##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB/A-1
 (Mark One)
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 o
    
    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.
 (Exact Name of Small Business Issuer as Specified in its Charter)
 Minnesota
    
    41-1716250(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 
 
   
   þ o
  o þ
   o þ




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EXPLANATORY NOTE
  2




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MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements
    
    
    4Condensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
    
    
    4Condensed Consolidated Statement of Operations (Restated)
Three- and nine-month periods ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows
Three- and nine-month periods ended September 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis or Plan of Operation
    
    
    12Item 3 Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    18Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3 Defaults Upon Senior Securities
    
    
    18Item 4 Submission of Matters to a Vote of Security Holders
    
    
    18Item 5 Other Information
    
    
    18Item 6 Exhibits
    
    
    18Signatures
    
    
    19Exhibit Index
    
    
    20CertificationCertificationCertificationCertification
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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,
    
    Dec. 31,2006
    
    2005(unaudited)AssetsCash
    
    $
    2,524
    
    
    $
    2,952Accounts receivable, net of allowances
    
    
    1,492
    
    
    
    1,004Inventories, net of reserves
    
    
    384
    
    
    
    435Prepaid expenses and other current assets
    
    
    81
    
    
    
    161Total current assets
    
    
    4,481
    
    
    
    4,552Property and equipment, net
    
    
    648
    
    
    
    323Goodwill, net
    
    
    3,630
    
    
    
    3,630Capitalized software
    
    
    734
    
    
    
    471Other non-current assets
    
    
    60
    
    
    
    66Total assets
    
    $
    9,553
    
    
    $
    9,042Liabilities and Shareholders EquityCurrent portion of capital lease obligations
    
    $
    10
    
    
    $
    6Accounts payable
    
    
    277
    
    
    
    441Accrued compensation
    
    
    921
    
    
    
    681Other accrued liabilities
    
    
    228
    
    
    
    238Post-contract support
    
    
    181
    
    
    
    181Reserve for product returns
    
    
    440
    
    
    
    339Current portion of deferred rent
    
    
    23
    
    
    
    20Deferred revenue
    
    
    1,010
    
    
    
    842Total current liabilities
    
    
    3,090
    
    
    
    2,748Capital lease obligations, net of current portion
    
    
    18
    
    
    
    9Deferred rent, net of current portion
    
    
    102
    
    
    
    120120
    
    
    
    129Shareholders Equity:Common stock, $0.01 par value:Authorized shares  10,000,000
    
    
    39
    
    
    
    39Issued and outstanding shares  3,937,562 and
3,856,654
in 2006 and 2005, respectivelyAdditional paid-in capital
    
    
    62,832
    
    
    
    62,459Accumulated deficit
    
    
    (56,528
    )
    
    
    (56,347
    )Other comprehensive income
    
    
    0
    
    
    
    14Total shareholders equity
    
    
    6,343
    
    
    
    6,165Total liabilities and shareholders equity
    
    $
    9,553
    
    
    $
    9,042
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MakeMusic, Inc.
 
 Condensed Consolidated Statements of Operations
 (In thousands of U.S. dollars, except share and per share data)
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Notation Revenue
    
    
    3,208
    
    
    
    3,391
    
    
    
    7,312
    
    
    
    7,083SmartMusic Revenue
    
    
    621
    
    
    
    403
    
    
    
    1,558
    
    
    
    1,070Other Revenue
    
    
    196
    
    
    
    187
    
    
    
    389
    
    
    
    375NET REVENUE
    
    
    4,025
    
    
    
    3,981
    
    
    
    9,259
    
    
    
    8,528COST OF REVENUES
    
    
    540
    
    
    
    634
    
    
    
    1,307
    
    
    
    1,479GROSS PROFIT
    
    
    3,485
    
    
    
    3,347
    
    
    
    7,952
    
    
    
    7,049OPERATING EXPENSES:Development expenses
    
    
    901
    
    
    
    746
    
    
    
    2,623
    
    
    
    2,471Selling and marketing expenses
    
    
    1,051
    
    
    
    942
    
    
    
    3,088
    
    
    
    2,754General and administrative expenses
    
    
    720
    
    
    
    727
    
    
    
    2,497
    
    
    
    2,414Total operating expenses
    
    
    2,672
    
    
    
    2,415
    
    
    
    8,208
    
    
    
    7,639INCOME (LOSS) FROM OPERATIONS
    
    
    813
    
    
    
    932
    
    
    
    (256
    )
    
    
    (590
    )Interest income
    
    
    17
    
    
    
    12
    
    
    
    68
    
    
    
    15Other income (expense)
    
    
    14
    
    
    
    (4
    )
    
    
    16
    
    
    
    16Net loss before income tax
    
    
    844
    
    
    
    940
    
    
    
    (172
    )
    
    
    (559
    )Income tax expense
    
    
    (1
    )
    
    
    0
    
    
    
    (9
    )
    
    
    (2
    )Net income (loss)
    
    
    843
    
    
    
    940
    
    
    
    (181
    )
    
    
    (561
    )Income (loss) per common share:Basic
    
    
    0.22
    
    
    
    0.27
    
    
    
    (0.05
    )
    
    
    (0.16
    )Diluted (Restated)
    
    
    0.19
    
    
    
    0.23
    
    
    
    (0.05
    )
    
    
    (0.16
    )Weighted average common shares outstanding:Basic
    
    
    3,913,251
    
    
    
    3,497,749
    
    
    
    3,904,041
    
    
    
    3,457,132Diluted (Restated)
    
    
    4,411,458
    
    
    
    4,085,181
    
    
    
    3,904,041
    
    
    
    3,457,132
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MakeMusic, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (In thousands of U.S. dollars)
  Three
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended2006
    
    2005
    
    2006
    
    2005Operating activitiesNet income (loss)
    
    
    843
    
    
    
    940
    
    
    
    (181
    )
    
    
    (561
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Amortization of intangible assets
    
    
    0
    
    
    
    226
    
    
    
    0
    
    
    
    679Depreciation and amortization of property
and equipment
    
    
    69
    
    
    
    39
    
    
    
    167
    
    
    
    117Other amortization
    
    
    57
    
    
    
    46
    
    
    
    132
    
    
    
    135Stock based compensation expense
    
    
    69
    
    
    
    (2
    )
    
    
    239
    
    
    
    4Increase (decrease) in cash from:Accounts receivable
    
    
    (664
    )
    
    
    (422
    )
    
    
    (488
    )
    
    
    (175
    )Inventories
    
    
    (76
    )
    
    
    (20
    )
    
    
    51
    
    
    
    (285
    )Prepaid expenses and other current assets
    
    
    37
    
    
    
    (30
    )
    
    
    66
    
    
    
    32Accounts payable
    
    
    62
    
    
    
    (265
    )
    
    
    (164
    )
    
    
    (254
    )Accrued liabilities and product returns
    
    
    224
    
    
    
    32
    
    
    
    316
    
    
    
    (93
    )Deferred revenue
    
    
    128
    
    
    
    (15
    )
    
    
    168
    
    
    
    38Net cash provided by (used in) operating activities
    
    
    749
    
    
    
    529
    
    
    
    306
    
    
    
    (364
    )Investing activitiesPurchases of property and equipment
    
    
    (66
    )
    
    
    (59
    )
    
    
    (463
    )
    
    
    (201
    )Capitalized software development and other intangibles
    
    
    (172
    )
    
    
    (69
    )
    
    
    (389
    )
    
    
    (191
    )Net cash used in investing activities
    
    
    (238
    )
    
    
    (128
    )
    
    
    (852
    )
    
    
    (392
    )Financing activitiesProceeds from the exercise of stock options and warrants
    
    
    13
    
    
    
    119
    
    
    
    134
    
    
    
    279Payments on capital leases
    
    
    (14
    )
    
    
    (1
    )
    
    
    (16
    )
    
    
    (4
    )Net cash provided by (used in) financing activities
    
    
    (1
    )
    
    
    118
    
    
    
    118
    
    
    
    275Net increase (decrease) in cash
    
    
    510
    
    
    
    519
    
    
    
    (428
    )
    
    
    (481
    )Cash, beginning of period
    
    
    2,014
    
    
    
    1,215
    
    
    
    2,952
    
    
    
    2,215Cash, end of period
    
    
    2,524
    
    
    $
    1,734
    
    
    
    2,524
    
    
    $
    1,734Supplemental disclosure of cash flow informationInterest paid
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    5Income taxes paid
    
    
    1
    
    
    
    0
    
    
    
    9
    
    
    
    1Other non-cash investment and financing activitiesEquipment acquired under capital lease
    
    
    29
    
    
    
    0
    
    
    
    29
    
    
    
    0
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MakeMusic, Inc.
 
 Notes to Condensed Consolidated 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 and nine months ended
September 30, 2006 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 2005 financial statements, as previously reported,
have been reclassified to conform to the 2006 presentation. This did not have a material
effect on reported results.
 Note 2
    
    Net Income(Loss) Per Share. Net income (loss) per share was calculated by dividing the
net income (loss) 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 and nine months ended September 30, 2006 and 2005 in accordance with FASB Statement
128 (SFAS 128), Earnings per Share:
 Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Weighted-average
common shares
outstanding
    
    
    3,913,251
    
    
    
    3,497,749
    
    
    
    3,904,041
    
    
    
    3,457,132Dilutive effect of
stock options and
warrants (Restated)
    
    
    498,207
    
    
    
    587,432
    
    
    
    
    
    
    
    Equivalent average
common shares
outstanding 
diluted (Restated)
    
    
    4,411,458
    
    
    
    4,085,181
    
    
    
    3,904,041
    
    
    
    3,457,132
 The effect of options and warrants are excluded for the nine month periods ended
September 30, 2006 and 2005 because the effect is anti-dilutive.
 Note 3
    
    Income Tax Expense. The Company did not record a provision for income tax in the three or
nine months ended September 30, 2006 and 2005 as the provision was offset by a reduction in
the deferred tax asset valuation allowance. The only income tax expense recorded in the three
and nine months ended September 30, 2006 and 2005 was for minimum state and federal income tax
payments. Due to the uncertainty regarding the realization of the Companys Federal deferred
income tax assets and specifically the net
operating loss carry-forwards, the Company has recorded a valuation allowance
against its deferred income tax assets for 2006 and 2005.
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Note 4
    
    Stock-Based Compensation. The Company currently
offers a stock based compensation plan to its
employees, directors and consultants. These plans are
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
6 of the Companys consolidated financial statements
in its Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005 for additional
information related to the Companys stock based
compensation plans.
 Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), Share-Based Payment
(SFAS 123(R)), utilizing the modified prospective approach. Prior to the adoption of SFAS
123(R) the Company accounted for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees (the intrinsic value method), and accordingly,
recognized no compensation expense for stock option grants. Under the modified prospective
approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January
1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified
prospective approach, compensation cost recognized in fiscal 2006 includes compensation cost
for all share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all share-based payments granted subsequent to January
1, 2006 based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new
standard.As a result of adopting SFAS 123(R) on January 1, 2006, for the three months ended September
30, 2006, the Companys loss before taxes and net loss increased $66,000 and basic and
diluted income per share for the three months ended September 30, 2006, was $0.02 and $0.01
respectively, less than if it had continued to account for stock-based compensation under
APB opinion number 25. For the nine months ended September 30, 2006 the Companys loss
before taxes and net loss increased $231,000, or $0.06 per basic and diluted share more,
than if it had continued to account for stock-based compensation under APB opinion number
25.Generally, the Company would receive a tax deduction for certain stock option exercises
during the period the options are exercised for the excess of the price at which the options
are sold over the exercise prices of the options. Prior to adoption of SFAS 123(R), these
tax benefits would have been reported as operating cash flows in the Companys consolidated
statements of cash flows. Under SFAS 123(R), the Company would be required to revise its
consolidated statements of cash flows in order to present these tax benefits as financing
cash flows. The Company had no reported tax benefits related to stock compensation expense
prior to the implementation of SFAS 123(R) on January 1, 2006 and as such is not required to
revise the presentation of its statements of cash flows.
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The following table illustrates the effect on operating results and per share information
had the Company accounted for stock-based compensation in accordance with SFAS 123(R), for
the three and nine month periods ended September 30, 2005 (in thousands except per share
amounts).
 3 Months
    
    9 MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2005
    
    2005(In thousands, except per share data)Net income (loss) as reported
    
    
    940
    
    
    
    (561
    )Stock compensation under SFAS 123
    
    
    (55
    )
    
    
    (46
    )Pro forma net income (loss)
    
    
    885
    
    
    
    (607
    )Income (loss) per share:BasicAs reported
    
    
    0.27
    
    
    
    (0.16
    )Pro forma
    
    
    0.25
    
    
    
    (0.18
    )DilutedAs reported
    
    
    0.23
    
    
    
    (0.16
    )Pro forma
    
    
    0.22
    
    
    
    (0.18
    )
 Stock OptionsThe Company uses the Black-Scholes and Binomial Lattice option pricing models to estimate
the fair value of stock-based awards with the weighted average assumptions noted in the
following table.
 September 30,
    
    September 30,2006
    
    2005Black-Scholes Model:Risk-free interest rate
    
    
    3.2
    %
    
    
    3.4
    %Expected life, in years
    
    
    3.8
    
    
    
    3.4Expected volatility
    
    
    87.7
    %
    
    
    80.1
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Binomial Model:Risk-free interest rate
    
    
    3.6
    %
    
    
    Expected life, in years
    
    
    6.0
    
    
    
    Expected volatility
    
    
    136.3
    %
    
    
    Dividend yield
    
    
    0.0
    %
    
    
    
 Expected volatility is based on the historical volatility of the Companys share price in
the period prior to option grant equivalent to the expected life of the options. The
expected term is determined under the simplified method as allowed under the provisions of
the
Securities and Exchange Commissions Staff Accounting Bulletin No. 107 and represents the
period of time that options granted are expected to be outstanding.
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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,
2006:
 WeightedWeighted
    
    AverageShares
    
    
    
    
    
    Average
    
    RemainingReserved
    
    Plan
    
    Exercise
    
    Contractfor Grant
    
    Options
    
    Price
    
    LifeOutstanding at Dec. 31, 2005
    
    
    16,675
    
    
    
    712,473
    
    
    $
    3.96Granted
    
    
    (12,000
    )
    
    
    12,000
    
    
    $
    10.32Expired
    
    
    
    
    
    
    (15,900
    )
    
    $
    20.11Cancelled
    
    
    1,000
    
    
    
    (1,000
    )
    
    $
    2.35Exercised
    
    
    
    
    
    
    (2,080
    )
    
    $
    5.00Authorized
    
    
    200,000
    
    
    
    0
    
    
    
    Outstanding at September
30, 2006
    
    
    205,675
    
    
    
    705,493
    
    
    $
    3.71
    
    
    4.1 YearsOutstanding exercisable at
September 30, 2006
    
    
    
    
    
    
    337,467
    
    
    $
    4.04
    
    
    3.7 Years
 At September 30, 2006 the aggregate intrinsic value of options outstanding was
$1,808,000, and the aggregate intrinsic value of options exercisable was $884,000. Total
intrinsic value of options exercised was $0 for the three months ended September 30, 2006.
Total intrinsic value of options exercised was $10,800 for the nine months ended September
30, 2006.
 At September 30, 2006 there was $324,331 of unrecognized compensation cost related to
nonvested share-based payments which is expected to be recognized over a weighted-average
period of 2.01 years.
 Note 5
    
    Material Contingencies.On August 1, 2006 the Company entered into a separation agreement
with its Chief Financial Officer. In connection with this agreement the former executive is
entitled to payments of base salary and prorated bonuses. During the quarter ended September
30, 2006 the Company expensed $54,000 under this agreement of which $16,000 remains accrued at
September 30, 2006 and is expected to be paid by December 31, 2006. Additionally, the Company
expects to enter into a similar agreement with its former Chief Executive Officer who resigned
from the Company on October 19, 2006. The Company expects to recognize the expenses for this
agreement during the fourth quarter of 2006.
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New and Pending Accounting Pronouncements.
 In July 2006, the FASB issued 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 the Companys 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 are 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. The Company is currently evaluating
the impact of adopting FIN 48 on its financial statements.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. The
effective date of this pronouncement is for all full fiscal and interim periods beginning
after November 15, 2007. The Company is currently evaluating the impact of adopting FASB
Statement 157 on its financial statements.In September 2006, FASB issued Statement 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, which amend FASB Statements No. 87, 88, 106 and
132(R). Fair Value Measurements. This statement requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as an asset or
liability in its financial statements and to recognize changes in that funded status in the
year in which the changes occur. The effective date for the Company would be for any full
fiscal years ending after December 15, 2006. The Company is currently evaluating the impact
of adopting FASB Statement 157 on its financial statements.
 11




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Item 2. Managements Discussion And Analysis Or Plan Of Operation.
        12




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Results of Operations
  3 Months Ended September 30,
    
    
    9 Months Ended September 30,Incr
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incr2006
    
    
    2005
    
    
    (Decr)
    
    
    %
    
    
    2006
    
    
    2005
    
    
    (Decr)
    
    
    %Notation revenue
    
    $
    3,208
    
    
    $
    3,391
    
    
    ($
    183
    )
    
    
    -5
    %
    
    $
    7,312
    
    
    $
    7,083
    
    
    $
    229
    
    
    
    3
    %SmartMusic revenue
    
    
    621
    
    
    
    403
    
    
    
    218
    
    
    
    54
    %
    
    
    1,558
    
    
    
    1,070
    
    
    
    488
    
    
    
    46
    %Other revenue
    
    
    196
    
    
    
    187
    
    
    
    9
    
    
    
    5
    %
    
    
    389
    
    
    
    375
    
    
    
    14
    
    
    
    4
    %Net revenue
    
    
    4,025
    
    
    
    3,981
    
    
    
    44
    
    
    
    1
    %
    
    
    9,259
    
    
    
    8,528
    
    
    
    731
    
    
    
    9
    %Cost of revenues
    
    
    540
    
    
    
    634
    
    
    
    (94
    )
    
    
    -15
    %
    
    
    1,307
    
    
    
    1,479
    
    
    
    (172
    )
    
    
    -12
    %Gross profit
    
    
    3,485
    
    
    
    3,347
    
    
    
    138
    
    
    
    4
    %
    
    
    7,952
    
    
    
    7,049
    
    
    
    903
    
    
    
    13
    %Percentage of net sales
    
    
    87
    %
    
    
    84
    %
    
    
    
    
    
    
    
    
    
    
    86
    %
    
    
    83
    %Development expenses
    
    
    901
    
    
    
    746
    
    
    
    155
    
    
    
    21
    %
    
    
    2,623
    
    
    
    2,471
    
    
    
    152
    
    
    
    6
    %Selling and marketing
expense
    
    
    1,051
    
    
    
    942
    
    
    
    109
    
    
    
    12
    %
    
    
    3,088
    
    
    
    2,754
    
    
    
    334
    
    
    
    12
    %General and
administrative expense
    
    
    720
    
    
    
    727
    
    
    
    (7
    )
    
    
    -1
    %
    
    
    2,497
    
    
    
    2,414
    
    
    
    83
    
    
    
    3
    %Total operating expense
    
    
    2,672
    
    
    
    2,415
    
    
    
    257
    
    
    
    11
    %
    
    
    8,208
    
    
    
    7,639
    
    
    
    569
    
    
    
    7
    %Operating income (loss)
    
    
    813
    
    
    
    932
    
    
    
    (119
    )
    
    
    -13
    %
    
    
    (256
    )
    
    
    (590
    )
    
    
    334
    
    
    
    -57
    %Other income (expense)
    
    
    31
    
    
    
    8
    
    
    
    23
    
    
    
    288
    %
    
    
    84
    
    
    
    30
    
    
    
    54
    
    
    
    180
    %Net income (loss)
before taxes
    
    $
    844
    
    
    $
    940
    
    
    ($
    96
    )
    
    
    -10
    %
    
    ($
    172
    )
    
    ($
    560
    )
    
    $
    388
    
    
    
    -69
    %Income tax provision
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )
    
    
    0
    %
    
    
    (9
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    800
    %Net income (loss)
    
    $
    843
    
    
    $
    940
    
    
    ($
    97
    )
    
    
    -10
    %
    
    ($
    181
    )
    
    ($
    561
    )
    
    $
    380
    
    
    
    -68
    %
 For the three-month and nine-month periods ended September 30, 2006 compared to the
three-month and nine-month periods ended September 30, 2005.
 13




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##### Table of Contents



Net Revenues.
    Gross Profit.
 14




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##### Table of Contents



Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Net Income/(Loss) from Operations th th
 Net Income (Loss)
 15




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##### Table of Contents



Liquidity and Capital Resources .
   16




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##### Table of Contents



Item 3. Controls and Procedures.
 Evaluation of disclosure controls and procedures
 Changes in internal controls
 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. The
forward-looking statements in this report generally relate to the Companys plans for SmartMusic
Impact and the anticipated effect of Impact on its SmartMusic subscriptions, the timing of Impacts
introduction, the Companys product development, market introduction and sales efforts, the
Companys anticipated cash requirements, the continuing effect of stock option expensing, and the
Companys expectations as to the sufficiency of capital. 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. The Company cautions investors that many important
factors have affected, and in the future could affect, the Companys 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 the Company or on its behalf. These factors include, but are
not limited to, the Companys possible need for and ability to obtain additional capital; the
market acceptance of SmartImpact and other of the Companys products; the Companys dependence upon
new product development effort; the Companys dependence on releasing annual Finale upgrades; the
maintenance of strategic relationships; the success of the Companys SmartMusic subscription
business; maintaining license agreements with a limited number of publishers; the limited and
fluctuating sales of certain of the Companys products; the intense competition the Company faces;
the rapid technological changes and obsolescence in the Companys industry; the Companys
dependence on key personnel and the proprietary nature of its technology; other general business
and economic conditions; and those risks described from time to time in the Companys reports to
the Securities and Exchange Commission (including its 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. The Company undertakes no obligation to update publicly or revise any
forward-looking statements.
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Pursuant to the exercise of warrants by one warrant holder on September 25, 2006 an
aggregate of 26,007 shares were sold at $0.50 per share. For these transactions, the
Company relied upon Section 4(2) of the Securities Act for an exemption for transactions
not involving a public offering.
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 Entry into a Material Definitive Agreement.On August 1, 2006, MakeMusic, Inc.
entered into a Separation Agreement and Release (the Agreement) with Alan G. Shuler,
which Agreement provides that, effective July 31, 2006, Mr. Shulers employment and
position as Chief Financial Officer with MakeMusic was terminated. Pursuant to the
Agreement, Mr. Shuler will receive a separation payment equal to five months of his base
salary, payable in full by the end of the year. In addition, Mr. Shuler will receive a
prorated 2006 bonus. Mr. Shuler has agreed to release any and all claims against
MakeMusic.
 
 Item 6. Exhibits.
 See the attached exhibit index.
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##### Table of Contents



SIGNATURES
  Date: January 25, 2007
    
    MAKEMUSIC, INC.By:  /s/ John W. PaulsonJohn W. Paulson, Chief Executive Officer
(Principal Executive Officer)And:  /s/ Ronald B. RaupRonald B. Raup, Interim Chief Financial Officer
(Chief Financial Officer)
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##### Table of Contents



EXHIBIT INDEX
 Form 10-QSB
 Three and nine months ended September 30, 2006
 Exhibit No.
    
    Description3.1
    
    Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrants
Form 8-K filed on October 24, 2006)*10.1
    
    Separation agreement of Alan G. Shuler dated 08/01/06*31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer 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 Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Previously filed on Form 10-QSB on November 1, 2006. 20