##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

(Mark One)

þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended September 30, 2003


o
    
    Transition report under Section 13 or 15(d) of the Exchange ActFor the transition period
from              to


Commission file number 0-26192

MakeMusic! Inc.




(Exact Name of Small Business Issuer as Specified in its Charter)


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




(Address of Principal Executive Offices)


(952) 937-9611




(Issuers Telephone Number, Including Area Code)




---

(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)


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
þ No o

As of November 11, 2003, there were 3,356,330 shares of Common Stock
outstanding. Such amount reflects the number of shares of Common Stock
outstanding after the Companys one-for-ten reverse stock split, which became
effective on January 16, 2003. All references in the accompanying financial
statements to the number of shares and per share amounts have been
retroactively restated to reflect the reverse split.

Transitional Small Business Disclosure Format (check one):

Yes
o No þ

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TABLE OF CONTENTS



|                                              |                                                                   |                                                      |  |  |  |  |  | 
|--------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                
|                                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS              
|                                              |                                                                   | Condensed Consolidated Balance Sheets               
|                                              |                                                                   | Consolidated Statements of Operations               
|                                              |                                                                   | Consolidated Statements of Cash Flows               
|                                              |                                                                   | Notes to Condensed Consolidated Financial Statements
|                                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|                                              | ITEM 3. CONTROLS AND PROCEDURES                                  
|PART 2. OTHER INFORMATION                    
|                                              | Item 6. Exhibits and Reports on Form 8-K.                        
|SIGNATURES                                   
|EXHIBIT INDEX                                
|Form 10-QSB                                  
|Quarter ended September 30, 2003             
|EX-31.1 Certification Pursuant to Section 302
|EX-31.2 Certification Pursuant to Section 302
|EX-32.1 Certification Pursuant to Section 906
|EX-32.2 Certification Pursuant to Section 906



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MakeMusic! Inc.

INDEX

Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
    
    
    3Condensed Consolidated Statement of Operations
Three and nine-month periods ended September 30, 2003 and 2002
    
    
    4Condensed Consolidated Statement of Cash Flows
Nine-month periods ended September 30, 2003 and 2002
    
    
    5Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis or
Plan of Operation.
    
    
    10Item 3.
    
    Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    16Exhibit Index
    
    
    17


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PART I. FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




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

September 30,
    
    December 31,2003
    
    2002(unaudited)
    
    (note)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,808
    
    
    $
    1,469Cash-restricted
    
    
    
    
    
    
    390Accounts receivable, net
    
    
    478
    
    
    
    400Inventories
    
    
    368
    
    
    
    324Value added tax receivable
    
    
    103
    
    
    
    58Prepaid expenses and other current assets
    
    
    146
    
    
    
    185Total current assets
    
    
    2,903
    
    
    
    2,826Property and equipment, net
    
    
    305
    
    
    
    528Goodwill, net
    
    
    3,630
    
    
    
    3,630Capitalized software products
    
    
    693
    
    
    
    732Intangible assets, net
    
    
    1,953
    
    
    
    2,719Other non-current assets
    
    
    151
    
    
    
    157Total assets
    
    $
    9,635
    
    
    $
    10,592Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    481
    
    
    $
    651Accrued expenses and other current liabilities
    
    
    1,215
    
    
    
    1,303Revolving note payable
    
    
    
    
    
    
    89Convertible loans
    
    
    
    
    
    
    419Current portion of long-term debt and capital leases
    
    
    574
    
    
    
    437Reserve for product returns
    
    
    369
    
    
    
    219Deposits
    
    
    
    
    
    
    390Deferred Revenue
    
    
    508
    
    
    
    178Total current liabilities
    
    
    3,147
    
    
    
    3,686Long-term debt and capital leases, net of current portion
    
    
    23
    
    
    
    151Shareholders equity:Common stock
    
    
    34
    
    
    
    22Additional paid-in capital
    
    
    61,586
    
    
    
    58,278Accumulated deficit
    
    
    (54,678
    )
    
    
    (50,877
    )Accumulated other comprehensive income
    
    
    
    
    
    
    (73
    )Deferred compensation
    
    
    (477
    )
    
    
    (595
    )Total shareholders equity
    
    
    6,465
    
    
    
    6,755Total liabilities and shareholders equity
    
    $
    9,635
    
    
    $
    10,592


NOTE:The Balance Sheet at December 31, 2002 has been derived from the audited
financial statements as of 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.

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

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002NET REVENUE
    
    $
    2,246
    
    
    $
    2,444
    
    
    $
    5,281
    
    
    $
    5,803COST OF REVENUES
    
    
    514
    
    
    
    401
    
    
    
    1,218
    
    
    
    1,130GROSS PROFIT
    
    
    1,732
    
    
    
    2,043
    
    
    
    4,063
    
    
    
    4,673OPERATING EXPENSES:Website development expenses
    
    
    140
    
    
    
    274
    
    
    
    349
    
    
    
    810Content and product development
expenses
    
    
    530
    
    
    
    504
    
    
    
    1,621
    
    
    
    1,649Selling and marketing expenses
    
    
    844
    
    
    
    836
    
    
    
    2,667
    
    
    
    2,761General and administrative expenses
    
    
    963
    
    
    
    1,112
    
    
    
    2,946
    
    
    
    3,420Impairment of long-lived assets
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    193Total operating expenses
    
    
    2,477
    
    
    
    2,919
    
    
    
    7,583
    
    
    
    8,833LOSS FROM OPERATIONS
    
    
    (745
    )
    
    
    (876
    )
    
    
    (3,520
    )
    
    
    (4,160
    )Interest (expense)/income, net
    
    
    (13
    )
    
    
    (5
    )
    
    
    (745
    )
    
    
    6Gain on forgiveness of debt
    
    
    542
    
    
    
    
    
    
    
    542
    
    
    
    Other income/(expense), net
    
    
    
    
    
    
    (2
    )
    
    
    (76
    )
    
    
    (4
    )Net loss before income tax
    
    
    (216
    )
    
    
    (883
    )
    
    
    (3,799
    )
    
    
    (4,158
    )Income Tax
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Net loss before extraordinary items
    
    
    (216
    )
    
    
    (883
    )
    
    
    (3,801
    )
    
    
    (4,160
    )Cumulative effect of change in
accounting principle (FAS 142)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,500
    )Net loss
    
    $
    (216
    )
    
    $
    (883
    )
    
    $
    (3,801
    )
    
    $
    (15,660
    )Basic and diluted loss per common share
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (1.21
    )
    
    $
    (6.76
    )Weighted average common shares
outstanding
    
    
    3,356,330
    
    
    
    2,316,846
    
    
    
    3,147,939
    
    
    
    2,316,846


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

Nine Months EndedSeptember 30,2003
    
    2002Operating activitiesNet loss
    
    $
    (3,801
    )
    
    $
    (15,660
    )Adjustments to reconcile net loss to net cash used in
operating activities:Amortization of intangible assets
    
    
    988
    
    
    
    1,180Depreciation and amortization of property and equipment
    
    
    309
    
    
    
    515Amortization of deferred compensation
    
    
    118
    
    
    
    123Impairment of goodwill and license rights
    
    
    
    
    
    
    11,693Restructuring
    
    
    (140
    )
    
    
    (136
    )Non-cash interest on debt and discount
    
    
    723
    
    
    
    Forgiveness of debt
    
    
    (542
    )
    
    
    Issuance of stock options and warrants for services
    
    
    60
    
    
    
    11Foreign currency translation loss recorded
    
    
    145
    
    
    
    Increase (decrease) in cash from:Accounts receivable
    
    
    (115
    )
    
    
    391Inventories
    
    
    (44
    )
    
    
    (25
    )Prepaid expenses and other current assets
    
    
    41
    
    
    
    159Accounts payable
    
    
    (184
    )
    
    
    (306
    )Accrued liabilities and product returns
    
    
    212
    
    
    
    105Deferred revenue
    
    
    329
    
    
    
    53Net cash used in operating activities
    
    
    (1,901
    )
    
    
    (1,897
    )Net cash used by investing activitiesPurchases of property and equipment
    
    
    (113
    )
    
    
    Capitalized development and other intangible assets
    
    
    (165
    )
    
    
    (274
    )Net cash used in investing activities
    
    
    (278
    )
    
    
    (274
    )Net cash provided (used) by financing activitiesIssuance of shares
    
    
    2,119
    
    
    
    Collection of notes receivable from issuance of shares
    
    
    
    
    
    
    64Proceeds from revolving note payable, net
    
    
    
    
    
    
    67Proceeds from loans
    
    
    519
    
    
    
    708Payments on long-term debt and capital leases
    
    
    (120
    )
    
    
    (154
    )Net cash provided by financing activities
    
    
    2,518
    
    
    
    685Effect of exchange rate changes on cash
    
    
    
    
    
    
    22Net increase (decrease) in cash and cash equivalents
    
    
    339
    
    
    
    (1,464
    )Cash and cash equivalents, beginning of period
    
    
    1,469
    
    
    
    3,258Cash and cash equivalents, end of period
    
    $
    1,808
    
    
    $
    1,794Supplemental disclosure of cash flow informationInterest paid
    
    
    36
    
    
    
    10Notes Receivable on share subscriptions in September 2002
    
    
    
    
    
    
    10


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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 nine months ended September 30, 2003 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. All adjustments are
of a normal, recurring nature other than the debt forgiveness described in
Note 3.Certain amounts as presented in the 2002 financial statements, as
previously reported, have been reclassified to conform to the 2003
presentation.Note 2
    
    Impairment of Long Lived Assets. In September 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets (FAS 142),
effective for the first quarter of fiscal years beginning after December
15, 2001. Under FAS 142, goodwill and intangible assets deemed to have
indefinite lives are not amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized
over their useful lives.In the first quarter of 2002, the Company completed its analysis of the
required transitional impairment test for goodwill upon adoption of FAS
142 and recorded an $11,500,000 goodwill impairment in the income
statement in the Cumulative effect of change in accounting principle.
In the fourth quarter of 2002, the Company performed its annual
impairment analysis of goodwill and recorded an impairment of $2,200,000
to 2002 operating income. In the fourth quarter of 2003, the Company
will again perform its annual impairment assessment.Note 3
    
    Debt Forgiveness. On September 22, 2003, the Company received
formal forgiveness of debt from the Agence Nationale pour la
Valorisation de la Recherche (ANVAR), a French state-owned
institution dedicated to the financing of research and development
activities of French companies. The Company had debt of 467,000
euros to ANVAR for advances dedicated to the development of digital
sheet music sales by MakeMusic! SA (formerly Net4Music SA). The
development of the digital sheet music business was discontinued in
April 2002, at which time the Company requested a waiver of the
debt. MakeMusic! SA was liquidated in April 2003 and ANVAR
completed an audit in September 2003 and granted forgiveness of the
advance. At the time debt was forgiven, the U.S. dollar value of
the debt was $542,000.


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Note 4
    
    Restructuring Charges. In the fourth quarter 2002, the Company
announced plans to restructure its French operations by reducing
and moving the SmartMusic® website and administrative functions to
its Minneapolis location. A charge of $174,000 was booked to
accrued expenses for the restructuring in the quarter ended
December 31, 2002.The following table displays a roll-forward of the liabilities for
restructuring charges between December 31, 2002 and September 30,
2003.


December 31,
    
    
    
    
    
    September 30,2002
    
    Usage
    
    2003Non-Cash Items:Fixed asset write-off
    
    $
    23,500
    
    
    $
    23,500
    
    
    $
    Cash Items:Severance and
related
personnel expenses
    
    
    127,000
    
    
    
    127,000
    
    
    
    Legal and accounting
    
    
    23,500
    
    
    
    17,800
    
    
    
    5,700Total
    
    $
    174,000
    
    
    $
    168,300
    
    
    $
    5,700


Note 5
    
    Revolving Note Payable. On August 5, 2002, the Company signed an
agreement for a one-year asset-based discretionary revolving note
of $500,000. The agreement allowed the Company an advance of 75%
of qualified domestic accounts receivable at an interest rate of
prime + 4.75% with a minimum interest charge of $3,000 per month
with payments on advanced receivables deposited directly to pay off
the loan. The agreement was canceled and the liability was paid in
full as of August 31, 2003.Note 6
    
    Note Payable. Effective July 17, 2003, the Company entered into a
loan and investment agreement whereby, effective September 1, 2003,
it could borrow from $500,000 to $1,000,000 in its discretion. The
Company received $500,000 on this loan on September 11, 2003, which
is due December 25, 2003 and cannot be prepaid. Interest accrues
at an annual rate of twenty percent calculated on a 360-day year
and will be paid in the form of warrants to purchase 24,100 shares
of Common Stock of the Company with an expiration date of March 11,
2005 and an exercise price of $2.30. The Company is now completing
the process of filing for the registration of these shares. If the
registration process is not completed before the interest is due,
it is to be paid in cash. The Company does not anticipate any
difficulty completing the registration of the shares before the due
date of the interest payment. The Company recorded $5,000 in
interest expense in the quarter ended September 30, 2003 and will
be recording an additional $24,000 in the fourth quarter of 2003.
The Note is secured by the issuance to the Investor of security
warrants to purchase up to 242,000 shares of Common Stock of the
Company at an exercise price of $2.30 and a ten-year life. The
security warrants shall not become exercisable unless and until an
event of default occurs.Note 7
    
    Private Financing. On March 3, 2003, the Company announced that it
had completed a private placement of $3,015,000, which was approved
by shareholders on February 24, 2003. Of this amount, $750,000
represented proceeds received upon the sale of convertible bridge
loans on September 30, 2002. According to the bridge loan
agreement, holders of bridge loans were entitled to receive: (i)
warrants (Original


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Warrants) to purchase one additional share of Common Stock for each converted
share for $0.10 if a private placement of at least $1.0 million was not
completed by March 31, 2003; or (ii) warrants to purchase one additional share
of Common Stock for each converted share for $0.50 per share if the requisite
private placement was completed prior to March 31, 2003. In 2002, the value
attributed to the Original Warrants was recorded as a debt discount and
additional paid-in capital. For the year ended December 31, 2002, interest
expense of $44,000 was recorded as a result of the value attributed to the
Original Warrants.Upon completion of the private placement, and
concurrent bridge loan conversion into 325,260 shares
of Common Stock, the Company issued warrants
(Conversion Warrants) to holders of bridge loans to
purchase 325,260 shares of Common Stock for $0.50 per
share. These events resulted in $706,000 of interest
expense being recorded in the quarter ended March 31,
2003. Of this amount, $356,000 was recorded to
recognize the value attributed to the Conversion
Warrants upon their issuance and $350,000 was
recorded to amortize in full the discount originally
recorded (and remaining unamortized) on the bridge
loan relating to their beneficial conversion feature.
An additional 49,549 warrants were issued to an
advisor who helped identify investors for the private
financing. The warrants entitle the holder to
exercise the warrants and purchase shares of Common
Stock for $1.90 per share at any time up to ten years
after issuance.In addition to the 325,260 shares issued to the
bridge loan holders, 707,814 shares were issued for
the $2.265 million received from investors at the
full private placement price of $3.20. These
investors also received warrants to purchase 707,814
shares of Common Stock for $3.20 per share. As of
September 30, 2003, 3,356,330 shares of Common Stock
were issued and outstanding.Note 8
    
    Income Tax Benefit. Due to the uncertainty
regarding the realization of our federal deferred
income tax assets and specifically our net operating
loss carry-forwards, we have recorded a valuation
allowance against our income tax benefit for 2002 and
2003.Note 9
    
    Comprehensive Income (Loss). Effective April 30,
2003, the Company completed its closing and
liquidation of the France operations. As of the
effective date, accumulated comprehensive income
attributable to adjustments resulting from
translation of the France subsidiarys financial
statements from its functional currency to the
Companys reporting currency was written off and a
$73,000 loss on liquidation of subsidiary was
recorded. All future translation effects on cash
associated with these assets and liabilities will be
recorded as an operating expense.Note 10
    
    Common Stock and Loss Per Common Share. On January 16, 2003, the
Companys Board of Directors authorized and implemented a reverse stock
split (the Reverse Split) of MakeMusics issued, outstanding and
authorized shares of Common Stock at a ratio of one-for-ten. As a result
of the Reverse Split, one new share of Common Stock was deemed issued for
every ten shares of Common Stock held by stockholders of record as of
January 16, 2003. All share and per share amounts in the accompanying
financial statements have been restated to reflect the Reverse Split.
Both basic and diluted net loss per share were computed by dividing the
net loss by the weighted average number of common shares outstanding
during the period. The effect of options and warrants are excluded, as
their effect is anti-dilutive.


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Note 11
    
    Stock Options and Warrants. On September 10, 2003, the Company
granted 33,000 stock options to advisory board members for their services.
The options allow the investors to purchase up to 33,000 shares of common
stock at a price of $2.35 per share. They were fully vested upon issuance
and expire on September 9, 2008, resulting in recording of $56,000 in
general and administrative expense in the quarter ended September 30,
2003. The Company accounts for stock options under Accounting Principles
Board Opinion No. 25, under which the excess, if any, of the quoted market
price at the date of grant over the amount an employee must pay to acquire
the stock is recognized as compensation expense. The following table
displays pro forma net income and earnings per share as if the fair value
based method of accounting had been applied, as required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensationand Statement of Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure:


Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(In thousands, except per share data)Net loss:Net loss as reported
    
    $
    (216
    )
    
    $
    (883
    )
    
    $
    (3,801
    )
    
    $
    (15,660
    )Stock compensation
recorded under APB
25
    
    
    96
    
    
    
    42
    
    
    
    177
    
    
    
    128Stock compensation
recorded under FAS
123
    
    
    (229
    )
    
    
    (120
    )
    
    
    (450
    )
    
    
    (381
    )Pro forma net loss
    
    $
    (349
    )
    
    $
    (961
    )
    
    $
    (4,074
    )
    
    $
    (15,913
    )Basic and diluted net
loss per share:As reported
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (1.21
    )
    
    $
    (6.76
    )Pro forma
    
    $
    (0.10
    )
    
    $
    (0.41
    )
    
    $
    (1.29
    )
    
    $
    (6.87
    )


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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

MakeMusic! Inc. (MakeMusic! or the Company), a Minnesota corporation,
believes it is a world leader in music education technology whose mission is to
enhance and transform the experience of making, teaching and learning music.
Among its leading products are Finale®, one of the worlds best-selling music
notation software, and SmartMusic®, a complete music practice system that
features Intelligent Accompaniment® and one of the worlds largest interactive
accompaniment libraries.

The Company has incurred losses from operations since inception and has an
accumulated deficit of $54,678,000 as of September 30, 2003.

In our Form 10-KSB filed with the Securities and Exchange Commission for
the year ended December 31, 2002, we identified critical accounting policies
and estimates for our business.

Results of operations

For the periods ended September 30, 2003 compared to the periods ended September 30, 2002

Net Revenues.Net revenues of $2,246,000 for the quarter ended September
30, 2003 were $198,000, or 8.1%, lower than the quarter ended September 30,
2002. Net revenues of $5,281,000 for the nine months ended September 30, 2003
were $522,000, or 9.0%, lower than the nine months ended September 30, 2002.
The decrease in sales for the nine-month period ended September 30, 2003
compared to the prior period is primarily related to the original release date
of the annual Finale upgrade. The 2004 Finale Windows upgrade version was
released August 21, 2003 compared to a release date of June 3, 2002 for the
2003 version of Finale for Windows. The 2004 version of Finale for Macintosh
has not yet been released; the 2003 version was released July 18, 2002. Based
on the sales results to-date, Finale 2004 for Windows is proving to be one of
the strongest versions ever; it is outselling both 2002 and 2003 Windows
versions based on an equal number of days in the market. The sales decrease
has been minimized due to successful upgrade and trade-up campaigns executed
prior to the release of Finale 2004. Finale sales have also been negatively
impacted because, prior to Finale 2004, the Companys Finale products were not
compatible with the Macintosh OS X operating system. The next Finale Macintosh
upgrade release will run on a Macintosh OS X platform.

The overall decrease in sales of the Finale notation family of products
was partly offset by sales of the SmartMusic subscription service. The
SmartMusic subscription service was launched in November 2001 for schools,
September 2002 for home users, and October 2002 for school-sponsored home
subscriptions. SmartMusic subscription revenues of $97,000 were recognized in
the quarter ended September 30, 2003, compared to $23,000 in the same period of
the prior year. It was an increase of 10% over the quarter ended June 30,
2003, 120% over the quarter ended December 31, 2002, and 319% over the same
quarter last year. For the nine months ended September 30, 2003, earned
SmartMusic subscription revenue of $252,000 increased by 545%, from $39,000,
over the nine months ended September 30, 2002. In addition, deferred
SmartMusic subscription revenue, coming from annual subscription renewals and
new subscription programs, to be recognized over the balance of the current
subscription period was $251,000 as of September 30, 2003 compared to $57,000
at September 30, 2002, an increase of $194,000, or 340%. Subscription service
revenues are accounted for over the period of the

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subscription.

As of September 30, 2003, more than 1,960 schools were subscribing to the
SmartMusic service with over 5,300 subscriptions. This is a net increase of
more than 660 schools and 1,800 subscriptions since December 31, 2002, and an
increase of 200 schools and 500 subscriptions since June 30, 2003. These
schools subscriptions correspond to recurring annual subscription revenue of
$200,000 to be recognized over the subscription period. As of September 30,
2003, the Companys school-sponsored home subscription program had more than
220 schools participating for a total of more than 7,600 school-sponsored home
subscriptions, an average of 34.5 students per school. This represents a 4.5%
increase over the number of subscriptions per school at June 30, 2003.
School-sponsored home subscriptions have increased approximately 170 schools
and 5,650 subscriptions since December 31, 2002 and 60 schools and 2,200
subscriptions since June 30, 2003. These school-sponsored home subscriptions
correspond to annual recurring revenue of $140,500 as of September 30, 2003.
As of September 30, 2003, the Company had more than 1,190 home subscribers,
1,400 more than at December 31, 2002 and 120 more than at June 30, 2003. The
home subscribers subscriptions correspond to recurring annual revenue of
$112,500. The total number of annual SmartMusic subscriptions as of September
30, 2003 was more than 14,200, generating an annual run rate (total revenue to
be earned on subscriptions over a twelve-month period) of $453,000 as of
September 30, 2003, an increase of 21% over the run rate as of June 30, 2003,
91% over the run rate as of December 31, 2002, and 409% over the run rate as of
September 30, 2002.

Gross Profit. Gross profit of $1,732,000 for the quarter ended September
30, 2003 was $311,000, or 15%, lower than the quarter ended September 30, 2002.
Gross profit of $4,063,000 for the nine months ended September 30, 2003 was
$611,000, or 13.1%, lower than the nine months ended September 30, 2002. Gross
profit is lower than prior year primarily due to the lower volume of Finale
sales because of the later release. However, gross margin as a percentage of
sales is also lower than 2002 due to the sales mix; sales of Finale, a higher
margin product, are less than prior year while sales of SmartMusic accessories,
which are lower margin products being sold at a price intended to get
SmartMusic subscriptions into the market, are greater than prior year. In
addition, the quarter ended September 30, 2003 includes $36,000 in write-offs
of obsolete inventory products.

Selling and Marketing Expenses.Selling and marketing expenses were
$844,000 for the third quarter ended September 30, 2003, a 1.0% increase over
selling and marketing expenses of $836,000 for the quarter ended September 30,
2002. Selling and marketing expenses were $2,667,000 for the first nine months
of 2003, a 3.4% decrease from selling and marketing expenses of $2,761,000 for
the nine months of 2002. The year-to-date decrease in comparison to prior year
is primarily due to the elimination of the sheet music business and its related
marketing expenses. Savings were not realized for the third quarter due to
increased international marketing efforts and marketing programs for Finale
trade-up and upgrade sales.

Website Development Expenses.Website development expenses were $140,000
for the quarter ended September 30, 2003, a 48.9% decrease from website
development expense of $274,000 for the quarter ended September 30, 2002. For
the nine months ended September 30, 2003, website development expenses of
$349,000 were $461,000, or 56.9%, lower than for the nine months ended
September 30, 2002. Website development expenses consist primarily of expenses
related to improvement of the design and development of additional features for
the MakeMusic, FinaleMusic, and SmartMusic websites and other underlying
technology infrastructure. Personnel resources have been reduced due to the
closing of the Companys France operations and consolidation of the SmartMusic®
website and administrative functions in

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its Minneapolis location. The Company plans to continue to refine the
SmartMusic subscription Internet distribution model and these expenses may
increase as Minneapolis resources are added.

Content and Product Development Expenses.Content and product development
expenses of $530,000 for the quarter ended September 30, 2003 were $26,000, or
5.2%, higher than the quarter ended September 30, 2002. For the nine months
ended September 30, 2003, content and product development expenses of
$1,621,000 were $28,000, or 1.7%, lower than the nine months ended September
30, 2002. The third quarter increase is due to higher personnel and contract
labor costs for developing Finale 2004 for Macintosh OS X. Content and product
development consists primarily of internal payroll and payments to third
parties for the development and ongoing maintenance of Finale notation
products, SmartMusic software, and SmartMusic accompaniments. The Company
continues to develop upgrades of the Finale family of products on a regular
basis for the Macintosh and Windows platforms.

General and Administrative Expenses.General and administrative expenses
were $963,000 for the third quarter ended September 30, 2003, a $149,000, or
13.4%, decrease from the third quarter ended September 30, 2002. General and
administrative expenses of $2,946,000 for the nine months ended September 30,
2003 decreased $474,000, or 13.9%, from the nine months ended September 30,
2002. General and administrative expenses consist primarily of payroll and
related expenses for executive and administrative personnel, professional
service expenses relating to financing activities, amortization of certain
intangible assets with definite lives, and other general corporate expenses.
The decreases primarily relate to actual expense reductions as a result of the
closing of the Companys France operations. Related restructuring costs were
accrued in the fourth quarter of the prior fiscal year. Other expense
reductions compared to prior periods include lower professional fees, lower
hardware, software, and maintenance expenses, and lower amortization of
intangibles due to the write-off of the employee workforce asset in the fourth
quarter of 2002.

Net Loss from Operations. The Company recorded a net loss from operations
of $745,000 for the quarter ended September 30, 2003, compared with a net loss
from operations of $876,000 for the quarter ended September 30, 2002. For the
nine months ended September 30, 2003, the Company recorded a net loss from
operations of $3,520,000 compared to a net loss from operations of $4,160,000
for the same period last year. For both the quarter and year-to-date periods,
lower gross profit primarily due to the later release of the Finale upgrade is
offset by the Companys operating expense reductions.

Interest Expense, Net.The Company had interest expense of $13,000 for
the quarter ended September 30, 2003. For the nine months ended September 30,
2003 the Company had interest expense of $745,000, net of $9,000 interest
income. The majority of the interest expense was a non-cash charge for
warrants and beneficial conversion features of the bridge loan debt that was
converted to equity upon the private placement financing completed in the
quarter ended March 31, 2003 (see Note 7 to the financial statements).

Gain on Forgiveness of Debt. In September 2003, the Company received
formal forgiveness of debt from ANVAR, a French administrative organization
that extends loans to companies to develop new business. The debt forgiveness
resulted in recognition of non-operating income of $542,000 during the quarter
ended September 30, 2003 (See Note 3).

Cumulative Effect of Change in Accounting Principle. In the first quarter
2002, a charge of $11,500,000 was recorded related to the cumulative effect of
change in accounting principle relating to the impairment of goodwill recorded
from the reverse merger of Coda and Net4Music

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on October 19, 2000 (See Note 2).

Net Loss. The Company recorded a net loss of $216,000, or $0.06 per basic
and diluted share, for the quarter ended September 30, 2003 compared to a net
loss of $883,000, or $0.38 per basic and diluted share, for the quarter ended
September 30, 2002. For the nine months ended September 30, 2003, the Company
recorded a net loss of $3,801,000, or $1.21 per basic and diluted share, as
compared to a net loss of $15,660,000, or $6.76 basic and diluted share, for
the same period last year. In addition to the Companys decrease in operating
expenses, the decrease in net loss is primarily attributed to the
non-recurrence of the cumulative effect of the change in accounting principle
described above and the debt forgiveness received from ANVAR. The weighted
average common shares for the quarter ended September 30, 2003 also increased
by 1,039,484 shares, or 45%, compared to the quarter ended September 30, 2002
due to the bridge loan and private placement equity conversion described in
Note 7 of the Consolidated Financial Statements.

Liquidity and Capital Resources.Net cash used in operating activities
totaled $1,901,000 for the nine months ended September 30, 2003 as compared to
$1,897,000 of cash used for operating activities in the nine months ending
September 30, 2002. Although year to date operating cash usage is similar to
prior year, the first quarter of 2003, which included payments against 2002
accruals for restructuring of France operations and 2002 bonus payments,
totaled $1,387,000 of the current year cash usage. Operating cash usage has
improved significantly each quarter, with an operating cash loss of $590,000 in
the second quarter of 2003 and the third quarter providing positive cash of
$77,000 from operations. This compares to 2002 operating cash usage of
$793,000 in the second quarter and $98,000 in the third quarter.

In total, Company cash increased by $339,000 for the nine months ending
September 30, 2003 primarily due to the private placement financing completed
in February 2003. The financing yielded $2,119,000 in cash, net of related
costs. While revenues are cyclical related to the academic calendar and the
release schedule of product upgrades, the Company has shown improvements in
operating cash usage in each quarter of 2003 in spite of the delayed release of
the Finale 2004 upgrade.

The Company has continued to experience operating losses and a resulting
reduction in cash resources. The later Finale release will cause a reduction
in cash resources, which required the Company, as a precautionary measure, to
utilize a short-term loan of $500,000 on September 11, 2003 with a maturity
date of December 25, 2003 that is collateralized by warrants with an exercise
price of $2.30 (see Note 6). Based on the planned Finale Macintosh release and
the anticipated growth of SmartMusic sales, management expects to achieve
positive operating cash flow in 2004. The Company has had discussions with the
lender that provided the September 11, 2003 $500,000 short-term loan to extend
another loan of up to $1 million during the course of 2004 on similar terms.
Although we have not signed an agreement with the lender and do not plan to do
so until we evaluate the need based on cash resources in early 2004, management
believes that such a loan could be obtained from this lender, and possibly from
other sources, and the board of directors has approved a resolution to take a
loan on similar terms at managements discretion.

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ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. After evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly report, our
chief executive officer and corporate controller, with the participation of the
Companys management, have concluded that the Companys disclosure controls and
procedures are effective to ensure that information that is required to be
disclosed by the Company in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules of the Securities Exchange Commission.

(b) Changes in internal controls. There were no changes in our internal
controls over financial reporting that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

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 goals, the future of the SmartMusic
Studio program, release of annual Finale upgrades, 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
possible need for and ability to obtain additional capital; the market
acceptance of our products; our dependence upon new product development effort;
our dependence on releasing annual Finale upgrades; the success of our Internet
business; 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 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.

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PART 2. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:See the attached Exhibit Index following signature
page.

(b) Reports onForm 8-K:On August 14, 2003, a Form 8-K was filed
containing a press release dated announcing second quarter financial
results.

On October 21, 2003, a Form 8-K was filed containing a press release
announcing the hiring of Bill Wolff as Executive Vice President and
Chief Financial Officer and the resignation of Barbara Remley as Chief
Financial Officer.

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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 November 11, 2003
    

MAKEMUSIC INC.By:
    
    /s/ Philip Sean LafleurPhilip Sean Lafleur, Chief Executive OfficerAnd:
    
    /s/ Michael L. ListonMichael L. Liston, Corporate Controller(Acting Principal Financial and Accounting
Officer)


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EXHIBIT INDEX




Form 10-QSB




Quarter ended September 30, 2003

Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Corporate Controller pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Corporate Controller Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.


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