
    $
    10
    
    
    $
    6Accounts payable
    
    
    507
    
    
    
    441Accrued compensation
    
    
    1,066
    
    
    
    681Other accrued liabilities
    
    
    254
    
    
    
    164Post contract support
    
    
    181
    
    
    
    181Reserve for product returns
    
    
    429
    
    
    
    339Current portion of deferred rent
    
    
    25
    
    
    
    20Deferred revenue
    
    
    1,199
    
    
    
    916Total current liabilities
    
    
    3,671
    
    
    
    2,748Capital lease obligations, net of current portion
    
    
    15
    
    
    
    9Deferred rent, net of current portion
    
    
    96
    
    
    
    120Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and outstanding shares  3,971,229 and 3,856,654
in 2006 and 2005, respectively
    
    
    40
    
    
    
    39Additional paid-in capital
    
    
    62,896
    
    
    
    62,459Accumulated deficit
    
    
    (56,092
    )
    
    
    (56,347
    )Other comprehensive income
    
    
    0
    
    
    
    14Total shareholders equity
    
    
    6,844
    
    
    
    6,165Total liabilities and shareholders equity
    
    $
    10,626
    
    
    $
    9,042
 See accompanying notes.
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MakeMusic, Inc.
Consolidated Statements of Operations  (In thousands of U.S. dollars, except share and per share data)
 YearEnded December 31,2006
    
    
    2005Revenues:Notation revenue
    
    $
    10,267
    
    
    $
    9,740SmartMusic revenue
    
    
    2,164
    
    
    
    1,567Other revenue
    
    
    547
    
    
    
    510NET REVENUES
    
    
    12,978
    
    
    
    11,817COST OF REVENUES
    
    
    1,847
    
    
    
    2,185GROSS PROFIT
    
    
    11,131
    
    
    
    9,632OPERATING EXPENSES:Development expenses
    
    
    3,474
    
    
    
    3,279Selling and marketing expenses
    
    
    4,114
    
    
    
    3,882General and administrative expenses
    
    
    3,388
    
    
    
    3,000Total operating expenses
    
    
    10,976
    
    
    
    10,161INCOME (LOSS) FROM OPERATIONS
    
    
    155
    
    
    
    (529
    )Interest income
    
    
    94
    
    
    
    34Interest expense
    
    
    (1
    )
    
    
    (5
    )Other income, net
    
    
    16
    
    
    
    3Income (Loss) before income tax
    
    
    264
    
    
    
    (497
    )Income taxes
    
    
    9
    
    
    
    1Net Income (Loss)
    
    
    255
    
    
    $
    (498
    )Income (Loss) per common share:Basic
    
    
    0.07
    
    
    
    (0.14
    )Diluted
    
    
    0.06
    
    
    
    (0.14
    )Weighted average number of common shares
outstanding:Basic
    
    
    3,916,578
    
    
    
    3,520,130Diluted
    
    
    4,551,031
    
    
    
    3,520,130
 See accompanying notes.
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MakeMusic, Inc.
Consolidated Statement of Shareholders Equity  (In thousands of U.S. dollars, except share data)
 Common Stock
    
    Additional
    
    
    
    
    
    Accumulated Other
    
    ShareholdersTotal
    
    
    
    
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Capital
    
    Deficit
    
    Income
    
    (Deficit)Balance at December 31, 2004
    
    
    3,419,464
    
    
    $
    34
    
    
    $
    61,626
    
    
    
    ($55,849
    )
    
    $
    0
    
    
    $
    5,811Exercise of stock options and warrants
    
    
    437,190
    
    
    
    5
    
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    831Issuance of stock, stock options and
warrants for services
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Comprehensive Income: Unrealized gain
on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (498
    )
    
    
    
    
    
    
    (498
    )Balance at December 31, 2005
    
    
    3,856,654
    
    
    $
    39
    
    
    $
    62,459
    
    
    
    ($56,347
    )
    
    $
    14
    
    
    $
    6,165Exercise of stock options and warrants
    
    
    114,575
    
    
    
    1
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    239Compensation under FAS123(R)
    
    
    
    
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    
    
    
    
    189Issuance of stock, stock options and
warrants for services
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Comprehensive Income: Realized loss
on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    
    
    
    
    255Balance at December 31, 2006
    
    
    3,971,229
    
    
    $
    40
    
    
    $
    62,896
    
    
    
    ($56,092
    )
    
    $
    0
    
    
    $
    6,844
 See accompanying notes.
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MakeMusic, Inc.
Consolidated Statements of Cash Flows  (In thousands of U.S. dollars)
 Year Ended
    
    Year Ended2006
    
    2005Operating activitiesNet Income/(loss)
    
    $
    255
    
    
    $
    (498
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Amortization of intangible assets
    
    
    0
    
    
    
    725Depreciation and amortization of property,
equipment and capitalized software
    
    
    414
    
    
    
    325Loss (Gain) on disposal of property and equipment
    
    
    (11
    )
    
    
    21Issuance of options and warrants for services
    
    
    199
    
    
    
    7Net changes in assets and liabilities:Accounts receivable
    
    
    (660
    )
    
    
    (174
    )Inventories
    
    
    88
    
    
    
    (103
    )Prepaid expenses and other current assets
    
    
    (33
    )
    
    
    111Accounts payable
    
    
    66
    
    
    
    (53
    )Accrued liabilities and product returns
    
    
    546
    
    
    
    (129
    )Deferred revenue
    
    
    283
    
    
    
    219Net cash provided by operating activities
    
    
    1,147
    
    
    
    451Net cash used in investing activitiesPurchases of property and equipment
    
    
    (552
    )
    
    
    (255
    )Proceeds from disposal of property and equipment
    
    
    3
    
    
    
    5Capitalized development and other intangibles
    
    
    (650
    )
    
    
    (289
    )Net cash used in investing activities
    
    
    (1,199
    )
    
    
    (539
    )Net cash provided by financing activitiesProceeds from stock options and warrants exercised
    
    
    239
    
    
    
    831Payments on long-term debt and capital leases
    
    
    (9
    )
    
    
    (6
    )Net cash provided by financing activities
    
    
    230
    
    
    
    825Net increase in cash and cash equivalents
    
    
    178
    
    
    
    737Cash and cash equivalents, beginning of year
    
    
    2,952
    
    
    
    2,215Cash and cash equivalents, end of year
    
    $
    3,130
    
    
    $
    2,952Supplemental disclosure of cash flow informationInterest paid
    
    
    1
    
    
    
    5Taxes paid
    
    
    9
    
    
    
    0Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    29
    
    
    
    0
 See accompanying notes.
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Notes to Consolidated Financial Statements
 1. Description of Business
  2. Summary of Significant Accounting Policies
 Consolidation
  Revenue Recognition
 Software Revenue
Recognition
   Accounting
for Shipping and Handling Fees and Costs
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2. Summary of Significant Accounting Policies (Continued)
 Net Income (Loss) Per Share
   Segment Reporting
  Cash and Cash Equivalents
  Fair Value of Financial Instruments
  Accounts Receivable
   27




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2. Summary of Significant Accounting Policies (Continued)
 Inventories
  Property and Equipment
   Capitalized Software Products
  Product development. Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed
    Goodwill
 Goodwill and
Other Intangible Assets
 28




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2. Summary of Significant Accounting Policies (Continued)
 Other Intangible Assets
  Patents and trademarks
  Impairment of Long-Lived Assets
  Leases
 Accounting for Leases
 Income Taxes
  Stock-Based Compensation
   29




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2. Summary of Significant Accounting Policies (Continued)
     FASB
Staff Position No. SFAS 123(R)-3 long-form short-cut
  Year EndedDecember 31,2005(In thousands)Net loss:Net loss as reported
    
    $
    (498
    )Stock-based compensation under FAS 123
    
    
    (135
    )Proforma net loss
    
    $
    (633
    )Basic and diluted loss per share:As reported
    
    $
    (0.14
    )Pro forma
    
    $
    (0.18
    )
 30




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2. Summary of Significant Accounting Policies (Continued)
 Stock Options
  December 31,
    
    December 31,2006
    
    2005Black-Scholes Model:Risk-free interest rate
    
    
    3.2
    %
    
    
    3.4
    %Expected life, in years
    
    
    3.7
    
    
    
    3.4Expected volatility
    
    
    87.43
    %
    
    
    80.07
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Binomial Model:Risk-free interest rate
    
    
    3.64
    %
    
    
    Expected life, in years
    
    
    6.0
    
    
    
    Expected volatility
    
    
    136.18
    %
    
    
    Dividend yield
    
    
    0.00
    %
    
    
    
  Use of Estimates
  Advertising and Promotion
  Deferred Rent
  31




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2. Summary of Significant Accounting Policies (Continued)
 Reclassifications
  3. New Accounting Pronouncements
   Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
 Inventories
  December 31,2006
    
    2005(In thousands)Components
    
    $
    330
    
    
    $
    407Finished goods
    
    
    146
    
    
    
    95Reserve for obsolescence
    
    
    (129
    )
    
    
    (67
    )$
    347
    
    
    $
    435
 32




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4. Supplemental Balance Sheet Information (Continued)
 Property and Equipment
  December 31,2006
    
    2005(In thousands)Computer equipment and software
    
    $
    2,614
    
    
    $
    2,118Office furniture and other
    
    
    404
    
    
    
    3553,018
    
    
    
    2,473Less accumulated depreciation
    
    
    (2,355
    )
    
    
    (2,150
    )$
    663
    
    
    $
    323
   Capitalized Software Products
  December 31,2006
    
    
    2005(In thousands)Software translation
    
    $
    125
    
    
    $
    125SmartMusic website
    
    
    461
    
    
    
    461Impact development
    
    
    403
    
    
    
    0Repertoire development
    
    
    1,209
    
    
    
    9602,198
    
    
    
    1,546Less accumulated depreciation and amortization
    
    
    (1,244
    )
    
    
    (1,075
    )$
    954
    
    
    $
    471
  (In thousands)2007 Amortization
    
    $
    2742008 Amortization
    
    
    3492009 Amortization
    
    
    2492010 Amortization
    
    
    82$
    954
 33




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4. Supplemental Balance Sheet Information (Continued)
 Goodwill
  Other intangible Assets
  December 31,2006
    
    2005(In thousands)Distributor/dealer network
    
    $
    1,440
    
    
    $
    1,440Software products
    
    
    2,304
    
    
    
    2,304Customer lists
    
    
    780
    
    
    
    780Total gross value
    
    
    4,524
    
    
    
    4,524Less accumulated amortization
    
    
    (4,524
    )
    
    
    (4,524
    )$
    0
    
    
    $
    0
   Other Non-current Assets
  December 31,2006
    
    2005(In thousands)Patents and trademarks
    
    $
    28
    
    
    $
    34Prepaid royalties
    
    
    11
    
    
    
    32$
    39
    
    
    $
    66
 Deferred Revenue
  34




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4. Supplemental Balance Sheet Information (Continued)
 December 31,2006
    
    2005(In thousands)Deferred SmartMusic subscription revenue
    
    $
    1,094
    
    
    $
    836Deposits
    
    
    68
    
    
    
    73Deferred notation revenue
    
    
    37
    
    
    
    7$
    1,199
    
    
    $
    916
 Other Accrued Liabilities
  December 31,2006
    
    2005(In thousands)Accrued royalties
    
    
    22
    
    
    
    34Other
    
    
    232
    
    
    
    130$
    254
    
    
    $
    164
 5. Shareholders Equity
 Stock Options and Warrants
   Weighted
    
    
    WeightedShares
    
    
    
    
    
    
    Average
    
    
    AverageReserved for
    
    
    Plan
    
    
    Exercise
    
    
    RemainingGrant
    
    
    Options
    
    
    Price
    
    
    Contract LifeOutstanding at December 31, 2005
    
    
    16,675
    
    
    
    712,473
    
    
    $
    3.96Granted
    
    
    (42,000
    )
    
    
    42,000
    
    
    $
    7.33Expired
    
    
    
    
    
    
    (20,900
    )
    
    $
    16.79Cancelled
    
    
    34,144
    
    
    
    (34,144
    )
    
    $
    3.82Exercised
    
    
    
    
    
    
    (27,934
    )
    
    $
    3.18Authorized
    
    
    200,000
    
    
    
    0
    
    
    
    Outstanding at December 31, 2006
    
    
    208,819
    
    
    
    671,495
    
    
    $
    3.81
    
    
    4.0 YearsOutstanding exercisable at
December 31, 2006
    
    
    
    
    
    
    316,939
    
    
    $
    3.95
    
    
    3.5 Years
 35




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##### Table of Contents



5. Shareholders Equity (Continued)
   Options Outstanding
    
    
    
    
    
    Options ExercisableWeightedRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of Exercise Prices
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseFrom
    
    to
    
    
    Outstanding
    
    (in Years)
    
    Price
    
    Outstanding
    
    Price$
    2.27 to
    
    $
    2.27
    
    
    
    265,003
    
    
    
    3.52
    
    
    $
    2.27
    
    
    
    122,204
    
    
    $
    2.27$
    2.27 to
    
    $
    3.50
    
    
    
    134,229
    
    
    
    3.37
    
    
    $
    2.55
    
    
    
    100,667
    
    
    $
    2.50$
    3.51 to
    
    $
    10.00
    
    
    
    231,053
    
    
    
    5.20
    
    
    $
    4.44
    
    
    
    67,108
    
    
    $
    4.21$
    10.01 to
    
    $
    20.00
    
    
    
    33,410
    
    
    
    3.26
    
    
    $
    10.58
    
    
    
    19,160
    
    
    $
    10.78$
    20.01 to
    
    $
    35.00
    
    
    
    7,800
    
    
    
    0.20
    
    
    $
    29.87
    
    
    
    7,800
    
    
    $
    29.87Total
    
    
    
    
    
    
    671,495
    
    
    
    4.02
    
    
    $
    3.81
    
    
    
    316,939
    
    
    $
    3.95
     2008  599,1452010    15,0832011    15,000
 36




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##### Table of Contents



6. Commitments
 Capital Lease Obligations
  2007
    
    $
    102008
    
    
    102009
    
    
    6Total minimum lease payments
    
    
    26Less amount representing interest
    
    
    1Present value of net minimum lease payments
    
    
    25Less current portion
    
    
    10Long-term portion
    
    $
    15
 Operating Leases
  2007
    
    $
    1852008
    
    
    1862009
    
    
    1902010
    
    
    1922011
    
    
    48Total
    
    $
    801
  7. 401(k) Savings Plan
  37




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##### Table of Contents



8. Income Taxes
  December 31,2006
    
    
    2005(In thousands)Deferred tax assets:Loss carry-forwards
    
    $
    7,472
    
    
    $
    8,113Research and development credits
    
    
    875
    
    
    
    736Inventory
    
    
    47
    
    
    
    26Depreciation and amortization
    
    
    116
    
    
    
    115Deferred revenue
    
    
    407
    
    
    
    348Software development and prepaid royalties
    
    
    89
    
    
    
    90Accrued expenses
    
    
    390
    
    
    
    350Accounts receivable
    
    
    53
    
    
    
    6Valuation allowance for deferred tax assets
    
    
    (9,066
    )
    
    
    (9,567
    )Net deferred tax assets
    
    $
    383
    
    
    
    217Deferred tax liabilities:Software development costs
    
    
    383
    
    
    
    217Net deferred taxes
    
    $
    
    
    
    $
    
   December 31,2006
    
    
    2005(In thousands)Income tax expense computed at the statutory rate
    
    $
    90
    
    
    $
    (169
    )State tax expense, net of calculated Federal income tax effects
    
    
    5
    
    
    
    (21
    )Change in deferred tax rate
    
    
    463
    
    
    
    Prior year change in NOLs carryforward
    
    
    28
    
    
    
    Prior Year and Current Year R&D Credits
    
    
    (139
    )
    
    
    Change in Valuation Allowance
    
    
    (501
    )
    
    
    174Permanent differences
    
    
    56
    
    
    
    17Other
    
    
    7
    
    
    
    Income tax expense
    
    $
    9
    
    
    $
    1
 38




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##### Table of Contents



8. Income Taxes (Continued)
 Net Operating Losses
  Research andNet Operating Loss
    
    
    Development Credits2007
    
    
    0
    
    
    
    132008
    
    
    0
    
    
    
    722009
    
    
    1,576
    
    
    
    902010
    
    
    2,128
    
    
    
    472011
    
    
    2,192
    
    
    
    432012
    
    
    1,736
    
    
    
    382018
    
    
    770
    
    
    
    462019
    
    
    1,472
    
    
    
    362020
    
    
    4,414
    
    
    
    2021
    
    
    3,037
    
    
    
    722022
    
    
    1,375
    
    
    
    1162023
    
    
    2,056
    
    
    
    722024
    
    
    0
    
    
    
    912025
    
    
    0
    
    
    
    682026
    
    
    0
    
    
    
    71$
    20,756
    
    
    $
    875
  9. Litigation
  10. Segment and Geographic Data
  39




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##### Table of Contents



10. Segment and Geographic Data (Continued)
  December 31,2006
    
    
    2005(In thousands)Net sales:North America
    
    $
    10,740
    
    
    $
    9,370Europe
    
    
    1,165
    
    
    
    1,102Other foreign countries
    
    
    1,073
    
    
    
    1,345$
    12,978
    
    
    $
    11,817Long-lived assets:North America
    
    $
    5,286
    
    
    $
    4,490
 11. Liquidity
  40




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##### Table of Contents



ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
  Changes in Internal Controls
  
 ITEM 8B. OTHER INFORMATION
  41




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##### Table of Contents



PART III
 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionJohn W. Paulson
    
    58
    
    Chief Executive OfficerRonald B. Raup
    
    56
    
    President and Chief Operating OfficerKaren L. VanDerBosch
    
    43
    
    Chief Financial Officer and Treasurer
 John W. Paulson
 Ronald B. Raup,
 Karen L. VanDerBosch,
  
 ITEM 10. EXECUTIVE COMPENSATION
  
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 42




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##### Table of Contents



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
    
    
    671,495
    
    
    $
    4.02
    
    
    
    208,819Totals
    
    
    671,495
    
    
    $
    4.02
    
    
    
    208,819
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  43




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##### Table of Contents



SIGNATURES
  MakeMusic, Inc.Dated:  March 15, 2007
    By:
    /s/ John W. PaulsonJohn W. Paulson, Chief Executive Officer   
 Signature and Title
    
    Date/s/ John W. PaulsonJohn W. Paulson, Chief Executive Officer and Director
    
    March 15, 2007/s/ Ronald B. RaupRonal B. Raup, President, Chief Operating Officer and Director
    
    March 15, 2007/s/ Karen L. VanDerBoschKaren L. VanDerBosch, Chief Financial Officer
    
    March 15, 2007/s/ Jeffrey A. KochJeffrey A. Koch, Chairman of the Board, Director
    
    March 15, 2007/s/ Graham RichmondGraham Richmond, Director
    
    March 15, 2007/s/ Michael R. SkinnerMichael R. Skinner, Director
    
    March 15, 2007/s/ Lawrence M. MortonLawrence M. Morton, Director
    
    March 15, 2007/s/ Keith A. FenhausKeith A. Fenhaus, Director
    
    March 15, 2007
 44




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##### Table of Contents



MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 2006 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 3.2 to the
Registrants Form 10-QSB for the quarter ended June 30, 200610.1
    
    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.
33-92212C10.2
    
    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. 33-92212C10.3*
    
    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. 33-92212C10.4
    
    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, 199610.5
    
    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, 199810.6*
    
    Employment Agreement dated October 19, 2000 between the Registrant and John W.
Paulson  incorporated by reference to Exhibit 10.15 to the Registrants Form
10-KSB for the year ended December 31, 200010.7
    
    MakeMusic, Inc. 2003 warrant for private placement at $3.20 issued February 28,
2003, with list of amounts purchased by directors, officers and principal
shareholders  incorporated by reference to exhibit 10.15 to the Registrants
Form 10-KSB for the year ended December 31, 200210.8
    
    MakeMusic, Inc. 2003 warrant for private placement at $0.50 issued February 28,
2003, with list of amounts purchased by directors, officers and principal
shareholders  incorporated by reference to exhibit 10.16 to the Registrants
Form 10-KSB for the year ended December 31, 200210.9*
    
    MakeMusic, Inc. 2003 Equity Incentive Plan, as amended  incorporated by reference
to exhibit 10.17 to the Registrants Form 10-KSB for the year ended December
31, 200310.10*
    
    Employment Agreement dated June 9, 2004, between the Registrant and William R.
Wolff  incorporated by reference to Exhibit 10.18 to the Registrants Form 8-K
filed on May 18, 200610.11*
    
    Board Compensation Plan effective January 23, 2006  incorporated by reference
to Exhibit 10.20 to the Registrants Form 10-KSB for the year ended December
31, 200510.12*
    
    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, 2004
 45




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##### Table of Contents



ExhibitNumber
    
    Description10.13*
    
    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, 200410.14*
    
    Form of Restricted Stock Agreement under the MakeMusic! 2003 Equity Incentive
Plan  incorporated by reference to Exhibit 10.23 to the Registrants Form
10-KSB for the year ended December 31, 200410.15*
    
    Separation Agreement of Alan Shuler  incorporated by reference to Exhibit 10.1
to the Registrants Form 10-QSB for the quarter ended September 30, 200610.16*
    
    Separation Agreement and Release with William R. Wolff  incorporated by
reference to the Registrants Form 8-K filed on December 19, 200610.17*
    
    Employment Agreement dated February 26, 2007, between the Registrant and Ronald
B Raup  incorporated by reference to the Registrants Form 8-K filed on March
1, 200710.18*
    
    Board Compensation Plan effective February 15, 2007  filed herewith23.1
    
    Consent of McGladrey & Pullen LLP, independent registered public accounting firm24
    
    Power of Attorney (included on the Signatures page of this Form 10-KSB)31.1
    
    Certification by Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification by Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification by Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Indicates a management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-KSB. 46