~~September~~UNITED ~~30,~~STATES December 31, 2003 2002 (unaudited) ---------------- --------------- ASSETS Current assets: Cash $ 2,393 $ 1,781 Accounts receivable, net of allowances of $1,862 and $1,708 28,070 26,531 Inventory 14,593 11,401 Prepaid expenses and other assets. 4,352 1,719 --------------- --------------- Total current assets 49,408 41,432 Property and equipment, net 108,839 110,889 Intangible assets, net 257,864 270,756 Deferred subscriber acquisition costs, net 44,464 41,410 Deferred charges and other assets, net 15,470 11,759 --------------- --------------- Total assets $ 476,045 $ 476,246 =============== =============== LIABILITIES AND MEMBERS' INTEREST Current liabilities: Accounts payable $ 6,945 $ 10,049 Accrued expenses 21,556 18,304 Current maturities of other liabilities 2,852 2,924 Current maturities of long term debt 417 7,855 Advance billings 1,680 1,040 --------------- --------------- Total current liabilities 33,450 40,172 Long-term debt 402,428 359,914 Related party notes -- 10,000 Other liabilities 9,565 10,215 Manditorily redeemable preferred units 123,887 109,114 Commitments and contingencies Total liabilities 569,330 529,415 Members' interest: Class A units 102,493 117,167 Class B units -- 97 Accumulated other comprehensive loss -- (290) Accumulated deficit (195,778) (170,143) --------------- --------------- Total members' interest (93,285) (53,169) --------------- --------------- Total liabilities and members' interest $ 476,045 $ 476,246 =============== ===============

~~Quarter~~SECURITIES ~~Ended~~AND ~~Nine~~EXCHANGE ~~Months~~COMMISSION Ended --------------------------- --------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Revenues: Music and other business services $ 43,965 $ 41,177 $ 129,995 $ 121,123 Equipment and related services. 15,384 14,989 43,627 40,075 ------------ ------------ ------------ ------------ 59,349 56,166 173,622 161,198 Cost of revenues: Music and other business services (excluding $10,393, $11,196, $32,300 and $32,932 of depreciation and amortization expense). 8,173 7,780 23,893 26,428 Equipment and related services. 12,100 11,873 35,355 32,474 ------------ ------------ ------------ ------------ 20,273 19,653 59,248 58,902 ------------ ------------ ------------ ------------ 39,076 36,513 114,374 102,296 Selling, general and administrative expenses. 20,038 17,931 59,958 53,853 Depreciation and amortization expense. 15,338 17,567 47,776 52,825 ------------ ------------ ------------ ------------ Income (loss) from operations. 3,700 1,015 6,640 (4,382) Other income (expense): Interest expense. (10,302) (8,865) (28,766) (27,505) Other, net. 36 76 131 192 Loss from extinguishment of debt -- -- (3,694) -- ------------ ------------ ------------ ------------ Loss before income taxes (6,566) (7,774) (25,689) (31,695) Income tax benefit (7) (308) (54) (899) ------------ ------------ ------------ ------------ Net loss. $ (6,559) $ (7,466) $ (25,635) $ (30,796) ============ ============ ============ ============

~~Nine Months Ended -------------------------------- September 30~~Washington, ~~September~~D.C. ~~30,~~20549 2003 2002 ------------------------------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (25,635) $ (30,796) Adjustments to derive cash flow from continuing operating activities: Loss on extinguishment of debt 3,694 -- Gain on disposal of fixed assets (37) (30) Deferred income tax benefit (501) (997) Depreciation and amortization 47,776 52,825 Amortization of senior discount notes and senior notes 5,672 5,669 Amortization of deferred financing fees 1,864 1,625 Amortization of deferred subscriber acquisition costs 11,562 9,182 Deferred subscriber acquisition costs (14,614) (10,845) Unearned installment income (26) (1,053) Change in certain assets and liabilities Increase in accounts receivable (1,539) (2,799) Increase in inventory (3,192) (1,836) Decrease in accounts payable (645) (1,684) Increase (decrease) in accrued expenses 3,602 (1,154) Increase in advance billings 640 512 Other, net (4,781) 149 -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 23,840 18,768 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (31,518) (26,700) Proceeds from sale of fixed assets 50 40 -------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (31,468) (26,660) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in book overdrafts (2,459) 3,037 Proceeds from issuance of Senior Notes 218,869 -- Repayments of senior credit facility (159,514) (3,347) Repayments on revolver (31,000) (10,000) Borrowings on revolver 17,400 11,500 Repurchase of Senior discount notes (14,440) -- Issuance (repayment) of notes payable to a related party (10,000) 10,000 Termination (purchase) of interest rate protection agreement 4 (372) Repayments of capital lease obligations and other debt (1,702) (2,035) Payment of fees associated with financing (8,918) (1,875) -------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITES 8,240 6,908 -------------- -------------- NET INCREASE (DECREASE) IN CASH 612 (984) CASH, BEGINNING OF PERIOD 1,781 2,583 CASH, END OF PERIOD $ 2,393 $ 1,599 ============== ============== Significant non-cash activities: Capital lease obligations $ 1,214 $ 1,953

~~Class~~FORM ~~A Class B Accumulated~~ 10-~~--------------------~~Q ------------------- Other Total Accumulated Comprehensive Members' Units Dollars Units Dollars Deficit Loss Interest --------- ---------- -------- --------- ----------- ------------- ---------- Balance, December 31, 2002 132,422 $ 117,167 11,419 $ 97 $ (170,143) $ (290) $ (53,169) Comprehensive loss: Net loss (25,635) (25,635) Current period change in value of derivative -- (78) (78) Reclassification to earnings -- 368 368 ---------- ------------ --------- Total comprehensive loss (25,635) 290 (25,345) Net Issuance of Units 3,117 -- -- Preferred return on preferred units -- (14,674) -- (97) -- -- (14,771) --------- --------- -------- -------- ---------- ------------ --------- Balance, September 30, 2003 132,422 $ 102,493 14,536 $ -- $ (195,778) $ -- $ (93,285) ========= ========= ======== ======== ========== ============ =========

~~September~~x ~~30,~~QUARTERLY ~~2003~~REPORT ~~December~~PURSUANT ~~31,~~TO ~~2002~~SECTION ~~(unaudited)~~13 ~~Useful~~OR ------------------------------------ ------------------------------------ Life Gross Carrying Accumulated Gross Carrying Accumulated (years) Amount Amortization Amount Amortization ---------- ------------------ ----------------- ------------------ ----------------- Income producing contracts....... 12 $153,900 $(56,235) $ 153,956 $(46,617) License agreements............... 20 5,082 (1,143) 5,082 (953) Deferred production costs........ 10 7,011 (1,717) 5,780 (1,232) Trademarks....................... 5 15~~,163~~ (~~13,515~~d) ~~15,136~~OF ~~(11,242)~~THE ~~Non-compete~~SECURITIES ~~agreements...........~~EXCHANGE ~~3-5~~ACT ~~591~~OF (459) 7,468 (6,211) Other............................ 20 10,741 (2,360) 10,741 (1,957) --------- --------- --------- --------- $ 192,488 $ (75,429) $ 198,163 $ (68,212) ========= ========= ========= =========1934

~~September~~For ~~30,~~the ~~2003~~quarterly ~~December~~period ~~31,~~ended ~~2002 (Unaudited) ----------------------- ----------------------- Accrued interest............................................... $ 8~~June 30,~~539~~ $2006 3,427 Accrued compensation and benefits.............................. 3,021 3,178 Licensing royalties........................................... 4,015 4,054 Other.......................................................... 5,981 7,645 --------- --------- $ 21,556 $ 18,304 ========= =========

~~September~~Or 30, December 31, 2003 2002 (Unaudited) ---------------- ---------------- Related Party Notes .......................................... $ -- $ 10,000 ================ ================ Long term debt: Revolving Loan-Senior Credit Facility....................... $ 12,700 $ 26,300 Senior Credit Facility...................................... -- 159,514 Senior Notes................................................ 218,923 -- Senior Subordinated Notes................................... 115,000 115,000 Senior Discount Notes....................................... 53,815 64,484 Other....................................................... 2,407 2,471 ---------------- ---------------- Total debt obligations........................................ 402,845 367,769 Less current maturities....................................... (417) (7,855) ---------------- ---------------- $ 402,428 $ 359,914 ================ ================

~~Muzak~~¨ ~~Muzak~~TRANSITION ~~Holdings~~REPORT ~~Muzak~~PURSUANT ~~Finance~~TO ~~LLC~~SECTION ~~LLC~~13 ~~Corp~~OR ~~Guarantor~~ 15(~~"Parent"~~d) ~~(Co-issuer)~~OF ~~(Co-issuer)~~THE Subsidiaries*SECURITIES ~~Eliminations~~EXCHANGE ~~Consolidated~~ACT ~~------------~~OF ----------- ----------- -------------- ------------ ------------- ASSETS Current assets: Cash $ -- $ 2,393 $ -- $ -- $ -- $ 2,393 Accounts receivable, net -- 27,049 -- 1,021 -- 28,070 Inventories -- 14,593 -- -- -- 14,593 Prepaid expenses and other assets -- 4,352 -- -- -- 4,352 ----------- ---------- ---------- ------------- ----------- ------------ Total current assets -- 48,387 -- 1,021 -- 49,408 Property and equipment, net -- 108,005 -- 834 -- 108,839 Intangible assets, net -- 233,586 -- 24,278 -- 257,864 Deposits and other assets, net 1,370 58,556 1,864 8 (1,864) 59,934 Advances in/due from subsidiary -- -- -- 983 (983) -- Investment in Subsidiary 83,047 21,370 -- -- (104,417) -- ----------- ---------- ---------- ------------- ----------- ------------ Total assets $ 84,417 $ 469,904 $ 1,864 $ 27,124 $ (107,264) $ 476,045 =========== ========== ========== ============= =========== ============ LIABILITIES AND MEMBERS' INTEREST Current liabilities: Accounts payable $ -- $ 6,685 $ -- $ 260 $ -- $ 6,945 Accrued expenses -- 20,348 473 1,208 (473) 21,556 Current portion of other liabilities -- 2,852 -- -- -- 2,852 Current maturities of long term debt -- 325 -- 92 -- 417 Advanced billings -- 1,680 -- -- -- 1,680 ----------- ---------- ---------- ------------- ----------- ------------ Total current liabilities -- 31,890 473 1,560 (473) 33,450 Long-term debt 53,815 346,623 115,000 1,990 (115,000) 402,428 Related party notes -- -- -- -- -- -- Other liabilities -- 7,361 -- 2,204 -- 9,565 Advances in/due from subsidiary -- 983 -- -- (983) -- Preferred Stock 123,887 -- -- -- -- 123,887 Members' interest/Shareholders equity (93,285) 83,047 (113,609) 21,370 9,192 (93,285) ----------- ---------- ---------- ------------- ----------- ------------ Total liabilities and members' interest $ 84,417 $ 469,904 $ 1,864 $ 27,124 $ (107,264) $ 476,045 =========== ========== ========== ============= =========== ============1934

~~Muzak~~For ~~Muzak~~the ~~Holdings~~transition ~~Muzak~~period Finance LLC LLC Corp Guarantor ("Parent") (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- Revenues Music and other business services $ -- $ 42,681 $ -- $ 1,284 $ -- $ 43,965 Equipment and related services -- 15,384 -- -- -- 15,384 ----------- ---------- ---------- ------------- ----------- ------------ -- 58,065 -- 1,284 -- 59,349 Cost of Revenues Music and other business services -- 7,757 -- 416 -- 8,173 Equipment and related services -- 12,100 -- -- -- 12,100 ----------- ---------- ---------- ------------- ----------- ------------ -- 19,857 -- 416 -- 20,273 ----------- ---------- ---------- ------------- ----------- ------------ -- 38,208 -- 868 -- 39,076 ----------- ---------- ---------- ------------- ----------- ------------ Selling, general & administrative -- 19,747 -- 291 -- 20,038 Depreciation & amortization expense -- 14,892 -- 446 -- 15,338 ----------- ---------- ---------- ------------- ----------- ------------ Income from Operations -- 3,569 -- 131 -- 3,700 Other income (expense) Interest expense (1,743) (8,506) (2,839) (53) 2,839 (10,302) Other, net -- 36 -- -- -- 36 Management Fee -- 255 -- (255) -- -- Equity in earnings of subsidiary** (4,816) (170) -- -- 4,986 -- ----------- ---------- ---------- ------------- ----------- ------------ Loss before income taxes (6,559) (4,816) (2,839) (177) 7,825 (6,566) Income tax benefit -- -- -- (7) -- (7) ----------- ---------- ---------- ------------- ----------- ------------ Net loss $ (6,559) $ (4,816) $ (2,839) $ (170) $ 7,825 $ (6,559) =========== ========== ========== ============= =========== ============ to .

~~Muzak~~Commission ~~Muzak~~File Holdings Muzak Finance Combined LLC LLC Corp Guarantor (Parent) (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- Assets Current assetsNumber: Cash $ -- $ 1,781 $ -- $ -- $ -- $ 1,781 Accounts receivable, net -- 25,298 -- 1,233 -- 26,531 Inventories -- 11,401 -- -- -- 11,401 Prepaid expenses and other assets -- 1,719 -- -- -- 1,719 ------------ ----------- ----------- -------------- ------------ ------------- Total current assets -- 40,199 -- 1,233 -- 41,432 Property and equipment, net -- 109,699 -- 1,190 -- 110,889 Intangible assets, net -- 244,913 -- 25,843 -- 270,756 Deferred subscriber acquisition costs and other assets, net 2,050 51,114 2,177 5 (2,177) 53,169 Advances to/from subsidiaries -- 62 -- -- (62) -- Investment in subsidiaries 118,379 22,333 --78573 -- (140,712) -- ------------ ----------- ----------- -------------- ------------ ------------- Total assets $ 120,429 $ 468,320 $ 2,177 $ 28,271 $ (142,951) $ 476,246 ------------ ----------- ----------- -------------- ------------ ------------- Liabilities and Members' Interest Current liabilities: Accounts payable $ -- $ 10,002 $ -- $ 47 $ -- $ 10,049 Accrued expenses -- 17,267 3,312 1,037 (3,312) 18,304 Current maturity of other liabilities -- 2,924 -- -- -- 2,924 Current maturities of long term debt -- 7,769 -- 86 -- 7,855 Advance billings -- 1,040 -- -- -- 1,040 ------------ ----------- ----------- -------------- ------------ ------------- Total current liabilities -- 39,002 3,312 1,170 (3,312) 40,172 Long-term debt 64,484 293,371 115,000 2,059 (115,000) 359,914 Related party notes -- 10,000 -- -- -- 10,000 Other liabilities -- 7,568 -- 2,647 -- 10,215 Advances to/from subsidiaries -- -- -- 62 (62) -- Mandatorily redeemable preferred units 109,114 -- -- -- -- 109,114 Members' interest/Shareholder equity (53,169) 118,379 (116,135) 22,333 ~~(24,577) (53,169)~~ -78573----------- ----------- ----------- -------------- ------------ ------------- Total liabilities and members' interest $ 120,429 $ 468,320 $ 2,177 $ 28,271 $ (142,951) $ 476,246 ------------ ----------- ----------- -------------- ------------ -------------01

~~Muzak~~MUZAK ~~Muzak~~HOLDINGS ~~Holdings Muzak Finance~~ LLC LLC Corp Guarantor ("Parent") (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- Revenues Music and other business services $ -- $ 39,698 $ -- $ 1,479 $ -- $ 41,177 Equipment and related services -- 14,989 -- -- -- 14,989 ----------- ---------- ---------- ------------- ----------- ------------ -- 54,687 -- 1,479 -- 56,166 Cost of Revenues Music and other business services -- 7,575 -- 205 -- 7,780 Equipment and related services -- 11,873 -- -- -- 11,873 ----------- ---------- ---------- ------------- ----------- ------------ -- 19,448 -- 205 -- 19,653 ----------- ---------- ---------- ------------- ----------- ------------ -- 35,239 -- 1,274 -- 36,513 ----------- ---------- ---------- ------------- ----------- ------------ Selling, general & administrative -- 17,753 -- 178 -- 17,931 Depreciation & amortization expense -- 16,581 -- 986 -- 17,567 ----------- ---------- ---------- ------------- ----------- ------------ Income from Operations -- 905 -- 110 -- 1,015 Other income (expense) Interest expense (2,036) (6,823) (2,839) (6) 2,839 (8,865) Other, net -- 76 -- -- -- 76 Management Fee -- 1,181 -- (1,181) -- -- Equity in earnings of subsidiary** (5,430) (769) -- -- 6,199 -- ----------- ---------- ---------- ------------- ----------- ------------ Loss before income taxes (7,466) (5,430) (2,839) (1,077) 9,038 (7,774) Income tax benefit -- -- -- (308) -- (308) ----------- ---------- ---------- ------------- ----------- ------------ Net loss $ (7,466) $ (5,430) $ (2,839) $ (769) $ 9,038 $ (7,466) =========== ========== ========== ============= =========== ============

~~Muzak~~MUZAK ~~Muzak~~HOLDINGS ~~Holdings~~FINANCE ~~Muzak~~CORP Finance LLC LLC Corp Guarantor ("Parent") (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- Revenues Music and other business services $ -- $ 125,487 $ -- $ 4,508 $ -- $ 129,995 Equipment and related services -- 43,627 -- -- -- 43,627 ----------- ---------- ---------- ------------- ----------- ------------ -- 169,114 -- 4,508 -- 173,622 Cost of Revenues Music and other business services -- 22,359 -- 1,534 -- 23,893 Equipment and related services -- 35,355 -- -- -- 35,355 ----------- ---------- ---------- ------------- ----------- ------------ -- 57,714 -- 1,534 -- 59,248 ----------- ---------- ---------- ------------- ----------- ------------ -- 111,400 -- 2,974 -- 114,374 ----------- ---------- ---------- ------------- ----------- ------------ Selling, general & administrative -- 58,949 -- 1,009 -- 59,958 Depreciation & amortization expense -- 45,855 -- 1,921 -- 47,776 ----------- ---------- ---------- ------------- ----------- ------------ Income from Operations -- 6,596 -- 44 -- 6,640 Other income (expense) Interest expense (5,837) (22,768) (8,517) (161) 8,517 (28,766) Other, net -- 131 -- -- -- 131 Extraordinary Loss 1,384 (5,078) -- -- -- (3,694) Management Fee -- 900 -- (900) -- -- Equity in earnings of subsidiaries** (21,182) (963) -- -- 22,145 -- ----------- ---------- ---------- ------------- ----------- ------------ Loss before income taxes (25,635) (21,182) (8,517) (1,017) 30,662 (25,689) Income tax benefit -- -- -- (54) -- (54) ----------- ---------- ---------- ------------- ----------- ------------ Net loss $ (25,635) $ (21,182) $ (8,517) $ (963) $ 30,662 $ (25,635) =========== ========== ========== ============= =========== ============

~~Muzak Muzak Holdings Muzak Finance LLC LLC Corp Guarantor~~ (~~"Parent")~~Exact ~~(Co-issuer)~~Name (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- Revenues Music and other business services $ -- $ 115,823 $ -- $ 5,300 $ -- $ 121,123 Equipment and related services -- 40,075 -- -- -- 40,075 ----------- ---------- ---------- ------------- ----------- ------------ -- 155,898 -- 5,300 -- 161,198 Cost of ~~Revenues~~Registrants ~~Music~~as ~~and~~Specified other business services -- 25,568 -- 860 -- 26,428 Equipment and related services -- 32,474 -- -- -- 32,474 ----------- ---------- ---------- ------------- ----------- ------------ -- 58,042 -- 860 -- 58,902 ----------- ---------- ---------- ------------- ----------- ------------ -- 97,856 -- 4,440 -- 102,296 ----------- ---------- ---------- ------------- ----------- ------------ Selling, general & administrative -- 53,269 -- 584 -- 53,853 Depreciation & amortization expense -- 49,334 -- 3,491 -- 52,825 ----------- ---------- ---------- ------------- ----------- ------------ Income (loss) from Operations -- (4,747) -- 365 -- (4,382) Other income (expense) Interest expense (5,917) (21,570) (8,517) (18) 8,517 (27,505) Other, net -- 192 -- -- -- 192 Management Fee -- 4,148 -- (4,148) -- -- Equity in ~~earnings~~their ~~of subsidiary** (24,879~~charter) (2,902) -- -- 27,781 -- ----------- ---------- ---------- ------------- ----------- ------------ Loss before income taxes (30,796) (24,879) (8,517) (3,801) 36,298 (31,695) Income tax benefit -- -- -- (899) -- (899) ----------- ---------- ---------- ------------- ----------- ------------ Net loss $ (30,796) $ (24,879) $ (8,517) $ (2,902) $ 36,298 $ (30,796) =========== ========== ========== ============= =========== ============

Muzak Muzak Holdings Muzak Finance LLC LLC Corp Guarantor ("Parent") (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by operating activities $ -- $ 22,515 $ -- $ 1,325 $ -- $ 23,840 ----------- ---------- ---------- ------------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets -- 50 -- -- -- 50 Capital expenditures (for property, plant & equipment and intangibles) -- (31,518) -- -- -- (31,518) ----------- ---------- ---------- ------------- ----------- ------------ Net cash used in investing activities -- (31,468) -- -- -- (31,468) ----------- ---------- ---------- ------------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Change in book overdrafts -- (2,459) -- -- -- (2,459) Proceeds from Senior note offering -- 218,869 -- -- -- 218,869 Repayments of senior credit facility -- (159,514) -- -- -- (159,514) Repayments of senior discount notes (14,440) -- -- -- -- (14,440) Repayments under revolving credit loan -- (31,000) -- -- -- (31,000) Borrowings under revolving credit loan -- 17,400 -- -- -- 17,400 Repayment on note payable to related party -- (10,000) -- -- -- (10,000) Proceeds from sale of interest rate protection agreement -- 4 -- -- -- 4 Repayments of capital lease obligations and other debt -- (1,638) -- (64) -- (1,702) Payment of financing fees -- (8,918) -- -- -- (8,918) Advances to/from subsidiaries 14,440 (13,179) -- (1,261) -- -- ----------- ---------- ---------- ------------- ----------- ------------ Net cash provided by/(used in) financing activities -- 9,565 -- (1,325) -- 8,240 ----------- ---------- ---------- ------------- ----------- ------------ NET INCREASE IN CASH -- 612 -- -- -- 612 CASH, BEGINNING OF PERIOD -- 1,781 -- -- -- 1,781 =========== ========== ========== ============= =========== ============ CASH, END OF PERIOD $ -- $ 2,393 $ -- $ -- $ -- $ 2,393 =========== ========== ========== ============= =========== ============


DELAWARE		04-3433730
DELAWARE		04-3433728
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

~~Muzak~~3318 ~~Muzak~~LAKEMONT ~~Holdings~~BLVD. Muzak Finance LLC LLC Corp Guarantor ("Parent") (Co-issuer) (Co-issuer) Subsidiaries* Eliminations Consolidated ------------ ----------- ----------- -------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by/(used in) operating activities $ -- $ 18,968 $ -- $ (200) $ -- $ 18,768 ----------- ---------- ---------- ------------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets -- 40 -- -- -- 40 Capital expenditures (for property, plant & equipment and intangibles) -- (26,700) -- -- -- (26,700) ----------- ---------- ---------- ------------- ----------- ------------ Net cash used in investing activities -- (26,660) -- -- -- (26,660) ----------- ---------- ---------- ------------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Change in book overdrafts -- 3,037 -- -- -- 3,037 Borrowings under revolver -- 11,500 -- -- -- 11,500 Repayments under revolver -- (10,000) -- -- -- (10,000) Repayments of senior credit facility -- (3,347) -- -- -- (3,347) Proceeds from issuance of note payable to related party 10,000 10,000 Payment of interest rate protection agreement -- (372) -- -- -- (372) Repayments of capital lease and other debt -- (1,976) -- (59) -- (2,035) Payment of fees associated with financing -- (1,875) -- -- -- (1,875) Advances to/from subsidiaries -- (259) -- 259 -- -- ----------- ---------- ---------- ------------- ----------- ------------ Net cash provided by financing activities -- 6,708 -- 200 -- 6,908 ----------- ---------- ---------- ------------- ----------- ------------ NET DECREASE IN CASH -- (984) -- -- -- (984) CASH, BEGINNING OF PERIOD -- 2,583 -- -- -- 2,583 =========== ========== ========== ============= =========== ============ CASH, END OF PERIOD $ -- $ 1,599 $ -- $ -- $ -- $ 1,599 =========== ========== ========== ============= =========== ============

~~Payments~~FORT due by Period ------------------------------------------------------------------------ Remaining 3 months 2003 2004 2005 2006 2007 After 2007 Total ------------------------------------------------------------------------ Long-term debt $347 $94 $101 $110 $118 $406MILL,~~287~~ ~~$407,057~~SC ~~Interest~~29708 11,297 38,178 41,872 41,864 41,855 43,136 218,202 Capital lease obligations 542 1,972 1,461 570 228 -- 4,773 Operating leases 2,306 8,722 5,521 4,388 4,148 23,966 49,051 Unconditional purchase obligations 4,072 9,679 6,062 5,733 1,092 -- 26,638 ------------------------------------------------------------------------ Total Contractual Cash Obligations $18,564 $58,645 $55,017 $52,665 $47,441 $473,389 $705,721 ========================================================================

Expected Maturity Date ---------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total ---------- --------- --------- --------- --------- ----------- -------- Debt: Fixed rate (~~$US~~803) ~~$ 347 $ 94 $ 101 $ 110 $ 118 $ 393,587 $ 394,357 Average interest rate 10.4% 10.4% 10.4% 10.4% 10.4% 10.4% Variable rate ($US) $~~ 396-3000 ~~$ - $ - $ - $ - 12,700 $ 12,700 Average interest rate 5.2% 5.9% 7.2% 8.2% 8.6% 9.5% Interest Rate Derivatives: Interest Rate Swap ($US Notional) $ 220,000 Variable Rate 9.1% 9.8%~~

(Address, Including Zip Code and Telephone Number including Area Code of Registrants’ Principal Executive Offices)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrants have filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

Muzak Holdings Finance Corp. and Muzak Finance Corp. meet the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format.

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

MUZAK HOLDINGS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)


	June 30, 2006			December 31, 2005 (1)
ASSETS
Current assets:
Cash	$	17,661		$	16,014
Restricted cash		744			721
Accounts receivable, net of allowances of $2,307 and $3,410		21,029			24,373
Inventories		15,578			16,706
Prepaid expenses and other assets		4,757			4,515

Total current assets		59,769			62,329
Restricted cash		982			982
Property and equipment, net		87,791			93,106
Goodwill		140,805			140,805
Intangible assets, net		72,757			79,568
Deferred subscriber acquisition costs, net		38,466			42,123
Deferred charges and other assets, net		7,348			9,155

Total assets	$	407,918		$	428,068

LIABILITIES AND MEMBERS’ DEFICIT
Current liabilities:
Accounts payable	$	4,964		$	5,723
Accrued expenses (see Note 4)		22,071			21,381
Current maturities of long term debt		1,173			1,160
Current portion of other liabilities		2,702			2,807
Advance billings		1,801			1,022

Total current liabilities		32,711			32,093
Long-term debt, net of current portion		463,316			463,730
Other liabilities, net of current portion		9,231			9,095
Commitments and contingencies
Redeemable preferred units		202,583			185,579
Redeemable purchased Class A units		7,788			7,788
Members’ deficit:
Class A units		16,008			33,012
Accumulated deficit		(323,719	)		(303,229	)

Total members’ deficit		(307,711	)		(270,217	)

Total liabilities and members’ deficit	$	407,918		$	428,068

(1)	The year end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.

The accompanying notes are an integral part of these consolidated financial statements.

MUZAK HOLDINGS LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands)


	Quarter Ended						Six Months Ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Net Revenues:
Music and other business services	$	47,172		$	46,948		$	94,664		$	93,779
Equipment and related services		14,321			13,916			26,278			28,009

		61,493			60,864			120,942			121,788
Cost of revenues:
Music and other business services (excluding $8,809, 9,620, 17,824 and $19,672 of depreciation and amortization expense).		11,251			10,388			22,320			20,467
Equipment and related services		14,227			13,450			27,659			27,026

		25,478			23,838			49,979			47,493

Selling, general and administrative expenses		20,525			24,863			41,211			47,884
Depreciation and amortization expense		12,751			13,709			25,893			28,040

Income (loss) from operations		2,739			(1,546	)		3,859			(1,629	)
Other income (expense):
Interest expense		(12,587	)		(12,136	)		(25,027	)		(23,536	)
Loss from extinguishment of debt, net		—			(2,735	)		—			(2,735	)
Other, net		372			122			514			110

Loss before income taxes		(9,476	)		(16,295	)		(20,654	)		(27,790	)
Income tax benefit		(84	)		(16	)		(164	)		(68	)

Net loss		(9,392	)		(16,279	)		(20,490	)		(27,722	)
Preferred return on redeemable preferred units		(8,718	)		(7,382	)		(17,004	)		(14,398	)

Net loss attributable to common unit holders	$	(18,110	)	$	(23,661	)	$	(37,494	)	$	(42,120	)

The accompanying notes are an integral part of these consolidated financial statements.

MUZAK HOLDINGS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	June 30, 2006			June 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(20,490	)	$	(27,722	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from extinguishment of debt		—			2,735
Gain on disposal of fixed assets		(30	)		(44	)
Impairment of capitalized labor		964			729
Note receivable impairment charges		—			1,666
Deferred income tax benefit		(221	)		(144	)
Depreciation and amortization		25,893			28,040
Amortization of senior discount, senior notes, and deferred financing fees		1,477			1,527
Amortization of deferred subscriber acquisition costs		8,226			8,975
Deferred subscriber acquisition costs		(4,569	)		(7,167	)
Change in unearned installment income		898			162
Change in certain assets and liabilities
Accounts receivable		3,344			4,660
Inventory		1,128			(878	)
Accounts payable		(759	)		4,292
Accrued expenses		690			(6,441	)
Advance billings		779			451
Other, net		23			528

Net cash provided by operating activities		17,353			11,369

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment		(14,134	)		(19,555	)
Capital expenditures for intangibles		(30	)		(24	)
Proceeds from sale of fixed assets		46			44

Net cash used in investing activities		(14,118	)		(19,535	)

CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in book overdrafts		—			(375	)
Restricted cash used to collateralize letters of credit		(23	)		(1,764	)
Borrowings under revolver		—			8,500
Repayment of revolver		—			(42,500	)
Proceeds from term loan		—			105,000
Repayment of term loan		(525	)		(35,000	)
Payment of financing fees		—			(2,591	)
Repayments of capital lease obligations and other debt		(1,040	)		(1,419	)

Net cash provided by (used in) financing activities		(1,588	)		29,851

NET INCREASE IN CASH		1,647			21,685
CASH, BEGINNING OF PERIOD		16,014			421

CASH, END OF PERIOD	$	17,661		$	22,106

Supplemental information; non-cash activities

Capital Lease Obligations	$	319		$	317

The accompanying notes are an integral part of these consolidated financial statements.

MUZAK HOLDINGS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

MEMBERS’ DEFICIT

(Unaudited)

(In thousands, except for units)


	Class A				Class B				Accumulated Deficit			Total Members’ Deficit
	Units	Dollars			Units		Dollars		Accumulated Deficit			Total Members’ Deficit
Balances, December 31, 2005	125,164	$	33,012		11,853		$	—	$	(303,229	)	$	(270,217	)

Net loss (1)										(20,490	)		(20,490	)
Preferred return on preferred units			(17,004	)									(17,004	)
Repurchase of units					(35	)

Balances, June 30, 2006	125,164	$	16,008		11,818		$	—	$	(323,719	)	$	(307,711	)

(1)	Comprehensive loss equals net loss

The accompanying notes are an integral part of these consolidated financial statements.

MUZAK HOLDINGS LLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Overview

Organization - Muzak Holdings LLC (and its subsidiaries (the “Company”)), previously known as ACN Holdings, LLC, was formed in September 1998 pursuant to the laws of the state of Delaware. The Company provides business music programming to clients through its integrated nationwide network of owned operations and franchises. All of the operating activities are conducted through the Company’s subsidiaries.

As of June 30, 2006, ABRY Partners, LLC and its respective affiliates, collectively own 64.2% of the beneficial interests in the Company’s voting interests.

Basis of Presentation - The consolidated financial statements include the accounts of the Company and its subsidiaries: Muzak LLC, Muzak Capital Corporation, Muzak Holdings Finance Corporation, Muzak Finance Corporation, Business Sound Inc., Electro Systems Corporation, BI Acquisition LLC, MLP Environmental Music LLC, Audio Environments Inc., Background Music Broadcasters Inc., Telephone Audio Productions Inc., Vortex Sound Communications Company Inc., Music Incorporated, and Muzak Houston, Inc. All significant intercompany items have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Muzak Holdings LLC Annual Report on Form 10-K for the year ended December 31, 2005.

The financial statements as of June 30, 2006 and the financial statements for the three and six months ended June 30, 2006 and 2005 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting solely of normal recurring adjustments) necessary to state fairly the financial information included herein. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year.

2. Property and Equipment

Property and equipment consists of the following (in thousands):


	Useful Life (years)	June 30, 2006			December 31, 2005
Equipment provided to subscribers	5	$	200,017		$	194,180
Capitalized installation labor	5		63,578			97,685
Equipment and vehicles	3-7		53,596			40,423
Other	5-30		11,636			21,073

			328,827			353,361
Less accumulated depreciation			(241,036	)		(260,255	)

		$	87,791		$	93,106

Included in equipment and vehicles and other at June 30, 2006 and December 31, 2005 is $17.7 million and $17.9 million, respectively of equipment under capital leases. Accumulated depreciation associated with the equipment under capital leases is $15.2 million and $14.7 million at June 30, 2006 and December 31, 2005, respectively. Depreciation of property and equipment was $9.3 million and $19.0 million for the quarter and six months ended June 30, 2006, respectively. Depreciation of property and equipment was $10.3 million and $21.2 million for the quarter and six months ended June 30, 2005, respectively.

3. Intangible Assets

Unamortized intangible assets consist of the following (in thousands):

June 30, 2006
Carrying Amount

December 31, 2005

Carrying Amount

Goodwill

140,805

Amortized intangible assets consist of the following (in thousands):


	Useful Life (years)	June 30, 2006					December 31, 2005
	Useful Life (years)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Income producing contracts	12	$	153,900	$	(91,503	)	$	153,900	$	(85,092	)
License agreements	20		5,082		(1,842	)		5,082		(1,715	)
Trademarks	5		15,333		(15,196	)		15,304		(15,164	)
Non-compete agreements	3-5		275		(275	)		275		(275	)
Other	20		10,831		(3,848	)		10,831		(3,578	)

		$	185,421	$	(112,664	)	$	185,392	$	(105,824	)

Aggregate amortization expense was $3.4 and $6.8 million for the quarters and six months ended June 30, 2006 and 2005, respectively.

The estimated future aggregate amortization expense is as follows (in thousands):


Fiscal year ending
2006 (remaining six months)	$	6,837
2007		13,664
2008		13,656
2009		13,644
2010		12,947

4. Accrued Expenses

Accrued expenses are summarized below (in thousands):


	June 30, 2006		December 31, 2005
Accrued interest	$	8,818	$	8,612
Accrued compensation and benefits		2,875		2,684
Amounts payable to franchisees		2,460		3,204
Licensing royalties		1,969		1,106
Other		5,949		5,775

	$	22,071	$	21,381

5. Debt

Debt obligations consist of the following (in thousands):


	June 30, 2006			December 31, 2005
Long term debt:
Term Loan – Senior credit facility	$	103,950		$	104,475
Senior notes		219,403			219,306
Senior subordinated notes		115,000			115,000
Senior discount notes		24,245			24,245
Other		1,891			1,864

Total debt obligations		464,489			464,890
Less current maturities		(1,173	)		(1,160	)

	$	463,316		$	463,730

April 2005 Term Loan Facility

On April 15, 2005, the Company refinanced its then existing Senior Credit Facility with a new $105.0 million senior secured term loan facility (“New Senior Credit Facility”). A portion of the proceeds was used to repay the then existing outstanding term and revolving loans and accrued interest, to provide collateral for outstanding letters of credit under the then existing Senior Credit Facility, and to pay fees and expenses. The then existing Senior Credit Facility has been terminated.

The New Senior Credit Facility is payable in quarterly installments of 0.25% of the original outstanding balance ($105.0 million) beginning September 2005 until final maturity on April 15, 2008. The New Senior Credit facility is guaranteed by certain of our direct and indirect subsidiaries and is secured by a first priority security interest in (i) substantially all of the Company’s tangible and intangible assets and (ii) the capital stock of the Company’s subsidiaries. The non-guarantor subsidiary is minor (as defined by Rule 3-10 of Regulation S-X) and the consolidated amounts in the Company’s financial statements are representative of the combined guarantor’s financial statements. The New Senior Credit Facility contains a senior secured leverage ratio (the ratio of Senior Secured Debt as of such date of determination to Consolidated EBITDA on a last twelve months (LTM) basis) and various other restrictive covenants, which are customary for such facilities. In addition, the Company is generally prohibited from incurring additional indebtedness, incurring liens, paying dividends or making other restricted payments, consummating asset sales, entering into transactions with affiliates, merging or consolidating with any other person or selling, assigning, transferring, leasing, conveying, or otherwise disposing of assets. The Company was in compliance with these covenants as of June 30, 2006.

Indebtedness under the term loan bears interest at a per annum rate equal to the Company’s choice of (i) Base Rate (which is the highest of prime rate and the Federal Funds Rate plus .5%) plus a margin of 3.75% or (ii) the offered rates for Eurodollar deposits (“LIBOR”) of one, two or three months, as selected by the Company, plus a margin of 4.75%. As of June 30, 2006, the interest rate on the term loan was 9.88%.

Senior Notes

Muzak LLC together with its wholly owned subsidiary, Muzak Finance Corp., has $220.0 million in principal amount of 10% Senior Notes which mature on February 15, 2009. Interest is payable semi-annually, in arrears, on May 15 and November 15 of each year. The Senior Notes are general unsecured obligations of Muzak LLC and Muzak Finance Corp. and are subordinate to existing and future secured debt and are senior to Muzak LLC’s existing Senior Subordinated Notes. The Senior Notes are guaranteed by the Company and certain of the Company’s direct and indirect subsidiaries (See Note 12). The indenture governing the Senior Notes prohibits the Company from making certain payments such as dividends and distributions of capital stock; repurchases or redemptions of capital stock, and investments (other than permitted investments) unless certain conditions are met by the Company. After February 15, 2006, the issuers may redeem all or part of the Senior Notes at a redemption price equal to 105.0% of the principal which redemption price declines to 100% of the principal amount in 2008.

Senior Subordinated Notes

Muzak LLC together with its wholly owned subsidiary, Muzak Finance Corp., has $115.0 million in principal amount of 9⁷/8% Senior Subordinated Notes (“Senior Subordinated Notes”) which mature on March 15, 2009. Interest is payable semi-annually, in arrears, on March 15 and September 15 of each year. The Senior Subordinated Notes are general unsecured

obligations of the Muzak LLC and Muzak Finance Corp and are subordinated in right of payment to all existing and future Senior Indebtedness of Muzak LLC and Muzak Finance Corp. The indenture governing the Senior Subordinated Notes prohibits Muzak LLC from making certain payments such as dividends and distributions of their capital stock; repurchases or redemptions of their capital stock, and investments (other than permitted investments) unless certain conditions are met by Muzak LLC. The issuers were able to redeem all or part of the Notes as of March 15, 2004. As of March 15, 2006, the issuers may redeem all or part of the Notes at a redemption price equal to 101.646% of the principal which redemption price declines to 100% of the principal amount in 2007.

Senior Discount Notes

The Company together with its wholly owned subsidiary Muzak Holdings Finance Corp. has $24.2 million in principal amount of 13% Senior Discount Notes (the “Senior Discount Notes”) due March 2010. The Senior Discount Notes were fully accreted as of March 15, 2004. From and after March 15, 2004, interest began accruing at a rate of 13% per annum. Interest is payable semi-annually in arrears on each March 15 and September 15 to holders of record of the Senior Discount Notes at the close of business on the immediately preceding March 1 and September 1. Muzak Holdings LLC does not have any operations or assets other than its ownership of Muzak LLC. Accordingly, Muzak Holdings LLC is dependent upon distributions from Muzak LLC in order to pay interest. Muzak LLC’s New Senior Credit Facility, Senior Notes, and Senior Subordinated Notes indentures impose restrictions on its ability to make distributions to Muzak Holdings LLC. The New Senior Credit Facility, the Senior Notes, and Senior Subordinated Notes indentures permit Muzak LLC to make payments and distributions to Muzak Holdings LLC in an amount sufficient to permit Muzak Holdings LLC to make cash interest payments when due, however the senior credit facility requires that certain financial covenant levels be met in order to make such distributions.

Other Debt

Muzak LLC assumed $2.4 million of promissory notes in connection with an acquisition in 1999. All of the notes, with the exception of one, aggregating $1.8 million, bear interest at 9.9% and mature in November 2016. Muzak LLC is required to make interest only payments on a monthly basis through October 2006, and principal and interest payments for the remainder of the term. The note terms are the same for all but one of the notes, which has an outstanding balance of $37 thousand as of June 30, 2006 and bears interest at 8% with principal and interest payments due monthly until maturity in October 2006.

Annual Maturities

Annual maturities of long-term debt obligations are as follows (in thousands):


2006 (remaining six months)	$	585
2007		1,178
2008		102,516
2009		335,156
2010		24,417
Thereafter		1,234

The Annual maturities schedule includes the principal amount of the Senior Notes which mature in 2009.

Total interest paid by the Company on all indebtedness was $13.5 million and $23.3 million for the quarter and six months ended June 30, 2006, respectively. Total interest paid by the Company on all indebtedness was $12.4 million and $21.1 million for the quarter and six months ended June 30, 2005, respectively.

6. Redeemable Preferred Units

The Company was in violation of unit coverage ratio, leverage ratio, and annualized operating cash flow under the Securities Purchase Agreement as of June 30, 2006. The Company has been in default of the unit coverage ratio since June 2003, of leverage ratio since December 31, 2003, and of annualized operating cash flow since June 2004. As a result of the defaults, the preferred units accrue at a preferential return of 17% per annum as long as the default is continuing. The Company is projecting to be out of compliance with the unit coverage ratio (the ratio of consolidated operating cash flow to the sum of consolidated interest expense plus the aggregate Series A preferred return, as more specifically defined in the Securities Purchase Agreement) and leverage ratio for the foreseeable future. As a result of non-compliance with unit coverage ratio and leverage ratio for four consecutive quarters (a Class B and Class A default under the Securities Purchase Agreement, respectively), two of the three preferred unit holders were each entitled to be designated as either a Class B or Class A Director, although neither party has elected to so designate a Class B or Class A Director. As such, the number of Class B Directors and Class A Directors remains unchanged at five and three directors, respectively. The same two preferred

unit holders will each be entitled to designate a Class A Director until such time as the Company complies with the leverage ratio. If the Company is still in default of the unit coverage ratio at the time that the Company complies with the leverage coverage ratio, the same two preferred unit holders would each still be entitled to designate a Class B Director. The foregoing defaults do not result in a cross default under the New Senior Credit Facility or the indentures governing the Senior Notes, the Senior Subordinated Notes, and the Senior Discount Notes.

7. Restructuring Charges

During January 2006, we reorganized our field management structure, including our Operations, Sales and Customer Service departments. This move was designed to improve our technician productivity and increase our responsiveness to our customer’s needs and requests. As part of this reorganization, the Senior Vice President of Customer Service and the Executive Vice President of Sales, Product and Marketing resigned. The Company created seven Regional Vice President positions that will be directly responsible for the operations, sales and customer service responsibilities of their respective regions. We recorded a restructuring charge of $0.3 million in the first quarter of 2006, for severance and related costs.

In June 2005, the Company implemented a revised business plan which entailed streamlining the size of its sales force in order to achieve more moderate growth. This revised business plan seeks to reduce the number of annual new client location additions. This revised plan contributed to our ability to generate modest positive operating cash flow after debt service obligation in the fourth quarter of 2005 and the first quarter of 2006. While there can be no assurances, we expect that the associated decrease in capital investments under the revised business plan will continue to contribute towards our goal of generating positive operating cash flow after debt service obligations.

Following is a summary of the accrued liability for the restructuring charges (in thousands):


	Employee Severance			Lease Impairment Costs			Total
Accrued liability as of December 31, 2005	$	177		$	657		$	834
Charges		339			—			339
Cash payments		(401	)		(82	)		(483	)

Accrued liability as of June 30, 2006	$	115		$	575		$	690

Employee severance-related costs include the elimination of certain sales, sales support, and operations employees. The reduction in workforce represented an approximate 9% reduction in the Company’s overall workforce. Lease impairment costs relate to certain field office facilities in which the Company has excess office space. The charge reflects the present value of costs that will continue to be incurred under lease contracts without economic benefit due to the excess office space, offset by assumed sublease rental income of approximately $1.1 million.

The Company expects to pay the majority of the remaining severance costs by the end of the fourth quarter of 2006 and will pay the charges relating to field office leases over the remaining terms of the leases principally through December 2013.

8. Muzak Holdings Finance Corp. and Muzak Finance Corp.

Muzak Holdings Finance Corp. and Muzak Finance Corp. had no operating activities during the quarters and six months ended June 30, 2006 and 2005.

9. Commitments and Contingencies

Indemnification

Muzak’s Limited Liability Company Agreement dated as of March 18, 1999, as amended, provides for indemnification of directors and officers, including advancement of reasonable attorney’s fees and other expenses, in connection with all claims, liabilities and expenses arising out of the management of Muzak’s affairs. Such indemnification obligations are limited to the extent Muzak’s assets are sufficient to cover such obligations. Muzak carries directors and officers insurance that covers such exposure for indemnification up to certain limits.

Litigation

Muzak and the Company are co-defendants in a lawsuit filed in the U.S. District Court, Northern District of Illinois, Eastern Division, by Sound of Music, Ltd., a former franchisee of Muzak. Sound of Music, Ltd. is asserting claims against Muzak and the Company for violation of Federal securities laws, breach of contract and common law fraud. The case has arisen as a result of Sound of Music, Ltd.’s sale of substantially all of its MUZAK^{^®} related assets to Muzak and the Company in 2001. Sound of Music, Ltd. commenced this lawsuit more than three years after the parties consummated the purchase and sale transaction and now contends that it did not receive the total consideration promised and that the value of certain Class A units of the Company received in consideration for the assets was misrepresented. Sound of Music, Ltd. is seeking damages in excess of $1 million. While we are unable to predict the outcome of this case, we contend that Sound of Music, Ltd.’s assertions, claims, and allegations against Muzak and the Company are without merit, and we are vigorously contesting the same. We filed our answer to the complaint on March 16, 2006 and discovery has commenced.

Muzak and CVS Pharmacy, Inc. were co-defendants in a lawsuit filed by DMX Music, Inc. in Los Angeles County Superior Court on July 25, 2003. The case arose as a result of a Request for Proposal prepared by CVS Pharmacy, Inc. in 2001 that solicited bids for music programming. Muzak and DMX Music, Inc. entered into a settlement and general release agreement that resolved all claims between Muzak and DMX Music, Inc. and required a $1.0 million payment by Muzak to DMX Music, Inc. The cost of the settlement was recorded in selling, general and administrative expenses in the first quarter of 2005. The United States Bankruptcy Court currently presiding over DMX Music, Inc.’s Chapter 11 reorganization approved the settlement terms and the $1.0 million payment was made in June 2005.

In March 2004, a jury found against Muzak and another defendant in Bono vs. Muzak LLC et al and awarded the plaintiff approximately $0.4 million in damages for claims of sexual harassment and battery. In March 2005, we entered into a settlement agreement with Bono under which we paid $0.7 million, which includes the amounts awarded for compensatory damages as well as the plaintiff’s legal fees. We paid such settlement during the second and third quarters of 2005.

We are the subject of, or a party to, various other proceedings in the ordinary course of our business. Management believes that such proceedings are routine in nature and incidental to the conduct of our business, and that none of such proceedings, if determined adversely to the Company, would have a material adverse effect on our consolidated financial condition or results of operations.

Other Commitments

As of June 30, 2006, the Company has approximately $12.0 million in outstanding capital expenditure commitments covering a five-year period. The Company is the lessee under various operating and capital leases for equipment, vehicles, satellite capacity, and buildings.

10. Guarantors

The following schedules set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X for the quarters and six months ended June 30, 2006 and 2005 for (1) Muzak Holdings, LLC, (2) Muzak LLC, a co-issuer of the Senior Notes and Senior Subordinated Notes, (3) Muzak Finance Corp., a co-issuer of the Senior Notes and Senior Subordinated Notes and a wholly-owned subsidiary of Muzak LLC, and (4) on a combined basis, the subsidiary guarantors of the Senior Notes and Senior Subordinated Notes which include MLP Environmental Music, LLC, Business Sound, Inc., BI Acquisition LLC, Audio Environments, Inc., Background Music Broadcasters, Inc., Muzak Capital Corporation, Telephone Audio Productions, Inc., Muzak Houston, Inc., Vortex Sound Communications Company, Inc., and Music Incorporated, and a subsidiary that is not a guarantor of the Senior Subordinated Notes. The guarantor subsidiaries are direct and indirect wholly-owned subsidiaries of Muzak Holdings, LLC and have fully and unconditionally, jointly and severally, guaranteed the Senior Notes and Senior Subordinated Notes of Muzak LLC and Muzak Finance Corp. Muzak Holdings, LLC has also fully and unconditionally, jointly and severally, guaranteed the Senior Notes and Senior Subordinated Notes. The subsidiary that does not guarantee the Senior Notes and Senior Subordinated Notes represents less than 3% of consolidated total assets, members’ interest, revenues, loss before income taxes and cash flow from operating activities. Therefore, the non-guarantor subsidiary information is not separately presented in the tables below but rather is included in the column labeled “Guarantor Subsidiaries”.

Condensed Consolidating Balance sheets as of June 30, 2006

(unaudited) (In thousands)


	Muzak Holdings LLC (Parent)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)			Combined Guarantor Subsidiaries*		Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	—		$	17,661		$	—		$	—	$	—		$	17,661
Restricted Cash		—			744			—			—		—			744
Accounts receivable, net		—			20,465			—			564		—			21,029
Inventories		—			15,578			—			—		—			15,578
Prepaid expenses and other assets		—			4,757			—			—		—			4,757

Total current assets		—			59,205			—			564		—			59,769
Restricted Cash		—			982			—			—		—			982
Property and equipment, net		—			87,778			—			13		—			87,791
Intangible assets, net		—			193,421			—			20,141		—			213,562
Deposits and other assets, net		289			45,516			4,321			9		(4,321	)		45,814
Advances in/due from subsidiary		—			4,727			—			4,408		(9,135	)		—
Investment in Subsidiary		(67,737	)		20,994			—			—		46,743			—

Total assets	$	(67,448	)	$	412,623		$	4,321		$	25,135	$	33,287		$	407,918

LIABILITIES AND MEMBERS’ DEFICIT
Current liabilities:
Accounts payable	$	—		$	4,850		$	—		$	114	$	—		$	4,964
Accrued expenses (see Note 4)		920			19,920			6,062			1,231		(6,062	)		22,071
Current maturities of long term debt		—			1,062			—			111		—			1,173
Current portion of other liabilities		—			2,702			—			—		—			2,702
Advance billings		—			1,801			—			—		—			1,801

Total current liabilities		920			30,335			6,062			1,456		(6,062	)		32,711
Long-term debt, net of current portion		24,245			437,370			334,403			1,701		(334,403	)		463,316
Other liabilities, net of current portion		—			8,247			—			984		—			9,231
Advances in/due from subsidiary		4,727			4,408			50,034			—		(59,169	)		—
Redeemable Preferred Stock		202,583			—			—			—		—			202,583
Redeemable Class A units		7,788			—			—			—		—			7,788
Members’ deficit/Shareholder equity		(307,711	)		(67,737	)		(386,178	)		20,994		432,921			(307,711	)

Total liabilities and members’ deficit	$	(67,448	)	$	412,623		$	4,321		$	25,135	$	33,287		$	407,918

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Condensed Consolidating Statements of Operations for the Three Months Ended June 30, 2006

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)			Guarantor Subsidiaries*			Eliminations		Consolidated
Net Revenues
Music and other business services	$	—		$	46,070		$	—		$	1,102		$	—	$	47,172
Equipment and related services		—			14,321			—			—			—		14,321

		—			60,391			—			1,102			—		61,493
Cost of Revenues
Music and other business services excluding depreciation and amortization expense		—			10,879			—			372			—		11,251
Equipment and related services		—			14,227			—			—			—		14,227

		—			25,106			—			372			—		25,478

Selling, general & administrative		—			20,331			—			194			—		20,525
Management Fee		—			(220	)		—			220			—		—
Depreciation & amortization expense		—			12,351			—			400			—		12,751

Income (Loss) from Operations		—			2,823			—			(84	)		—		2,739
Other income (expense)
Interest expense		(815	)		(11,762	)		(8,804	)		(10	)		8,804		(12,587	)
Other, net		—			372			—			—			—		372
Equity in earnings of subsidiaries**		(8,577	)		(10	)		—			—			8,587		—

Loss before income taxes		(9,392	)		(8,577	)		(8,804	)		(94	)		17,391		(9,476	)
Income tax benefit		—			—			—			(84	)		—		(84	)

Net loss	$	(9,392	)	$	(8,577	)	$	(8,804	)	$	(10	)	$	17,391	$	(9,392	)

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Amount excludes the net loss of Muzak Finance Corp (which is a wholly-owned subsidiary of Muzak LLC) as the interest expense recorded by Muzak Finance Corp, which relates solely to the Senior Notes and Senior Subordinated Notes, is also reflected in Muzak LLC’s results of operations due to both of these entities being co-issuers of the Senior Notes and the Senior Subordinated Notes. Muzak Finance Corp has no results of operations other than the interest expense on the Senior Notes and Senior Subordinated Notes.

Condensed Consolidating Statements of Operations for the Six Months Ended June 30, 2006

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)			Guarantor Subsidiaries*			Eliminations		Consolidated
Net Revenues
Music and other business services	$	—		$	92,432		$	—		$	2,232		$	—	$	94,664
Equipment and related services		—			26,278			—			—			—		26,278

		—			118,710			—			2,232			—		120,942
Cost of Revenues
Music and other business services excluding depreciation and amortization expense		—			21,564			—			756			—		22,320
Equipment and related services		—			27,659			—			—			—		27,659

		—			49,223			—			756			—		49,979

Selling, general & administrative		—			40,817			—			394			—		41,211
Management Fee		—			(446	)		—			446			—		—
Depreciation & amortization expense		—			25,093			—			800			—		25,893

Income (Loss) from Operations		—			4,023			—			(164	)		—		3,859
Other income (expense)
Interest expense		(1,630	)		(23,359	)		(17,607	)		(38	)		17,607		(25,027	)
Other, net		—			515			—			(1	)		—		514
Equity in earnings of subsidiaries**		(18,860	)		(39	)		—			—			18,899		—

Loss before income taxes		(20,490	)		(18,860	)		(17,607	)		(203	)		36,506		(20,654	)
Income tax benefit		—			—			—			(164	)		—		(164	)

Net loss	$	(20,490	)	$	(18,860	)	$	(17,607	)	$	(39	)	$	36,506	$	(20,490	)

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Condensed Consolidating Statements of Cash Flows for the Six Months Ended June 30, 2006

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)		Guarantor Subsidiaries*			Eliminations		Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities	$	50		$	15,268		$	—	$	2,035		$	—	$	17,353

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets		—			46			—		—			—		46
Capital expenditures (for property, plant & equipment and intangibles)		—			(14,164	)		—		—			—		(14,164	)

Net cash used in investing activities		—			(14,118	)		—		—			—		(14,118	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash used to collateralize letters of credit		—			(23	)		—		—			—		(23	)
Repayment of term loan		—			(525	)		—		—			—		(525	)
Repayment of capital lease obligations and other debt		—			(987	)		—		(53	)		—		(1,040	)
Advances to/from subsidiaries		(50	)		2,032			—		(1,982	)		—		—

Net cash used in/(provided by) financing activities		(50	)		497			—		(2,035	)		—		(1,588	)

NET INCREASE IN CASH		—			1,647			—		—			—		1,647
CASH, BEGINNING OF PERIOD		—			16,014			—		—			—		16,014

CASH, END OF PERIOD	$	—		$	17,661		$	—	$	—		$	—	$	17,661

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Condensed Consolidating Balance sheets as of December 31, 2005

(In thousands)


	Muzak Holdings LLC (Parent)			Muzak LLC (Co- issuer)			Muzak Finance Corp (Co- issuer)			Combined Guarantor Subsidiaries*		Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	—		$	16,014		$	—		$	—	$	—		$	16,014
Restricted cash		—			721			—			—		—			721
Accounts receivable, net		—			23,809			—			564		—			24,373
Inventories		—			16,706			—			—		—			16,706
Prepaid expenses and other assets		—			4,515			—			—		—			4,515

Total current assets		—			61,765			—			564		—			62,329
Restricted cash		—			982			—					—			982
Property and equipment, net		—			93,045			—			61		—			93,106
Intangible assets, net		—			199,480			—			20,893		—			220,373
Deferred charges and other assets, net		343			50,928			5,156			7		(5,156	)		51,278
Advances in/due from subsidiaries		—			3,152			—			3,853		(7,005	)		—
Investment in subsidiary		(48,877	)		21,033			—			—		27,844			—

Total assets	$	(48,534	)	$	430,385		$	5,156		$	25,378	$	15,683		$	428,068

LIABILITIES AND MEMBERS’ DEFICIENCY
Current liabilities:
Accounts payable	$	—		$	5,580		$	—		$	143	$	—		$	5,723
Accrued expenses (see Note 4)		919			19,333			6,062			1,129		(6,062	)		21,381
Current maturities of long term debt		—			1,050			—			110		—			1,160
Current portion of other liabilities		—			2,807			—			—		—			2,807
Advance billings		—			1,022			—			—		—			1,022

Total current liabilities		919			29,792			6,062			1,382		(6,062	)		32,093
Long-term debt, net of current portion		24,245			437,730			334,309			1,755		(334,309	)		463,730
Other liabilities, net of current portion		—			7,887			—			1,208		—			9,095
Advances in/due from subsidiaries		3,152			3,853			33,356			—		(40,361	)
Redeemable Preferred units		185,579			—			—			—		—			185,579
Redeemable Class A units		7,788			—			—			—		—			7,788
Members’ deficiency/Shareholder equity		(270,217	)		(48,877	)		(368,571	)		21,033		396,415			(270,217	)

Total liabilities and members’ deficiency	$	(48,534	)	$	430,385		$	5,156		$	25,378	$	15,683		$	428,068

*	Also includes non-guarantor which is considered to be “minor” as defined by Rule 3-10 of Regulation S-X. “minor”

Condensed Consolidating Statements of Operations for the Three Months Ended June 30, 2005

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)			Guarantor Subsidiaries*			Eliminations		Consolidated
Net Revenues
Music and other business services	$	—		$	45,735		$	—		$	1,213		$	—	$	46,948
Equipment and related services		—			13,916			—			—			—		13,916

		—			59,651			—			1,213			—		60,864
Cost of Revenues
Music and other business services excluding depreciation and amortization expense		—			9,993			—			395			—		10,388
Equipment and related services		—			13,450			—			—			—		13,450

		—			23,443			—			395			—		23,838

Selling, general & administrative		—			23,304			—			215			—		23,519
Restructuring charges		—			1,344			—			—			—		1,344
Management Fee		—			(243	)		—			243			—		—
Depreciation & amortization expense		—			13,319			—			390			—		13,709

Loss from operations		—			(1,516	)		—			(30	)		—		(1,546	)
Other income (expense)
Interest expense		(815	)		(11,274	)		(8,800	)		(47	)		8,800		(12,136	)
Other, net		—			124			—			(2	)		—		122
Extraordinary Loss		—			(2,735	)		—			—			—		(2,735	)
Equity in earnings of subsidiaries**		(15,464	)		(63	)		—			—			15,527		—

Loss before income taxes		(16,279	)		(15,464	)		(8,800	)		(79	)		24,327		(16,295	)
Income tax benefit		—			—			—			(16	)		—		(16	)

Net loss	$	(16,279	)	$	(15,464	)	$	(8,800	)	$	(63	)	$	24,327	$	(16,279	)

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Condensed Consolidating Statements of Operations for the Six Months Ended June 30, 2005

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)			Guarantor Subsidiaries*			Eliminations		Consolidated
Net Revenues
Music and other business services	$	—		$	91,316		$	—		$	2,463		$	—	$	93,779
Equipment and related services		—			28,009			—			—			—		28,009

		—			119,325			—			2,463			—		121,788
Cost of Revenues
Music and other business services excluding depreciation and amortization expense		—			19,664			—			803			—		20,467
Equipment and related services		—			27,026			—			—			—		27,026

		—			46,690			—			803			—		47,493

Selling, general & administrative		—			46,104			—			436			—		46,540
Restructuring charges		—			1,344			—			—			—		1,344
Management Fee		—			(493	)		—			493			—		—
Depreciation & amortization expense		—			27,156			—			884			—		28,040

Loss from Operations		—			(1,476	)		—			(153	)		—		(1,629	)
Other income (expense)
Interest expense		(1,630	)		(21,812	)		(17,598	)		(94	)		17,598		(23,536	)
Other, net		—			113			—			(3	)		—		110
Extraordinary Loss		—			(2,735	)		—			—			—		(2,735	)
Equity in earnings of subsidiaries**		(26,092	)		(182	)		—			—			26,274		—

Loss before income taxes		(27,722	)		(26,092	)		(17,598	)		(250	)		43,872		(27,790	)
Income tax benefit		—			—			—			(68	)		—		(68	)

Net loss	$	(27,722	)	$	(26,092	)	$	(17,598	)	$	(182	)	$	43,872	$	(27,722	)

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

Condensed Consolidating Statements of Cash Flows for the Six Months Ended June 30, 2005

(unaudited) (In thousands)


	Muzak Holdings LLC (“Parent”)			Muzak LLC (Co-issuer)			Muzak Finance Corp (Co-issuer)		Guarantor Subsidiaries*			Eliminations		Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities	$	57		$	11,137		$	—	$	175		$	—	$	11,369

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets		—			44			—		—			—		44
Capital expenditures (for property, plant & equipment and intangibles)		—			(19,579	)		—		—			—		(19,579	)

Net cash used in investing activities		—			(19,535	)		—		—			—		(19,535	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in book overdrafts		—			(375	)		—		—			—		(375	)
Repayments under revolving credit loan		—			(42,500	)		—		—			—		(42,500	)
Borrowings under revolving credit loan		—			8,500			—		—			—		8,500
Repayment of Term Loan B		—			(35,000	)		—		—			—		(35,000	)
Collateralize letter of credit		—			(1,764	)		—		—			—		(1,764	)
Proceeds from Term Loan		—			105,000			—		—			—		105,000
Repayments of capital lease obligations and other debt		—			(1,369	)		—		(50	)		—		(1,419	)
Payment of financing fees		—			(2,591	)		—		—			—		(2,591	)
Advances to/from subsidiaries		(57	)		182			—		(125	)		—		—

Net cash provided/(used) in financing activities		(57	)		30,083			—		(175	)		—		29,851

NET INCREASE IN CASH		—			21,685			—		—			—		21,685
CASH, BEGINNING OF PERIOD		—			421			—		—			—		421

CASH, END OF PERIOD	$	—		$	22,106		$	—	$	—		$	—	$	22,106

*	Also includes non-guarantor which is “minor” as defined by Rule 3-10 of Regulation S-X.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains statements which, to the extent they are not historical facts (such as when we describe what we “believe,” “expect,” or “anticipate” will occur), constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Safe Harbor Acts”). All forward-looking statements involve risks and uncertainties. The forward-looking statements in this Form 10-Q are intended to be subject to the safe harbor protection provided by the Safe Harbor Acts. Forward-looking statements are based on management’s beliefs, assumptions, and expectations of the Company’s future economic performance taking into account information currently available to management.

Recent Developments

On July 26, 2006, Thomas J. Gantert was named as Muzak LLC’s Chief Operating Officer. Mr. Gantert, 46 years of age, has been the Company’s Senior Vice President of Operations since October 2004 and served as the Company’s Vice President of Field Operations from May 2004 to October 2004. From October 2002 to May 2004, he served as the regional general manager of the Company’s Denver, Dallas, Houston, Kansas City and Omaha office. From March 1999 to October 2002, Mr. Gantert served as the Regional Vice President of the Company’s California, Portland, Seattle, Denver, Phoenix, Salt Lake City and Boise office. Mr. Gantert and the Company are parties to an employment agreement, the material terms of which are more fully disclosed in Muzak Holdings LLC’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2005. Mr. Gantert reports to Steve Villa, the Company’s CEO.

On July 17, 2006, Stephen P. Villa was named as the Company’s Chief Executive Officer. Mr. Villa, 42 years of age, had been named interim Chief Executive Officer in late June, 2006, when he replaced Greg Rayburn who had served as Chief Executive Officer of the Company for approximately one year through an agreement between the Company and FTI Palladium Partners, a division of FTI Consulting, Inc. Mr. Villa has been a Director and the Chief Operating Officer since October 2001, and has been Muzak’s Chief Financial Officer since September 2000. Prior to his appointment as interim Chief Executive Officer in late June 2006, Mr. Villa had served as the Company’s Chief Operating Officer since October 2001. Mr. Villa and the Company are parties to an amended and restated employment agreement dated August 14, 2006 which is attached as an exhibit to this form 10-Q.

In January 2006, our Board of Directors approved the implementation of an enterprise resource planning (“ERP”) system to enhance operating efficiencies and provide more effective management of our business operations. The implementation began in April 2006. Management anticipates placing the application into service during Q2 2007. Based on a detailed review of the implementation project over the last six months, the revised external project costs are now estimated to require cash outlays of $5.0 million and $1.3 million in 2006 and 2007, respectively. Anticipated increases to the initial estimate include additional software and hardware requirements as well as necessary customization to the base enterprise solution. The Company recently entered the “design phase” in which further customization requirements may be identified which will cause our projections to be revised. To date the Company has incurred $1.2 million of external implementation costs. We will continue to evaluate the estimated costs, anticipated benefits, and project timeline during this design phase.

As a result of the new ERP operating system, the existing operating system will have a revised useful life that is anticipated to end in June 2007. The existing operating system had a net book value of $0.6 million as of December 31, 2005. The revision of the useful life will result in an anticipated increase/ (decrease) of depreciation expense of $0.2 million, $0 million, ($0.1 million) for 2006, 2007, and 2008, respectively.

Results of Operations

Set forth below are discussions of the results of operations for Muzak Holdings LLC for the quarter and six months ended June 30, 2006 compared to the quarter and six months ended June 30, 2005. The following discussions should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Net Revenues. Revenues were $61.5 million and $120.9 million for the quarter and six months ended June 30, 2006, respectively, and were $60.9 million and $121.8 million for the quarter and six months ended June 30, 2005, respectively. Music and other business services revenue increased $0.2 million, or 0.5% in 2006 as compared to the quarter ended June 30, 2005. This increase is due to an increase in pricing, including annual rate increases, and additional services sold to existing clients, offset in part by a decline in the number of client locations. During the twelve months ended June 30, 2006, our cancellations exceeded our client gross additions by 4,200 clients. The overall reduction was driven by a net reduction of 4,400 Audio Architecture locations, offset by net increases of 200 other locations, while Voice clients remained flat. Other locations include such products as, Commercial TV and Drive Thru maintenance.

Equipment and related services revenue increased 2.9% or $0.4 million in 2006 as compared to the quarter ended June 30, 2005 and decreased 6.2% or $1.7 million for the six months in 2006 as compared to the six months ended June 30, 2005. The increase is primarily due to higher equipment sales during the quarter, but the decrease on the six month period is consistent with the revised business plan implemented on June 24, 2005, which entailed streamlining the size of the sales force in order to achieve more moderate growth.

Cost of Revenues. Cost of revenues was $25.5 million and $23.8 million for the quarters ended June 30, 2006 and 2005, respectively, an increase of 6.9%. Cost of revenues increased 5.2% or $2.5 million for the six months ended June 30, 2006 compared to the 2005 period. Total cost of revenues as a percentage of revenues was 41.4% and 39.2% for the quarters ended June 30, 2006 and 2005, respectively, and was 41.3% and 39.0% for the six months ended June 30, 2006 and 2005, respectively. Costs of music and other business services revenue as a percentage of music and other business services revenue was 23.9% and 22.1% for the quarters ended June 30, 2006 and 2005, respectively, and 23.6% and 21.8% for the six months ended June 30, 2006 and 2005, respectively. The increase in cost of music revenue is primarily due to an increase in amounts owed to licensors as a result of more clients receiving our service via on-premise devices and programming costs associated with the increase in our commercial television product offering.

Costs of equipment and related services revenue as a percentage of equipment and related services revenue was 99.3% and 96.7% for the quarters ended June 30, 2006 and 2005, respectively, and was 105.3% and 96.5% for the six months ended June 30, 2006 and 2005, respectively. In addition to equipment costs, these costs include salary, payroll taxes, and employee benefit related costs associated with our field install and service technicians as well as the management and centralized staff that supervises and schedule such technicians. Additionally, these costs also include the warehouse and purchasing functions and vehicle related expenses. The most recent quarter represents the second period of the reduced installation activity levels contemplated in our revised business plan. In order to replicate our Q2 2005 margin levels, productivity improvements will be necessary to fully absorb the fixed cost management infrastructure. Our field realignment announced and implemented in January 2006 was designed to generate productivity improvements. While we begun to see certain benefits in the first half of 2006, the full benefit of this realignment are starting to be realized during this quarter and future quarters to come.

Selling, general and administrative expenses. Selling, general, and administrative expenses were $20.5 million and $24.9 million for the quarters ended June 30, 2006 and 2005, respectively, a decrease of $4.3 million, or 17.4%. Selling, general, and administrative expenses decreased $6.7 million or 13.9% for the six months ended June 30, 2006 as compared to the 2005 period. Amortization of deferred subscriber acquisition costs, a non-cash component of selling, general, and administrative expenses was $4.1 million and $4.4 million for the quarters ended June 30, 2006 and 2005, respectively, and $8.2 and $9.0 million for the six months ended June 30, 2006 and 2005, respectively. This $0.8 million decrease is consistent with the lower installation levels experienced in the quarter and six months ended June 30, 2006 as compared to previous years. The remaining $5.9 million decrease in other selling, general, and administrative expenses for the six months ended June 30, 2006 as compared to the 2005 period is reflected in the following: (i) higher expenses incurred during the six months ended June 30, 2005 including a $1.0 million charge relating to the settlement with DMX Music, Inc., $0.6 million in legal expenses for the DMX matter and a $1.7 million provision for note receivable balances, and (ii) lower expenses incurred during the six months ended June 30, 2006 including a $1.0 million decrease in bad debt expense, a $1.0 million decrease in restructuring expenses, and a $1.5 million decrease in salaries and related expenses resulting from the June 2005 revised business plan. These lower expenses during the six months ended June 30, 2006 were offset by a $0.9 million increase in consulting expenses as a result of the FTI consulting agreement.

Depreciation and amortization expenses. Depreciation and amortization was $12.8 million and $13.7 million for the quarters ended June 30, 2006 and 2005, respectively, a decrease of 7.0%. Depreciation and amortization was $25.9 million and 28.0 million for the six months ended June 30, 2006 and 2005, respectively. Depreciation and amortization of $8.8 million and $9.6 million for the quarter ended June 30, 2006 and 2005, respectively, and $17.8 million and $19.7 million for the six months ended June 30, 2006 and 2005, respectively, are excluded from cost of revenue. Depreciation expense decreased $2.1 million in the six months ended June 30, 2006 compared to 2005 due to certain subscriber investments and other fixed assets becoming fully amortized in 2005, along with the lower levels of subscriber investments as a result of lower installations. Amortization expense for the six months ending June 30, 2006 and 2005 remained flat at $6.8 million.

Interest expense. Interest expense increased $0.5 million to $12.6 million for the quarter ended June 30, 2006 and increased $1.5 million for the six months ended June 30, 2006 compared to the same 2005 periods. This increase is due to higher overall indebtedness. In addition, an increase in overall interest rates has resulted in an increase in interest expense as our New Senior Credit facility bears interest at LIBOR plus a margin of 4.75%. Interest income generated on the outstanding cash balance is reflected in other income. Interest income was $0.3 million and $0.1 million for quarters ending June 30, 2006 and 2005, respectively, and was $0.4 million and $0.1 million for the six months ended June 30, 2006, respectively.

Income tax provision. Income tax benefit was $84 thousand and $16 thousand for the quarters ended June 30, 2006 and 2005, respectively. Income tax benefit was $164 thousand and $68 thousand for the six months ended June 30, 2006 and 2005, respectively. Although the Company is a limited liability company and is treated as a partnership for income tax purposes, the Company has several subsidiaries that are taxable corporations. The income tax benefit relates to these corporate subsidiaries.

Net Loss. The combined effect of the foregoing resulted in a net loss of $9.4 million and $20.5 million for the quarter and six months ended June 30, 2006, compared to a net loss of $16.3 million and $27.7 million for the comparable 2005 period.

Liquidity and Capital Resources

The Company evaluates the operating performance of its business using several measures, one of them being EBITDA as defined by our Senior Discount Notes, Senior Subordinated Notes, and Senior Notes indentures (defined as earnings before interest, income taxes (benefits), depreciation, and amortization plus all non-cash items reducing consolidated net income for such period except for any non-cash items that represent accruals of, or reserves for, cash disbursements to be made in any future accounting period, minus all non-cash items increasing consolidated net income for such period) (“EBITDA pursuant to the Notes”). EBITDA pursuant to the Notes is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, net income as a measure of performance, as determined in accordance with generally accepted accounting principles, known as GAAP. However, management believes that EBITDA pursuant to the Notes provides useful information because it is used to determine our ability to incur additional indebtedness. Consolidated Leverage ratios are the measure used to determine our ability to incur additional indebtedness under the indentures.

The following table provides reconciliation from net income to EBITDA pursuant to the Notes.


	Quarter Ended
	June 30, 2006			June 30, 2005
Net loss	$	(9,392	)	$	(16,279	)
Interest expense		12,587			12,136
Income tax benefit		(84	)		(16	)
Depreciation and amortization		12,751			13,709
Non-cash loss on extinguishment from debt		—			2,735
Non-cash impairment charges		393			522

EBITDA pursuant to Notes	$	16,255		$	12,807

Consolidated Leverage Ratio for the Company		6.48 x			8.22 x
Consolidated Leverage Ratio for Muzak		6.88 x			8.69 x

	Six Months Ended
	June 30, 2006			June 30, 2005
Net loss	$	(20,490	)	$	(27,722	)
Interest expense		25,027			23,536
Income tax benefit		(164	)		(68	)
Depreciation and amortization		25,893			28,040
Non-cash loss on extinguishment from debt		—			2,735
Non-cash impairment charges		964			729

EBITDA pursuant to Notes	$	31,230		$	27,250

Non-cash impairment charges reflect the write-off of capitalized installation labor upon client contract terminations.

Our principal sources of funds have historically been cash generated from operations and borrowings under the senior credit facility, which was fully repaid and terminated in April 2005. Cash was primarily used during the first six months of 2006 to make investments in new client locations and to make interest payments on our indebtedness. Cash flows provided by operations were $17.4 million and $11.4 million, cash flows used in investing activities were $14.1 million and $19.5 million, and cash flows provided by (used in) financing activities were ($1.6) million and $29.9 million in the six months ended June 30, 2006 and 2005, respectively.

Working capital (including the change in book overdraft) was a net source of $5.2 million in 2006 as compared to a net source of $2.2 million in 2005. Accounts receivable and inventory balances resulted in a source of $4.5 million and $3.8 million in the six months ended June 30, 2006 and 2005, respectively. However, during the six months ended June 30, 2005, the Company made incremental payments covering the period July 1, 2004 - December 31, 2004 under its new BMI agreement of approximately $1.6 million and also a payment to ASCAP for settlement of all claims for open audit periods prior to January 1, 2005.

The majority of our capital expenditures are comprised of the initial investment for the installation of equipment for new client locations. During the six months ended June 30, 2006, our total initial investment in new client locations was $13.1 million, which was comprised of equipment and installation costs attributable to new client locations of $10.3 million and $4.6 million in subscriber acquisition costs (included in cash provided by operating activities in the consolidated statement of cash flows) relating to these new locations. The subscriber acquisition costs are capitalized and are amortized as a component of selling, general and administrative expenses over the initial contract term. We also receive installation revenue of $1.8 million relating to new locations. This revenue is deferred and amortized as a component of equipment and related services revenue over the initial contract term.

We also invested $3.8 million in system upgrades, furniture and fixtures, and computers to be used at our headquarters. Approximately $1.2 million of this investment relates to a payment made for our new ERP system that was approved in January 2006. Our investment to replenish the equipment exchange pool relating to our drive-thru systems client locations was $1.0 million during the six months ended June 30, 2006.

Over the next twelve months, our future need for liquidity will arise primarily from capital expenditures for investments in new client locations and from interest payments on our indebtedness. The following table summarizes contractual obligations and commitments as of August 11, 2006 (in thousands).


	Payments due by Period
	Remaining 6 months 2006		2007		2008		2009		2010		After 2010		Total
Long-term debt	$	585	$	1,178	$	102,516	$	335,156	$	24,417	$	1,234	$	465,086
Interest		23,772		47,366		39,749		14,474		1,705		360		127,426
Capital lease obligations		947		1,336		421		133		—		—		2,837
Operating leases		4,434		8,676		8,150		7,794		6,841		23,481		59,376
Unconditional purchase obligations		2,193		1,214		2,100		2,100		2,100		2,319		12,026

Total Contractual Cash Obligations	$	31,931	$	59,770	$	152,936	$	359,657	$	35,063	$	27,394	$	666,751

We currently expect that our primary source of funds will be cash flows from operations and current cash balances. Total cash balance, including restricted cash of $1.7 million, was approximately $24.5 million as of August 10, 2006. The Company believes that its cash flow from operations, combined with its cash balances on hand will be sufficient to fund its growth in new client locations and debt service for at least the next twelve months.

Overall, the Company’s business plan anticipates growth in new client locations to be consistent with levels experienced over the last six months, and operational and administrative improvements. Given that the Company no longer has a revolving credit facility, if it requires cash in excess of amounts on hand, it may be required, among other things, to incur additional indebtedness, enter into other financing transactions, defer business opportunities, reduce its expenses, or sell assets. Our substantial indebtedness could prove difficult to refinance or restructure at favorable terms or at all.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For the period ended June 30, 2006, the Company did not experience any material changes in market risk disclosure that affect the quantitative and qualitative disclosures presented in the 10-K for the year ended December 31, 2005.

Item 4. Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) were effective as of June 30, 2006 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There have been no changes during the six months ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our Internal Controls over financial reporting as previous disclosed in our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings.

There have been no material developments in legal proceedings involving the Company since those reported in the Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2005.

ITEM 1A. Risk Factors

Risk factors which could cause actual results to differ materially from those suggested in any forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the Securities and Exchange Commission, and in our annual report on Form 10-K for 2005, including those factors set forth in Part I, Item 1A of such report. There have been no material changes in the risk factors previously disclosed in our 2005 Annual Report on Form 10-K.

ITEM 6. Exhibits.

(a)

Exhibits



10.27		Amended and Restated Executive Employment Agreement dated as of August 11, 2006, among Muzak Holdings LLC, Muzak LLC, and Stephen Villa.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.


	MUZAK HOLDINGS LLC MUZAK HOLDINGS FINANCE CORP.

	By:	/s/ STEPHEN P. VILLA
Date: August 14, 2006		Stephen P. Villa Chief Executive Officer (Principal Executive Officer)

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