##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 0-26192
(Commission file number)
 MAKEMUSIC, INC.
  Minnesota
    
    41-1716250(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 
 
   
  
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1
    
    Condensed Financial Statements
    
    
    3Condensed Balance Sheets
September 30, 2008 and December 31, 2007
    
    
    3Condensed Statement of Operations
Three and nine-month periods ended September 30, 2008 and 2007
    
    
    4Condensed Statements of Cash Flows
Nine-month period ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis and Results of Operation
    
    
    9Item 4T
    
    Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    17Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3
    
    Defaults Upon Senior Securities
    
    
    17Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5
    
    Other Information
    
    
    17Item 6
    
    Exhibits
    
    
    17Signatures
    
    
    18Exhibit Index
    
    
    19EX-10.1EX-10.2EX-31.1EX-31.2EX-31.3EX-32.1EX-31.2EX-32.3
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements.
 MakeMusic, Inc.
 
 Condensed Balance Sheets
 (In thousands of U.S. dollars, except share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,743
    
    
    $
    6,041Accounts receivable (net of allowance of $47 and $38 in
2008 and 2007, respectively)
    
    
    1,521
    
    
    
    1,491Inventories
    
    
    495
    
    
    
    332Prepaid expenses and other current assets
    
    
    321
    
    
    
    211Total current assets
    
    
    8,080
    
    
    
    8,075Property and equipment, net
    
    
    755
    
    
    
    730Capitalized software products, net
    
    
    2,479
    
    
    
    1,418Goodwill
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    11
    
    
    
    29Total assets
    
    
    14,955
    
    
    
    13,882Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    
    58
    
    
    
    57Accounts payable
    
    
    601
    
    
    
    427Accrued compensation
    
    
    1,154
    
    
    
    1,131Other accrued liabilities
    
    
    129
    
    
    
    184Post contract support
    
    
    169
    
    
    
    169Reserve for product returns
    
    
    367
    
    
    
    365Current portion of deferred rent
    
    
    28
    
    
    
    26Deferred revenue
    
    
    2,063
    
    
    
    1,702Total current liabilities
    
    
    4,569
    
    
    
    4,061Capital lease obligations, net of current portion
    
    
    89
    
    
    
    132Deferred rent, net of current portion
    
    
    48
    
    
    
    69Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000

Issued and outstanding shares  4,635,529 and 4,517,803
in 2008 and 2007, respectively
    
    
    46
    
    
    
    45Additional paid-in capital
    
    
    65,634
    
    
    
    65,017Accumulated deficit
    
    
    (55,431
    )
    
    
    (55,442
    )Total shareholders equity
    
    
    10,249
    
    
    
    9,620Total liabilities and shareholders equity
    
    $
    14,955
    
    
    $
    13,882
  3




---



##### Table of Contents



MakeMusic, Inc.
 
 Condensed Statements of Operations
 (In thousands of U.S. dollars, except share and per share data)
  3 Months
    
    
    9 MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Notation revenue
    
    $
    3,361
    
    
    $
    3,514
    
    
    $
    7,542
    
    
    $
    7,816SmartMusic revenue
    
    
    1,133
    
    
    
    822
    
    
    
    2,874
    
    
    
    1,980Other revenue
    
    
    271
    
    
    
    285
    
    
    
    572
    
    
    
    499NET REVENUE
    
    
    4,765
    
    
    
    4,621
    
    
    
    10,988
    
    
    
    10,295COST OF REVENUES
    
    
    726
    
    
    
    737
    
    
    
    1,675
    
    
    
    1,544GROSS PROFIT
    
    
    4,039
    
    
    
    3,884
    
    
    
    9,313
    
    
    
    8,751OPERATING EXPENSES:Development expenses
    
    
    1,182
    
    
    
    1,012
    
    
    
    3,466
    
    
    
    3,017Selling and marketing expenses
    
    
    1,225
    
    
    
    1,054
    
    
    
    3,365
    
    
    
    3,014General and administrative expenses
    
    
    675
    
    
    
    815
    
    
    
    2,515
    
    
    
    2,642Total operating expenses
    
    
    3,082
    
    
    
    2,881
    
    
    
    9,346
    
    
    
    8,673INCOME (LOSS) FROM OPERATIONS
    
    
    957
    
    
    
    1,003
    
    
    
    (33
    )
    
    
    78Other, net
    
    
    14
    
    
    
    28
    
    
    
    50
    
    
    
    85Net income before income tax
    
    
    971
    
    
    
    1,031
    
    
    
    17
    
    
    
    163Income tax expense
    
    
    0
    
    
    
    1
    
    
    
    6
    
    
    
    2Net income
    
    $
    971
    
    
    $
    1,030
    
    
    $
    11
    
    
    $
    161Income per common share:Basic
    
    
    0.21
    
    
    
    0.25
    
    
    
    0.00
    
    
    
    0.04Diluted
    
    
    0.20
    
    
    
    0.22
    
    
    
    0.00
    
    
    
    0.04Weighted average common shares outstanding:Basic
    
    
    4,634,768
    
    
    
    4,134,706
    
    
    
    4,615,655
    
    
    
    4,095,096Diluted
    
    
    4,939,271
    
    
    
    4,597,115
    
    
    
    4,983,017
    
    
    
    4,537,427
  4




---



##### Table of Contents



MakeMusic, Inc.
 
 Condensed Statements of Cash Flows
 (In thousands of U.S. dollars)
  9 MonthsEnded September 30,2008
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    11
    
    
    $
    161Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    631
    
    
    
    462Stock option compensation
    
    
    318
    
    
    
    247Net change in assets and liabilities:Accounts receivable
    
    
    (30
    )
    
    
    181Inventories
    
    
    (163
    )
    
    
    (23
    )Prepaid expenses and other assets
    
    
    (101
    )
    
    
    68Accounts payable
    
    
    174
    
    
    
    (21
    )Accrued liabilities and product returns
    
    
    (49
    )
    
    
    (259
    )Deferred revenue
    
    
    361
    
    
    
    285Net cash provided by operating activities
    
    
    1,152
    
    
    
    1,101Cash flows from investing activitiesPurchases of property and equipment
    
    
    (328
    )
    
    
    (172
    )Capitalized development and other intangibles
    
    
    (1,379
    )
    
    
    (510
    )Net cash used in investing activities
    
    
    (1,707
    )
    
    
    (682
    )Cash flows from financing activitiesProceeds from stock options and warrants exercised
    
    
    299
    
    
    
    570Payments on capital leases
    
    
    (42
    )
    
    
    (25
    )Net cash provided by financing activities
    
    
    257
    
    
    
    545Net increase (decrease) in cash and cash equivalents
    
    
    (298
    )
    
    
    964Cash and cash equivalents, beginning of period
    
    
    6,041
    
    
    
    3,130Cash and cash equivalents, end of period
    
    $
    5,743
    
    
    $
    4,094Supplemental disclosure of cash flow informationInterest paid
    
    $
    11
    
    
    $
    13Income taxes paid
    
    
    0
    
    
    
    2Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    0
    
    
    
    203
  5




---



##### Table of Contents



MakeMusic, Inc.
 
 Notes to Condensed Financial Statements
  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
three-month and nine-month periods ended September 30, 2008 are not
necessarily indicative of the operating results to be expected for
the full fiscal year. These statements should be read in
conjunction with our most recent Annual Report on Form 10-KSB.Note 2
    
    Net Income Per Share.Net income per share was calculated by
dividing the net income by the weighted average number of shares
outstanding during the period. The following table summarizes the
shares of stock included in calculating earnings per share for the
three-month and nine-month periods ended September 30, 2008 and
2007 in accordance with FASB Statement 128, Earnings per Share
(SFAS 128):
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302008
    
    2007
    
    2008
    
    2007Weighted-average
common shares
outstanding
    
    
    4,634,768
    
    
    
    4,134,706
    
    
    
    4,615,655
    
    
    
    4,095,096Dilutive effect of
stock options and
warrants
    
    
    304,503
    
    
    
    462,449
    
    
    
    367,362
    
    
    
    442,331Equivalent average
common shares
outstanding 
diluted
    
    
    4,939,271
    
    
    
    4,597,115
    
    
    
    4,983,017
    
    
    
    4,537,427
 Note 3
    
    Income Tax Expense.We did not record a provision for income tax in the three-month and
nine-month periods ended September 30, 2008 and 2007 as the provision was offset by a
reduction in the deferred tax asset valuation allowance. Due to the uncertainty regarding the
realization of our deferred income tax assets and specifically the net operating loss
carry-forwards, we have recorded a valuation allowance against our deferred income tax assets
for 2008 and 2007. The potential decrease or increase of the valuation allowance in the near
term is dependent on our future ability to realize the deferred tax assets that are affected
by the future profitability of MakeMusic.During the first quarter of 2007 we implemented FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement 109(FIN 48), which
clarifies the accounting for uncertainty in tax positions. This Interpretation provides
that the tax effects from an uncertain tax position can be recognized in our financial
statements, only if the position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 were effective as
of the beginning of fiscal 2007, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. In the first quarter of
2007 we completed our review of uncertain tax positions and recorded a FIN 48 reserve and
corresponding reduction in our valuation allowance of approximately $2,962,000. Due to the
reduction in our valuation allowance the adoption on FIN 48 did not have an effect on the
net loss for the quarter ending March 31, 2007 and no adjustment was made to opening
retained earnings. Interest and penalties related to any uncertain tax positions would be
accounted for as a long term liability with the corresponding expense being charged to
current period non-operating expense. As of September 30, 2008 and September 30, 2007, we
had recognized no liability related to interest or penalties. The total amount of
unrecognized tax benefits that if recognized would affect our effective tax rate is zero
based on the fact that we currently have a full reserve against our unrecognized tax
benefits.
 6




---



##### Table of Contents



As of September 30, 2008 the FIN 48 reserve and the valuation allowance against our
deferred tax asset for 2003-2007 was $3,133,000. As of September 30, 2008 and September
30, 2007, there are no open positions for which the unrecognized tax benefits will
significantly increase or decrease during the next
twelve months. Additionally, tax years still open for examination by Federal and major
state agencies as of September 30, 2008 are 2004-2007.Note 4
    
    Stock-Based Compensation.We currently offer an equity-based compensation plan to our
employees, directors and consultants. This plan is administered by the Compensation Committee
of the Board of Directors, which recommends to the Board persons eligible to receive awards
and the number of shares and/or options subject to each award, the terms, conditions,
performance measures and other provisions of the award. Readers should refer to Note 5 of our
financial statements in our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2007 and our 8-K filed on May 27, 2008 for additional information related to our
equity-based compensation plans.We account for equity-based compensation arrangements with our employees and directors in
accordance with SFAS No. 123 (revised), Share-Based Payment(SFAS No. 123R). Under the
fair value recognition provisions of SFAS No. 123R we measure stock-based compensation
cost at the grant date based on the fair value of the award and recognize the compensation
expense over the requisite service period, which is generally the vesting period. For the
three months ended September 30, 2008 and 2007, we recognized $87,000 and $86,000,
respectively, and for the nine months ended September 30, 2008 and 2007, we recognized
$318,000 and $247,000, respectively, of expense related to equity-based compensation.
 7




---



##### Table of Contents



Stock OptionsWe use the Black-Scholes option pricing model to estimate the fair value of stock-based
awards with the weighted average assumptions noted in the following table.
 September 30,
    
    September 30,2008
    
    2007Black-Scholes Model:Risk-free interest rate
    
    
    3.0
    %
    
    
    4.6
    %Expected life, in years
    
    
    3.5
    
    
    
    2.6Expected volatility
    
    
    67.2
    %
    
    
    78.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 Expected volatility is based on the historical volatility of our share price in the period
prior to option grant equivalent to the expected life of the options. The expected term is
based on managements estimate of when the option will be exercised which is generally the
mid-point between the vesting period and the term of the option. The risk-free interest rate
for periods within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.The following table represents stock option activity for the nine months ended September 30,
2008:
 Weighted
    
    
    WeightedShares
    
    
    
    
    
    
    Average
    
    
    AverageReserved for
    
    
    Plan
    
    
    Exercise
    
    
    RemainingGrant
    
    
    Options
    
    
    Price
    
    
    Contract LifeOutstanding at December 31, 2007
    
    
    55,160
    
    
    
    712,768
    
    
    $
    4.34Authorized
    
    
    550,000
    
    
    
    
    
    
    
    Granted
    
    
    (36,000
    )
    
    
    36,000
    
    
    $
    10.08Expired
    
    
    
    
    
    
    (44,410
    )
    
    $
    5.33Cancelled
    
    
    
    
    
    
    
    
    
    $
    0.00Exercised
    
    
    
    
    
    
    (7,000
    )
    
    $
    3.55Outstanding at September 30, 2008
    
    
    569,160
    
    
    
    697,358
    
    
    $
    4.58
    
    
    2.7 YearsOutstanding Exercisable at
September 30, 2008
    
    
    
    
    
    
    353,194
    
    
    $
    3.78
    
    
    2.3 Years
 At September 30, 2008 the aggregate intrinsic value of options outstanding was $1,606,000
and the aggregate intrinsic value of options exercisable was $1,059,000. Total intrinsic
value of options exercised was $38,000 for the nine months ended September 30, 2008.At September 30, 2008 there was $335,000 of unrecognized compensation cost related to
nonvested share-based payments which is expected to be recognized over a weighted-average
period of 1.7 years.Restricted Stock UnitsAs part of the 2008 Executive Compensation Plan, executive officers and certain key
employees are eligible to receive restricted stock units based on the achievement of annual
financial objectives. As of September 30, 2008 there were no vested restricted stock units.
Readers should refer to Exhibit 10.1 on our Form 10-Q for the period ended March 31, 2008
for additional information regarding the terms of the 2008 Executive Compensation Plan and
restricted stock units granted therunder.
 8




---



##### Table of Contents



Note 5
    
    New and Pending Accounting Pronouncements.
 In September 2006, FASB issued Statement 157, Fair Value Measurements. This statement
defines fair value and establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP). More precisely, this statement sets forth a standard
definition of fair value as it applies to assets or liabilities, the principal market (or
most advantageous market) for determining fair value (price), the market participants,
inputs and the application of the derived fair value to those assets and liabilities. We
adopted FASB Statement 157 during the first quarter of 2008. There has been no impact on our
financial statements as a result of adoption.In February 2007, FASB issued Statement 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This statement allows all entities to choose, at specified election
dates, to measure eligible items at fair value. Under this option, an entity will report
unrealized gains and losses on items for which the fair value option has been elected in
earnings. This statement is effective as of the beginning of the first fiscal year which
begins after November 15, 2007. We adopted FASB Statement 159 during the first quarter of
2008 and have not elected the permitted fair value measurement provisions of this statement.In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(SFAS 141R), which replaces FASB Statement No. 141. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non- controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure requirements
that will enable users to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective as of the beginning of an entitys fiscal year beginning
January 1, 2009. We are currently evaluating the impact of adopting SFAS 141R on our
financial statements.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 introduces
significant changes in the accounting and reporting for business acquisitions and
noncontrolling interest (NCI) in a subsidiary. SFAS 160 also changes the accounting and
reporting for the deconsolidation of a subsidiary. Companies are required to adopt the new
standard for fiscal years beginning after January 1, 2009. We expect the adoption of this
standard will have no impact on our financial statements.In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles(SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles
and provides entities with a framework for selecting the principles used in preparation of
financial statements that are presented in conformity with GAAP. The current GAAP hierarchy
has been criticized because it is directed to the auditor rather than the entity, it is
complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are not subject
to due process. The FASB believes the GAAP hierarchy should be directed to entities because
it is the entity (not its auditors) that is responsible for selecting accounting principles
for financial statements that are presented in conformity with GAAP. The adoption of FASB
162 is not expected to have any impact on our financial position.
 
 Item 2. Managements Discussion and Analysis and Results of Operations
 Executive Overview
  
    
    Providing integrated technology, content and web services to enhance and expand how
music is taught, learned and prepared for performance.
    
    Providing music education content developers with a technology-enriched publishing
platform that leverages their copyrighted assets while simultaneously increasing the
content and value of the SmartMusic library.
    
    Offering software solutions for engraving and electronically distributing sheet
music.
 9




---



##### Table of Contents



® ®
     
    10




---



##### Table of Contents



3 monthsended9/30/20087/1/2008
    
    New
    
    Renewed
    
    Subscriptions
    
    9/30/2008
    
    Net NewSubscriptions
    
    Subscriptions
    
    Subscriptions
    
    Ended
    
    Subscriptions
    
    Subscriptions95,632
    
    20,347
    
    20,017
    
    37,877
    
    98,119
    
    2,487
 .
    11




---



##### Table of Contents



Results of Operations
  3 Months Ended September 30,
    
    
    9 Months Ended September 30,Incr
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incr2008
    
    
    2007
    
    
    (Decr)
    
    
    %
    
    
    2008
    
    
    2007
    
    
    (Decr)
    
    
    %(In $ thousands)Notation revenue
    
    $
    3,361
    
    
    $
    3,514
    
    
    ($
    153
    )
    
    
    -4
    %
    
    $
    7,542
    
    
    $
    7,816
    
    
    ($
    274
    )
    
    
    -4
    %SmartMusic revenue
    
    
    1,133
    
    
    
    822
    
    
    
    311
    
    
    
    38
    %
    
    
    2,874
    
    
    
    1,980
    
    
    
    894
    
    
    
    45
    %Other revenue
    
    
    271
    
    
    
    285
    
    
    
    (14
    )
    
    
    -5
    %
    
    
    572
    
    
    
    499
    
    
    
    73
    
    
    
    15
    %Net revenue
    
    
    4,765
    
    
    
    4,621
    
    
    
    144
    
    
    
    3
    %
    
    
    10,988
    
    
    
    10,295
    
    
    
    693
    
    
    
    7
    %Cost of revenues
    
    
    726
    
    
    
    737
    
    
    
    (11
    )
    
    
    -1
    %
    
    
    1,675
    
    
    
    1,544
    
    
    
    131
    
    
    
    8
    %Gross profit
    
    
    4,039
    
    
    
    3,884
    
    
    
    155
    
    
    
    4
    %
    
    
    9,313
    
    
    
    8,751
    
    
    
    562
    
    
    
    6
    %Percentage of net sales
    
    
    85
    %
    
    
    84
    %
    
    
    
    
    
    
    
    
    
    
    85
    %
    
    
    85
    %Development expenses
    
    
    1,182
    
    
    
    1,012
    
    
    
    170
    
    
    
    17
    %
    
    
    3,466
    
    
    
    3,017
    
    
    
    449
    
    
    
    15
    %Selling and marketing
    
    
    1,225
    
    
    
    1,054
    
    
    
    171
    
    
    
    16
    %
    
    
    3,365
    
    
    
    3,014
    
    
    
    351
    
    
    
    12
    %General administrative
    
    
    675
    
    
    
    815
    
    
    
    (140
    )
    
    
    -17
    %
    
    
    2,515
    
    
    
    2,642
    
    
    
    (127
    )
    
    
    -5
    %Total operating expense
    
    
    3,082
    
    
    
    2,881
    
    
    
    201
    
    
    
    7
    %
    
    
    9,346
    
    
    
    8,673
    
    
    
    673
    
    
    
    8
    %Operating income (loss)
    
    
    957
    
    
    
    1,003
    
    
    
    (46
    )
    
    
    5
    %
    
    
    (33
    )
    
    
    78
    
    
    
    (111
    )
    
    
    -142
    %Other income
    
    
    14
    
    
    
    28
    
    
    
    (14
    )
    
    
    -50
    %
    
    
    50
    
    
    
    85
    
    
    
    (35
    )
    
    
    -41
    %Net income before taxes
    
    $
    971
    
    
    $
    1,031
    
    
    ($
    60
    )
    
    
    -6
    %
    
    $
    17
    
    
    $
    163
    
    
    ($
    146
    )
    
    
    -90
    %Income tax provision
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    -100
    %
    
    
    (6
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    200
    %Net income
    
    $
    971
    
    
    $
    1,030
    
    
    ($
    59
    )
    
    
    -6
    %
    
    $
    11
    
    
    $
    161
    
    
    ($
    150
    )
    
    
    -93
    %
 Comparison of the three-month and nine-month periods ended September 30, 2008 to the three-month
and nine-month periods ended September 30, 2007
 Net revenue.
  2007
    
    
    2008Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3(In $ thousands)
    
    
    (In $ thousands)Notation revenue
    
    $
    2,553
    
    
    $
    1,748
    
    
    $
    3,514
    
    
    $
    3,165
    
    
    $
    2,556
    
    
    $
    1,625
    
    
    $
    3,361SmartMusic revenue
    
    
    588
    
    
    
    571
    
    
    
    822
    
    
    
    919
    
    
    
    882
    
    
    
    859
    
    
    
    1,133Other revenue
    
    
    130
    
    
    
    84
    
    
    
    285
    
    
    
    201
    
    
    
    184
    
    
    
    117
    
    
    
    271Net revenue
    
    $
    3,271
    
    
    $
    2,403
    
    
    $
    4,621
    
    
    $
    4,285
    
    
    $
    3,622
    
    
    $
    2,601
    
    
    $
    4,765
 12




---



##### Table of Contents



® 
 
     13




---



##### Table of Contents



Gross profit.
  Development expense.
 Selling and marketing expense.
 General and administrative expense.
 14




---



##### Table of Contents



Operating income (loss).
 Net income.
 Liquidity and capital resources.
     15




---



##### Table of Contents



Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal controls
 Forward Looking and Cautionary Statements
 The preceding discussion and analysis should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Managements Discussion and Analysis 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, anticipate, and similar words or expressions. The forward-looking
statements in this report generally relate to: our expectations for future results of operations,
the growth potential of our SmartMusic products; our intent to report SmartMusic subscription
renewals on a quarterly basis; our expectations relating to future cash flows; our expectations
regarding strength of operations, our customer base and industry partnerships; our intent to focus
specific marketing activities on SmartMusic and Impact; our intent to increase the focus of our
direct sales force on existing SmartMusic teachers; our expectations regarding future subscription
rates for SmartMusic and related increases to revenue; our expectations relating to capitalized
costs for repertoire development; our belief that development costs will increase due to
improvements to our SmartMusic enrollment and purchase processes; our intent to develop training
programs for SmartMusic and Impact; and our belief that sales and marketing expense will increase
during 2008. 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. MakeMusic
cautions 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 MakeMusic or on its behalf. These
factors include, but are not limited to: unforeseen capital demands; the market acceptance of
Finale, SmartMusic, SmartMusic Impact and other products; the maintenance of strategic partnerships
and customer relationships; our ability to license titles from music publishers; the success of
our SmartMusic subscription business; the limited and fluctuating sales of certain of our products;
the intense competition that we face; the rapid technological changes and obsolescence in software
industry; our dependence on key personnel and the proprietary nature of our technology; other
general business and economic conditions, including the impact of current economic conditions on
school and individual budgets; 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 forward-looking statements, which speak only as of the
date on which they are made. We do not intend to update publicly or revise any forward-looking
statements.
 16




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  17




---



##### Table of Contents



SIGNATURES
  Date: November 7, 2008
    MAKEMUSIC, INC.By:
    /s/ John W. PaulsonJohn W. Paulson, co-Chief Executive Officer(Principal Executive Officer)And:
    /s/ Ronald RaupRonald Raup, co-Chief Executive Officer(Principal Executive Officer)And:
    /s/ Karen L. VanDerBoschKaren L. VanDerBosch, Chief Financial Officer(Principal Financial Officer) 18




---



##### Table of Contents



EXHIBIT INDEX
MAKEMUSIC, INC.
FORM 10-Q
 The quarterly period ended September 30, 2008
 Exhibit No.
    
    Description10.1*
    
    Amendment No. 1 to Employment Agreement between the Company and John
Paulson10.2*
    
    Amendment No. 1 to Employment Agreement between the Company and
Ronald Raup31.1*
    
    Certification of co-Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of co-Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.3*
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of co-Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of co-Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.3*
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 19