##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

|                |  |                                                                                  
|--------------- |  | ---------------------------------------------------------------------------------
|X IN BALLOT BOX |  | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|                |  | For the quarterly period ended June 30, 2002                                     
|               
|OPEN BALLOT BOX |  | Transition report under Section 13 or 15(d) of the Exchange Act                  
|                |  | For the transition period from _________ to _________                            

|                       |         | 
|---------------------- | ------- | 
|Commission file number | 0-26192 | 
|                       |         | 

MakeMusic! Inc.

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Minnesota                                                      |  | 41-1716250                          
|                                                               |  |                                     
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

6210 Bury Drive
Eden Prairie, Minnesota 55346-1718

(952) 937-9611



Check whether the issuer: (1) 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

As of July 26, 2002, there were 21,680,383 shares of Common Stock outstanding.

Transitional Small Business Disclosure Format (check one):

Yes OPEN BALLOT BOX No X IN BALLOT BOX

1



---

TABLE OF CONTENTS



|                                                     |  |  |  |  |  |  |  | 
|---------------------------------------------------- |  |  |  |  |  |  |  | 
|Condensed Consolidated Balance Sheets               
|Consolidated Statements of Operations               
|Consolidated Statements of Cash Flows               
|Notes to Condensed Consolidated Financial Statements
|SIGNATURES                                          



---



##### Table of Contents






MakeMusic! Inc.
Condensed Consolidated Balance Sheets(In thousands of U.S. dollars)

|                                                  |                                                |   |             |         |   |              |        |         |  
|------------------------------------------------- | ---------------------------------------------- | - | ----------- | ------- | - | ------------ | ------ | ------- | -
|                                                  |                                                |   | June 30,    |         |   | December 31, |       
|                                                  |                                                |   | 2002        |         |   | 2001         |       
|                                                  |                                                |   |             |         |   |              |       
|                                                  |                                                |   | (unaudited) |         |   | (Note)       |       
|Assets                                            |                                                |   |             |         |   |              |        |        
|Current assets:                                   |                                                |   |             |         |   |              |        |        
|                                                  | Cash and cash equivalents                      |   | $           | 1,244   |   |              | $      | 3,258   |  
|                                                  | Accounts receivable                            |   |             | 316     |   |              |        | 640     |  
|                                                  | Inventories                                    |   |             | 489     |   |              |        | 391     |  
|                                                  | Value added tax receivable                     |   |             | 33      |   |              |        | 172     |  
|                                                  | Prepaid expenses and other current assets      |   |             | 138     |   |              |        | 341     |  
|                                                  |                                                |   |             |         |   |             
|Total current assets                              |                                                |   | 2,220       |         |   |              | 4,802  |        
|Property and equipment, net                       |                                                |   | 927         |         |   |              | 1,099  |        
|Goodwill, net                                     |                                                |   | 5,830       |         |   |              | 17,330 |        
|Intangible assets, net                            |                                                |   | 3,567       |         |   |              | 4,380  |        
|Other non-current assets                          |                                                |   | 1,104       |         |   |              | 981    |        
|                                                  |                                                |   |             |         |   |              |       
|Total assets                                      |                                                | $ | 13,648      |         |   | $            | 28,592 |        
|                                                  |                                                |   |             |         |   |             
|Liabilities and shareholders equity              |                                                |   |             |         |   |              |        |        
|Current liabilities:                              |                                                |   |             |         |   |              |        |        
|                                                  | Accounts payable                               |   | $           | 495     |   |              | $      | 749     |  
|                                                  | Accrued expenses and other current liabilities |   |             | 955     |   |              |        | 1,095   |  
|                                                  | Current portion of long-term debt              |   |             | 431     |   |              |        | 254     |  
|                                                  | Current portion of capital lease obligations   |   |             | 37      |   |              |        | 172     |  
|                                                  | Reserve for product returns                    |   |             | 243     |   |              |        | 167     |  
|                                                  | Deferred Revenue                               |   |             | 128     |   |              |        | 63      |  
|                                                  |                                                |   |             |         |   |              |       
|Total current liabilities                         |                                                |   | 2,289       |         |   |              | 2,500  |        
|Long-term debt, net of current portion            |                                                |   | 270         |         |   |              | 354    |        
|Capital lease obligations, net of current portion |                                                |   | 38          |         |   |              | 10     |        
|Shareholders equity:                             |                                                |   |             |         |   |              |        |        
|                                                  | Common stock                                   |   |             | 217     |   |              |        | 209     |  
|                                                  | Additional paid-in capital                     |   |             | 57,683  |   |              |        | 57,686  |  
|                                                  | Subscription shares receivable                 |   |             | (21     | ) |              |        | (73     | )
|                                                  | Accumulated deficit                            |   |             | (45,844 | ) |              |        | (31,067 | )
|                                                  | Accumulated other comprehensive income         |   |             | (306    | ) |              |        | (277    | )
|                                                  | Deferred compensation                          |   |             | (678    | ) |              |        | (750    | )
|                                                  |                                                |   |             |         |   |              |       
|Total shareholders equity                        |                                                |   | 11,051      |         |   |              | 25,728 |        
|                                                  |                                                |   |             |         |   |             
|Total liabilities and shareholders equity        |                                                | $ | 13,648      |         |   | $            | 28,592 |        
|                                                  |                                                |   |             |         |   |             

NOTE:The Balance Sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not reflect all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.

2



---



##### Table of Contents






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

|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |       |   |   |            |       |  
|------------------------------------------------------------- | ---------------------------------------- | - | ---------------------- | ----- | - | ------------------------- | ---------- | ----- | ---- | - | ---------- | ----- | - | - | ---------- | ----- | -
|                                                              |                                          |   | Quarter Ended June 30, |       |   | Six Months Ended June 30, |           
|                                                              |                                          |   | 2002                   |       |   | 2001                      |            |       | 2002 |   |            | 2001  |  
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |       |  
|NET REVENUE                                                   |                                          | $ | 1,347                  |       |   | $                         | 1,184      |       |      | $ | 3,226      |       |   | $ | 3,077      |      
|COST OF REVENUES                                              |                                          |   | 294                    |       |   |                           | 298        |       |      |   | 596        |       |   |   | 710        |      
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|GROSS PROFIT                                                  |                                          |   | 1,053                  |       |   |                           | 886        |       |      |   | 2,630      |       |   |   | 2,367      |      
|OPERATING EXPENSES:                                           |                                          |   |                        |       |   |                           |            |       |      |   |            |       |   |   |            |      
|                                                              | Website development expenses             |   |                        | 257   |   |                           |            | 330   |      |   |            | 536   |   |   |            | 771   |  
|                                                              | Content and product development
expenses |   |                        | 597   |   |                           |            | 587   |      |   |            | 1,145 |   |   |            | 1,286 |  
|                                                              | Selling and marketing expenses           |   |                        | 941   |   |                           |            | 815   |      |   |            | 1,925 |   |   |            | 2,548 |  
|                                                              | General and administrative expenses      |   |                        | 1,104 |   |                           |            | 2,201 |      |   |            | 2,308 |   |   |            | 4,340 |  
|                                                              | Restructuring charges                    |   |                        |      |   |                           |            |      |      |   |            |      |   |   |            | 645   |  
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|Total operating expenses                                      |                                          |   | 2,899                  |       |   |                           | 3,933      |       |      |   | 5,914      |       |   |   | 9,590      |      
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|LOSS FROM OPERATIONS                                          |                                          |   | (1,846                 | )     |   |                           | (3,047     | )     |      |   | (3,284     | )     |   |   | (7,223     | )    
|                                                              | Interest income/(expense), net           |   |                        | 2     |   |                           |            | 43    |      |   |            | 13    |   |   |            | 88    |  
|                                                              | Foreign exchange loss                    |   |                        | (4    | ) |                           |            |      |      |   |            | (4    | ) |   |            | 1     |  
|                                                              | Other income/(expense), net              |   |                        |      |   |                           |            | (31   | )    |   |            |      |   |   |            | (29   | )
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|Net loss before income tax                                    |                                          |   | (1,848                 | )     |   |                           | (3,035     | )     |      |   | (3,275     | )     |   |   | (7,163     | )    
|Income Tax                                                    |                                          |   |                       |       |   |                           |           |       |      |   | (2         | )     |   |   | (1         | )    
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|Net loss before cumulative effect of
accounting change        |                                          |   | (1,848                 | )     |   |                           | (3,035     | )     |      |   | (3,277     | )     |   |   | (7,164     | )    
|Cumulative effect of change in
accounting principle (FAS 142) |                                          |   |                       |       |   |                           |           |       |      |   | (11,500    | )     |   |   |           |      
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|Net loss before income tax                                    |                                          | $ | (1,848                 | )     |   | $                         | (3,035     | )     |      | $ | (14,777    | )     |   | $ | (7,164     | )    
|                                                              |                                          |   |                        |       |   |                           |            |       |      |   |            |      
|Basic and diluted loss per common share                       |                                          | $ | (0.08                  | )     |   | $                         | (0.15      | )     |      | $ | (0.64      | )     |   | $ | (0.34      | )    
|Weighted average common shares
outstanding                    |                                          |   | 23,167,995             |       |   |                           | 20,869,109 |       |      |   | 23,167,995 |       |   |   | 20,868,933 |      

3



---



##### Table of Contents






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

(Unaudited)

|                                                                            |                                                         |                                           |         |                           |      |   |        |       |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ------- | ------------------------- | ---- | - | ------ | ----- | ------ | -
|                                                                            |                                                         |                                           |         | Six months ended June 30, |     
|                                                                            |                                                         |                                           |         | 2002                      |      |   | 2001   |      
|                                                                            |                                                         |                                           |         |                           |      |   |        |      
|Operating activities                                                        |                                                         |                                           |         |                           |      |   |        |      
|Net loss                                                                    |                                                         | $                                         | (14,777 | )                         |      | $ | (7,164 | )    
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                         |                                           |         |                           |      |   |        |      
|                                                                            | Amortization of intangible assets                       |                                           |         | 798                       |      |   |        | 1,648 |       
|                                                                            | Depreciation and amortization of property and equipment |                                           |         | 342                       |      |   |        | 375   |       
|                                                                            | Amortization of deferred compensation                   |                                           |         | 82                        |      |   |        | 62    |       
|                                                                            | Impairment of goodwill                                  |                                           |         | 11,500                    |      |   |        |      |       
|                                                                            | Restructuring                                           |                                           |         | (110                      | )    |   |        | 645   |       
|                                                                            | Issuance of stock options and warrants for services     |                                           |         | 7                         |      |   |        | 270   |       
|                                                                            | Increase (decrease) in cash from:                       |                                           |         |                           |      |   |        |       |       
|                                                                            |                                                         | Accounts receivable                       |         |                           | 521  |   |        |       | 143    |  
|                                                                            |                                                         | Inventories                               |         |                           | (98  | ) |        |       | 51     |  
|                                                                            |                                                         | Prepaid expenses and other current assets |         |                           | 144  |   |        |       | (45    | )
|                                                                            |                                                         | Accounts payable                          |         |                           | (292 | ) |        |       | (1,073 | )
|                                                                            |                                                         | Accrued expenses and other liabilities    |         |                           | 84   |   |        |       | (872   | )
|                                                                            |                                                         |                                           |         |                           |      |   |        |      
|Net cash used in operating activities                                       |                                                         |                                           | (1,799  | )                         |      |   | (5,960 | )    
|Net cash (used) provided by investing activities                            |                                                         |                                           |         |                           |      |   |        |      
|Capitalized development cost and purchases of property
and equipment        |                                                         |                                           | (213    | )                         |      |   | (341   | )    
|Net redemptions of short-term investments                                   |                                                         |                                           |        |                           |      |   | 917    |      
|                                                                            |                                                         |                                           |         |                           |      |  
|Net cash provided (used) in investing activities                            |                                                         |                                           | (213    | )                         |      |   | 576    |      
|Net cash (used) provided by financing activities                            |                                                         |                                           |         |                           |      |   |        |      
|Issuance of shares                                                          |                                                         |                                           | (3      | )                         |      |   | 70     |      
|Collections of notes receivables from issuance of shares                    |                                                         |                                           | 52      |                           |      |   |       |      
|Increase in long-term debt                                                  |                                                         |                                           | 41      |                           |      |   |       |      
|Payments on long-term debt                                                  |                                                         |                                           | (136    | )                         |      |   | (168   | )    
|                                                                            |                                                         |                                           |         |                           |      |   |        |      
|Net cash used by financing activities                                       |                                                         |                                           | (46     | )                         |      |   | (98    | )    
|Effect of exchange rate changes on cash                                     |                                                         |                                           | 43      |                           |      |   | (517   | )    
|                                                                            |                                                         |                                           |         |                           |      |  
|Net decrease in cash and cash equivalents                                   |                                                         |                                           | (2,014  | )                         |      |   | (5,999 | )    
|Cash and cash equivalents, beginning of period                              |                                                         |                                           | 3,258   |                           |      |   | 9,090  |      
|                                                                            |                                                         |                                           |         |                           |      |  
|Cash and cash equivalents, end of period                                    |                                                         | $                                         | 1,244   |                           |      | $ | 3,091  |      
|                                                                            |                                                         |                                           |         |                           |      |  
|Supplemental disclosure of cash flow information                            |                                                         |                                           |         |                           |      |   |        |      
|Interest paid                                                               |                                                         | $                                         | 5       |                           |      | $ | 33     |      
|                                                                            |                                                         |                                           |         |                           |      |  

4



---



##### Table of Contents






MakeMusic! Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 1 |  | Accounting Policies.The information furnished in this report is
unaudited but reflects all adjustments that are necessary, in the opinion
of management, for a fair statement of the results for the interim period.
The operating results for the six months ended June 30, 2002 are not
necessarily indicative of the operating results to be expected for the
full fiscal year. These statements should be read in conjunction with the
Companys most recent Annual Report on Form 10-KSB.                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Certain amounts as presented in the 2001 financial statements, as
previously reported, have been reclassified to conform to the 2002
presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Note 2 |  | Impairment of Long Lived Assets. In September 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective for the first quarter of fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | The Company completed its analysis of the required transitional
impairment test for goodwill upon adoption of FAS 142 and has recorded
$11,500,000 goodwill impairment in the income statement in the
Cumulative effect of change in accounting principle in the first
quarter 2002.                                                                                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Goodwill resulting from the reverse merger with Coda in 2000 consist of
the following (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                              |  |          |       |  |              |   |        | 
|----------------------------- |  | -------- | ----- |  | ------------ | - | ------ | 
|                              |  | June 30, |       |  | December 31, |  
|                              |  | 2002     |       |  | 2001         |  
|                              |  |          |       |  |              |  
|Goodwill                      |  | $        | 8,190 |  |              | $ | 19,690 | 
|Less accumulated amortization |  |          | 2,360 |  |              |   | 2,360  | 
|                              |  |          |       |  |              |  
|                              |  | $        | 5,830 |  |              | $ | 17,330 | 
|                              |  |          |       |  |              |  

5



---



##### Table of Contents



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With the adoption of FAS 142 the Company ceased amortization of goodwill
as of January 1, 2002. The following table presents the results of the
Company for all periods presented on a comparable basis (in thousands):

|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------- |  | ---------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                    |  | Quarter Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                    |  | 2002                   |        |   | 2001                      |   |        | 2002 |  |   | 2001    |  
|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |  
|Reported net loss attributed to
common shareholder  |  | $                      | (1,848 | ) |                           | $ | (3,035 | )    |  | $ | (14,777 | ) |  | $ | (7,164 | )
|Add back goodwill amortization                      |  |                        |       |   |                           |   | 492    |      |  |   |        |   |  |   | 984    |  
|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |  
|Adjusted net loss attributed to
common shares       |  |                        | (1,848 | ) |                           |   | (2,543 | )    |  |   | (14,777 | ) |  |   | (6,180 | )
|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |  
|Basic and diluted net loss per share:               |  |                        |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Reported net loss attributed to
common shareholders |  | $                      | (0.08  | ) |                           | $ | (0.15  | )    |  | $ | (0.64   | ) |  | $ | (0.34  | )
|Goodwill amortization                               |  |                        |       |   |                           |   | 0.02   |      |  |   |        |   |  |   | 0.05   |  
|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |  
|Adjusted net loss attributed to
common shareholders |  | $                      | (0.08  | ) |                           | $ | (0.13  | )    |  | $ | (0.64   | ) |  | $ | (0.29  | )
|                                                    |  |                        |        |   |                           |   |        |      |  |   |         |  

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 3 |  | Restructuring Charges. In 2001, the Company announced restructuring
plans to eliminate redundant responsibilities and cut excess costs and
reduce the digital sheet music operations in its European and Madagascar
locations. As a result of these plans to reduce operating costs,
MakeMusic! recorded a restructuring charge of $1,172,000 in 2001. The
remaining accrual relating to the restructure charge is $51,000 of which
all are New York lease accruals. The following table displays a
roll-forward of the liabilities for restructuring charges from December
31, 2001 to June 30, 2002.

|                                         |  |              |         |  |       |   |         |      |          |   |        | 
|---------------------------------------- |  | ------------ | ------- |  | ----- | - | ------- | ---- | -------- | - | ------ | 
|                                         |  | December 31, |         |  |       |   |         |      | June 30, |  
|                                         |  | 2001         |         |  | Usage |   |         | 2002 |         
|                                         |  |              |         |  |       |   |         |      |         
|Severance and related
personnel expenses |  | $            | 67,000  |  |       | $ | 67,000  |      |          | $ |       | 
|Lease Termination                        |  |              | 94,000  |  |       |   | 43,000  |      |          |   | 51,000 | 
|                                         |  |              |         |  |       |   |         |      |         
|Total                                    |  | $            | 161,000 |  |       | $ | 110,000 |      |          | $ | 51,000 | 
|                                         |  |              |         |  |       |   |         |      |         

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 4 |  | Loss Per Common Share. Basic and diluted net loss per common share was
computed by dividing the net loss by the weighted average number of shares of
Common Stock outstanding plus 1,487,612 and 2,382,426 for the quarter ended
June 30, 2002 and 2001, respectively. These shares are issuable under the put
and call agreement from the Companys reverse acquisition and deemed
outstanding for purposes of loss per share.

6



---



##### Table of Contents



|       |  |                                                                                                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 5 |  | Income Tax Expense. Because of net operating losses the Company has not
incurred income tax expense.                                                    
|       |  |                                                                                                                                                         
|Note 6 |  | Comprehensive Income (Loss). The effect of foreign currency translation
is $29,000 of other comprehensive income for the six months ended June 30,
2002.

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

MakeMusic! Inc. (MakeMusic! 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 across the globe.

The Company has incurred losses from operations since inception and has an
accumulated deficit of $45,844 ,000 as of June 30, 2002.

Results of operations

For the periods ended June 30, 2002 compared to the periods ended June 30, 2001

Net Revenues.Net revenues of $1,347,000 for the quarter ended June 30,
2002 were $163,000 or 14% higher than for the quarter ended June 30, 2001. Net
revenues of $3,226,000 for the six months ended June 30, 2002 were $149,000 or
5% higher than for the six months ended June 30, 2001. The significant
increase in sales over prior years is related to the early June release of
Finale 2003 and increased sales of PrintMusic!, offset by lower sales in Finale
Allegro and SmartMusic Studio software and accompaniment sales, which were not
promoted by the Company while it developed and launched the SmartMusic Studio
subscription service.

The SmartMusic subscription service for music
educators, launched in November 2001, has been purchased by more than
720 schools with more than 1,930 subscriptions as of the end of the
second quarter 2002. These schools subscriptions correspond to
recurring annual subscription revenue of $61,000 to be recognized
over the subscription period, of which $10,000 was recorded in the
financial statements in the second quarter. The home version is
scheduled to be introduced in late summer 2002.

Gross Profit.Gross profit of $1,053,000 for the quarter ended June 30,
2002 was $167,000 or 19% higher than for the quarter ended June 30, 2001.
Gross profit of $2,630,000 for the six months ended June 30, 2002 was $263,000
or 11% higher than for the six months ended June 30, 2001. The increase in
gross profit is attributed to the early release of Finale 2003 products
and an overall shift in revenue away from
SmartMusic packaged good products and digital sheet music which are lower
margin percentage products.

Selling and
Marketing Expenses.Selling and marketing expenses were
$941,000 for the second quarter ended June 30, 2002, a 15% increase from
selling and marketing expenses of $815,000 for the quarter ended June 30, 2001.
Selling and marketing expenses were $1,925,000 for the first six months of
2002, a 24% decrease from selling and marketing expenses of $2,548,000 for the
six months ended June 30, 2001. The selling and marketing expenses

7



---



##### Table of Contents



increase for the quarter is related to the marketing campaigns for the
June release of Finale 2003. For the six months ended June 30, 2002 the
decrease is largely due to the full impact of the reduced workforce relating to
the sheet music operations announced in the first and third quarter of 2001,
partially offset by sales and marketing increases related to release of Finale
2003.

During the second
quarter of 2002 the Company analyzed the sales generated from its
first quarter SmartMusic subscription customer acquisition marketing
campaign and determined that it could acquire new school subscription
accounts for direct costs of less than $250 per school. This customer
acquisition cost, while higher than originally estimated, still
allows for profitable customer acquisition on the basis of the
Companys stated goal of obtaining more than $600 per year of
revenues from each subscribing school through school and student
subscription fees.

Website Development Expenses.Website development expenses were $257,000
for the quarter ended June 30, 2002, a 22% decrease from website development
expense of $330,000 for the quarter ended June 30, 2001. For the six months
ended June 30, 2002, website development expenses of $536,000 were $235,000 or
30% lower than for the six months ended June 30, 2001. Prior year expenses
reflect the initial website development of the sheet music website, which has
slowed since the website is complete. Current year website development expense
continues to consist primarily of expenses related to improvement of the design
and development of additional features for the SmartMusic website and other
underlying technology infrastructure. In the first quarter of 2001, the
Company announced a restructure of its operation which resulted in a
significant reduction of expenses in website development and a shift of
personnel in the European operation into SmartMusic Online internet
development.

Content and Product Development Expenses.Content and product development
expenses of $597,000 for the quarter ended June 30, 2002 were $10,000 or 2%
higher than for the quarter ended June 30, 2001. For the six months ended June
30, 2002, content and product development expenses of $1,145,000 were $141,000
or 11% lower than for the six months ended June 30, 2001. The decrease is
largely due to the discontinued sheet music content operations in Lyon and
Madagascar in 2001, partially offset by additional personnel and related costs
for Finale 2003 development and the related costs for software and repertoire
development in support of the SmartMusic Studio subscription service.

General and Administrative Expenses.General and administrative expenses
were $1,104,000 for the second quarter ended June 30, 2002, a $1,097,000 or 50%
decrease from the second quarter ended June 30, 2001. General and
administrative expenses of $2,308,000 for the six months ended June 30, 2002
decreased $2,032,000 or 47% from the six months ended June 30, 2001. The
decrease relates to actual expense reductions as a result of the 2001
restructurings, the reduction of amortization of license rights due to the
write-off of $1.3 million license rights in the third and fourth quarter of
2001, and the non-amortization of goodwill resulting from the adoption of FASB
142, Goodwill and Other Intangible Assets (See Note 2).

Interest Income, Net.The Company had interest income of $5,000, net of
$3,000 interest expense for the quarter ended June 30, 2002. Net interest
income decreased $41,000 or 95% when compared to the quarter ended June 30,
2001. For the first six months of 2002, the Company had a net interest income
of $13,000 as compared to $88,000 for the same period a year ago. Decreased
interest income relates to lower cash investments.

Net Loss Before Cumulative Effect of Accounting Principle. The Company
recorded a net loss before cumulative effect of accounting principle of
$1,848,000 for the quarter ended June 30, 2002, compared with a net loss of
$3,035,000 for the quarter ended June 30, 2001. For the first six months ended
June 30, 2002, the Company recorded a net loss before cumulative effect of
accounting principle of $3,277,000, compared to $7,164,000 for the six months
ended June 30, 2001. The reduced level of net loss is attributed to factors
that affect revenues and expenses

8



---



##### Table of Contents



as described above.

Cumulative Effect of Accounting Principle. The Company has recorded in the
first quarter 2002 a cumulative effect of accounting principle change of
$11,500,000 relating to the goodwill generated from the reverse merger of Coda
and Net4Music on October 19, 2000 (See Note 2).

Net Loss. The Company recorded a net loss of $1,848,000 or $0.08 per basic
and diluted share for the quarter ended June 30, 2002 compared to a net loss of
$3,035,000 or $0.15 per basic and diluted share for the quarter ended June 30,
2001. For the six months ended June 30, 2002, the Company recorded a net
loss of $14,777,000 or $0.64 per basic and diluted share as compared to a net
loss $7,164,000 or $0.34 basic and diluted share for the same period last year.
This loss is attributable to the changes in revenues and expenses described
above.

Liquidity and Capital Resources.Net cash used in operating activities
totaled $1,799,000 for the six months ended June 30, 2002 as compared to
$5,960,000 of cash used for operating activities in the six months ended June
30, 2001. The significant reduction in cash usage is attributed to increased
gross margins from higher revenues and higher margin products; the full impact
of closing the New York facility and reduction of European operations, which
included sales and marketing expense reductions; personnel reductions for sales
and marketing, website development and content development; and general
administrative expense reduction.

Cash usage of $1,799,000 is significantly less than the net loss reported
because $12,722,000 is depreciation and amortization. In addition,
accounts
receivable decreased by $521,000 due to collection efforts and $144,000 of
prepaid expenses and other current assets have been expensed, offset by build
up of inventories of $98,000 for the release of Finale 2003 and paydown of
accounts payable and accrued expenses of $208,000. The Company made capital
expenditures of $213,000, paid down long-term debt of $136,000 and reclassed
$26,000 of short-term debt to long-term debt due to negotiations with some
vendors in the six months ended June 30, 2002.

The Company has continued to experience operating losses and a resulting
reduction in cash resources. However, the Companys software
sales are cyclical and historically generate cash commencing in the
quarter with the release of the new version of Finale, its notation
software product. The latest Finale release occurred late in the
second quarter 2002 and will positively impact the third quarter
2002. Given the limited cash resources now available for investing in
SmartMusic customer acquisition, the Companys new forecasts of
SmartMusic customer acquisition costs are expected to lead to a
slower growth of SmartMusic revenues in 2002 and early 2003 in
comparison with managements earlier estimate. The
Company has taken steps to reduce costs and believes the existing
cash, together with funds generated by product sales, will be
sufficient to finance operations into the first quarter of 2003 which
extends beyond the expected launch of the SmartMusic home
subscriptions service. Management is actively seeking additional
funds to support future operations. If new financing is not
attainable, further expense reductions will be initiated.

Cautionary Statements

This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. Our
forward-looking statements in this release generally relate to our growth
strategy and expectations, our business

9



---



##### Table of Contents



goals, the results of the pilot program and the future of the SmartMusic Studio
program, sufficiency of and ability to obtain additional capital, product
development, market introductions, 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. We caution investors that
many important factors have affected, and in the future could affect, our
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this release and
elsewhere by us or on our behalf. These factors include, but are not limited
to, our need for and ability to obtain additional capital; the market
acceptance of our products; our dependence upon new product development
efforts, the success of our Internet business and accompaniment sales efforts;
maintaining license agreements with a limited number of publishers; the limited
and fluctuating sales of certain of our products; the intense competition we
face; the rapid technological changes and obsolescence in our industry; the
changing governmental regulation we may face; the risks of doing business
internationally; our dependence on key personnel and the proprietary nature of
our technology; our expected continuing operating losses; the market volatility
of our stock; potential market delisting; other general business and economic
conditions; and those risks described from time to time in our reports to the
Securities and Exchange Commission (including our Annual Report on Form
10-KSB). 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 of the risks, uncertainties or potentially
inaccurate assumptions that investors should take into account
when making investment decisions.
Shareholders and other readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. We undertake no obligation to update publicly or revise any
forward-looking statements.

10



---



##### Table of Contents



|        |  |                                                     
|------- |  | ----------------------------------------------------
|PART 2. |  | OTHER INFORMATION                                   
|        |  |                                                     
|Item 1. |  | Legal Proceedings:                                  
|        |  |                                                     
|        |  | None                                                
|        |  |                                                     
|Item 2. |  | Changes in Securities:                              
|        |  |                                                     
|        |  | None                                                
|        |  |                                                     
|Item 3. |  | Defaults upon Senior Securities:                    
|        |  |                                                     
|        |  | None                                                
|        |  |                                                     
|Item 4. |  | Submission of Matters to a Vote of Security Holders:



| | (a) |  | The annual meeting of the Companys shareholders was
held on Tuesday, May 21, 2002.                                                                                                                                                                                                                          
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |  |                                                                                                                                                                                                                                                                                                              
| | (b) |  | At the annual meeting, a proposal to set the number of
directors at nine was adopted by a vote of 15,351,704 shares in
favor, with 363,167 shares against, 95,351 shares abstaining and
0 shares represented by broker nonvotes.                                                                             
|
| | (c) |  | Proxies for the annual meeting were solicited pursuant
to Regulation 14A under the Securities Exchange Act of 1934. The
following persons were elected directors of the Company to serve
until the next annual meeting of shareholders and until their
successors shall have been duly elected and qualified:

|                    |  |                     |            |  |                |           |         | 
|------------------- |  | ------------------- | ---------- |  | -------------- | --------- | ------- | 
|                    |  |                     |            |  |                | Number of |        
|Nominee             |  | Number of Votes For |            |  | Votes Withheld |          
|                    |  |                     |            |  |                |          
|Philip Sean Lafleur |  |                     | 15,584,465 |  |                |           | 225,757 | 
|John W. Paulson     |  |                     | 15,584,465 |  |                |           | 225,757 | 
|Philippe Aubert     |  |                     | 15,740,465 |  |                |           | 69,757  | 
|Timothy Bajarin     |  |                     | 15,740,465 |  |                |           | 69,757  | 
|François Duliège    |  |                     | 15,584,465 |  |                |           | 225,757 | 
|Benoist Grossmann   |  |                     | 15,740,465 |  |                |           | 69,757  | 
|Patrick Revenu      |  |                     | 15,740,465 |  |                |           | 69,757  | 
|Martin Velasco      |  |                     | 15,740,465 |  |                |           | 69,757  | 
|Benson K. Whitney   |  |                     | 15,740,465 |  |                |           | 69,757  | 

11



---



##### Table of Contents





| | (d) |  | At the annual meeting the shareholders approved an
amendment to the Articles of Incorporation to change the
Companys name to MakeMusic! Inc. by a vote of 15,684,930
shares in favor, with 97,107 shares against, 28,185 shares
abstaining and 0 shares represented by broker nonvotes.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |                                 
|------- |  | --------------------------------
|Item 5. |  | Other Information:              
|       
|        |  | None                            
|       
|Item 6. |  | Exhibits and Reports on Form 8-K

| |  |                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) Exhibits: None                                                                                                                                                                                  
|
| |  | (b) Reports on Form 8-K: A report on Form 8-K was filed by the
Company on May 23, 2002, reporting under Item 5 the issuance of a
press release relating to the Companys school pilot music program.

12



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |                 |  |  |                                                                        
|----- | --------------- |  |  | -----------------------------------------------------------------------
|Date: | August 12, 2002 |  |  | MAKEMUSIC INC.                                                         
|     
|      |                 |  |  | By: /s/ Philip Sean LafleurPhilip Sean Lafleur, Chief Executive Officer
|     
|      |                 |  |  | And:    /s/ Barbara S. RemleyBarbara S. Remley, Chief Financial Officer

13