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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~EXCHANGE~~For ~~ACT~~the OFquarterly ~~1934~~period ended September 30, 2012

~~For~~¨ ~~the~~TRANSITION ~~quarterly~~REPORT ~~period~~PURSUANT ~~ended~~TO ~~June 30,~~SECTION ~~2012~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

1-35438

(Commission File Number)

MAKEMUSIC, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-1716250

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

7615 Golden Triangle Drive, Suite M

Eden Prairie, Minnesota 55344-3848

(Address of principal executive offices)

(952) 937-9611

(Registrant’s telephone number, including area code)

Not applicable

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

Indicate by check mark whether the registrant (1) has filed all 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of ~~July~~ October 30, 2012 there were 4,898,707 shares of Common Stock outstanding.

MakeMusic, Inc.

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1	Condensed Financial Statements	3	3
	Condensed Balance Sheets June 30, 2012 and December 31, 2011		3
	Condensed Balance Sheets September 30, 2012 and December 31, 2011	3
	Condensed Statements of Operations Three and six-month periods ended June 30, 2012 and 2011		4
	Condensed Statements of Operations Three and nine-month periods ended September 30, 2012 and 2011	4
	Condensed Statements of Cash Flows Six-month periods ended June 30, 2012 and 2011		5
	Condensed Statements of Cash Flows Nine-month periods ended September 30, 2012 and 2011	5
	Notes to Condensed Financial Statements	6	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12	13
Item 4	Controls and Procedures	20	20
	PART II. OTHER INFORMATION
Item 1	Legal Proceedings	21	21
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	21	21
Item 3	Defaults Upon Senior Securities	21	21
Item 4	Mine Safety Disclosures	21	21
Item 5	Other Information	21	21
Item 6	Exhibits	21	21
	Signatures	22	22
	Exhibit Index	23	23

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements.

MakeMusic, Inc.

Condensed Balance Sheets

(In thousands of U.S. dollars, except share data)

	June 30,2012(Unaudited)			December 31,2011
	September 30,2012(Unaudited)			December 31,2011
Assets
Current assets:
Cash and cash equivalents	$	5,~~922~~894		$	9,296
Accounts receivable (net of allowance of $3 and $9 in 2012 and 2011, respectively)		1,312			1,539
Accounts receivable (net of allowance of $5 and $9 in 2012 and 2011, respectively)		1,862			1,539
Inventories		~~261~~488			291
Deferred income taxes, net		2,338			2,338
Prepaid expenses and other current assets		~~512~~359			362
Total current assets		10,~~345~~941			13,826
Property and equipment, net		~~539~~589			441
Capitalized software products, net		3,~~563~~872			3,113
Finite life intangible assets		~~904~~843			1,020
Goodwill		4,483			4,483
Deferred income taxes, net		1,~~030~~457			57
Total assets	$	2022,~~864~~185		$	22,940
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of capital lease obligations	$	3		$	4
Accounts payable		~~527~~824			585
Accrued compensation		1,~~147~~138			676
Other accrued expenses		~~935~~626			508
Post contract support		125			125
Reserve for product returns		~~250~~243			214
Current portion of deferred revenue		24,~~881~~828			4,208
Total current liabilities		57,~~868~~787			6,320
Capital lease obligations, net of current portion		8			—
Deferred revenue, net of current portion		~~115~~114			123
Total liabilities		~~123~~7,909			~~123~~6,443
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized shares – 10,000,000 Issued and outstanding shares – 4,898,707 and 4,934,020 in 2012 and 2011, respectively		49			49
Authorized shares – 10,000,000Issued and outstanding shares – 4,898,707 and 4,934,020 in 2012 and 2011, respectively		49			49
Additional paid-in capital		67,~~083~~107			66,930
Accumulated deficit		(52,~~259~~880	)		(50,482	)
Total shareholders’ equity		14,~~873~~276			16,497
Total liabilities and shareholders’ equity	$	2022,~~864~~185		$	22,940

See Notes to Condensed Financial Statements

MakeMusic, Inc.

Condensed Statements of Operations

(In thousands of U.S. dollars, except share and per share data)

(Unaudited)

3 Months

69 Months

Ended June 30,

Ended September 30,

2012

2011

2012

2011

Notation revenue

2,~~118~~377

1,~~672~~647

46,~~389~~766

45,~~006~~653

SmartMusic revenue

12,~~905~~438

12,~~641~~158

36,~~835~~273

35,~~301~~459

NET REVENUE

4,~~023~~815

3,~~313~~805

813,~~224~~039

711,~~307~~112

COST OF REVENUES

~~558~~853

~~534~~783

12,~~229~~082

1,~~128~~911

GROSS PROFIT

3,~~465~~962

23,~~779~~022

610,~~995~~957

69,~~179~~201

OPERATING EXPENSES:

Development expenses

1,~~829~~971

~~1,085~~971

35,~~485~~457

23,~~300~~271

Selling and marketing expenses

1,~~576~~846

1,~~015~~384

35,~~259~~105

23,~~248~~632

General and administrative expenses

1,~~571~~123

~~989~~907

34,~~054~~177

23,~~097~~004

Patent litigation expense

—

225

Total operating expenses

4,~~976~~940

3,~~089~~262

914,~~798~~739

610,~~870~~132

LOSS FROM OPERATIONS

(~~1,511~~978

)

(~~310~~240

)

(23,~~803~~782

)

(~~691~~931

)

Other, net

2811

2538

5264

5291

Net loss before income tax

(~~1,483~~967

)

(~~285~~202

)

(23,~~751~~718

)

(~~639~~840

)

Income tax expense (benefit)

(~~546~~347

)

203

(~~973~~1,320

)

(~~153~~150

)

Net loss

~~938~~(620

)

~~305~~(205

)

1(2,~~778~~398

)

~~486~~(690

)

Loss per common share:

Basic and diluted

(0.1913

)

(0.0604

)

(0.3649

)

(0.1014

)

Weighted average common shares outstanding:

Basic and diluted

4,~~930~~898,~~365~~707

4,~~859~~908,~~563~~829

4,~~932~~921,~~482~~142

4,~~872~~884,~~518~~755

See Notes to Condensed Financial Statements

MakeMusic, Inc.

Condensed Statements of Cash Flows

(In thousands of U.S. dollars)

(Unaudited)

	6 Months
	9 Months
	Ended June 30,
	Ended September 30,
	2012			2011
Cash flows from operating activities
Net loss	($	1(2,~~778~~398	)	($	~~486~~(690	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		~~689~~1,073			~~548~~826
Loss on disposal of asset		5			—
Deferred income taxes, net		(~~973~~1,400	)		(~~153~~208	)
Share based compensation		~~148~~171			~~247~~293
Net changes in operating assets and liabilities:
Accounts receivable		~~227~~(323	)		41(505	)
Inventories		30(197	)		41(134	)
Prepaid expenses and other current assets		~~(150~~3	)		(~~171~~76	)
Accounts payable		~~(58~~239	)		(~~196~~91	)
Accrued expenses and product returns		~~940~~615			(~~652~~659	)
Deferred revenue		~~(1,335~~611	)		~~(876~~531	)
Net cash used in operating activities		(21,~~255~~601	)		(~~1,657~~713	)
Cash flows from investing activities
Purchases of property and equipment		(~~208~~325	)		(96239	)
Capitalized development and other intangibles		(~~907~~1,472	)		(~~299~~453	)
Net cash used in investing activities		(1,~~115~~797	)		(~~395~~692	)
Cash flows from financing activities
Proceeds from stock options exercised		—			2887
Payments on redemption of stock options		—			(18	)
Repurchase of common stock		—			(291	)
Payments on capital leases		(4	)		(2224	)
Net cash used in financing activities		(4	)		(~~303~~246	)
Net decrease in cash and cash equivalents		(3,~~374~~402	)		(21,~~355~~651	)
Cash and cash equivalents, beginning of period		9,296			11,532
Cash and cash equivalents, end of period	$	5,~~922~~894		$	9,~~177~~881
Supplemental disclosure of cash flow information
Interest paid	$	—2		$	1
Income taxes paid		7097			1124
Other non-cash investment and financing activities
Non-cash investment and financing activities
Equipment acquired under capital lease		11			—

See Notes to Condensed Financial Statements

MakeMusic, Inc.

Notes to Condensed Financial Statements

(Unaudited)

Note 1 Accounting Policies. The information furnished in this report is unaudited but reflects all adjustments that are necessary, in the opinion of management, for a fair statement of the results for the interim period. The operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year. In preparing the accompanying financial statements, management has evaluated subsequent events and has determined that ~~except for the item disclosed in Note 8 below,~~ no events have occurred that require disclosure. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these statements should be read in conjunction with the Company’s most recent Form 10-K.

Accounting Pronouncements. In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance for goodwill in order to simplify how companies test goodwill for impairment. The amendment permits an entity to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our financial statements and we do not expect it to have a material impact on our annual goodwill impairment assessment in the fourth quarter.

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our financial statements.

Note 2 Net Loss Per Share. Net loss per share was calculated by dividing the net loss by the weighted average number of shares outstanding during the period. The effect of options and warrants are excluded for the three and ~~six~~nine-month periods ended ~~June~~September 30, 2012 and 2011 because the effect is anti-dilutive.

Note 3

Income Taxes. We account for income taxes using the asset and liability method. We estimate our income taxes in each of the jurisdictions in which we operate and account for income taxes payable as part of the preparation of our financial statements. This process involves estimating our actual current tax expense as well as assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for financial and tax reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet to the extent deemed realizable. We assess the likelihood that, and the extent to which, our deferred tax assets will be realized and establish a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. If we increase or decrease a valuation allowance in a given period, then we must increase or decrease the tax provision in our statements of income.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

As of ~~June~~September 30, 2012, there are no open positions for which the unrecognized tax benefits will significantly increase or decrease during the next twelve months. Additionally, tax years still open for examination by Federal and major state agencies as of ~~June~~September 30, 2012 are 2007-2011.

As of December 31, 2011, we had U.S. net operating loss carry-forwards of approximately $1312,~~915~~630,000, federal alternative minimum tax credit carry-forwards of $~~111~~140,000, Minnesota net operating loss carry-forwards of $4,203,000, federal research and development tax credits of $1,~~318~~231,000 and Minnesota research and development tax credits of $471,000. The losses and tax credits are carried forward for federal and state corporate income taxes and may be used to reduce future taxes.

Significant management judgment is required in determining any valuation allowance recorded against our net deferred tax assets. Each reporting period, management reviews various factors including, but ~~not~~ not limited to, prior taxable income, projected future taxable income, changes in technology and tax planning strategies to determine if an adjustment is needed to the valuation allowance. Due to uncertainties related to our ability to utilize all of of our deferred tax assets, as of ~~June~~September 30, 2012 and December 31, 2011, we continue to maintain a valuation allowance of $5,690,000. Should the remaining $5,690,000 valuation allowance be reversed in the future, a liability of up to $3,~~166~~149,000 would have to be established for uncertain tax positions.

We recorded a benefit for income taxes of $~~546~~347,000 for the three months ended ~~June~~September 30, 2012 and a benefit for income taxes of $~~973~~1,320,000 for the ~~six~~nine months ended ~~June~~September 30, 2012. This benefit is based on the current period and year-to-date losses, respectively, and the estimated annual effective tax rate of 35.46%. Comparatively for the same periods last year, we recorded tax expense of $203,000 for the three months ended ~~June~~September 30, 2011, and a benefit for income taxes of $~~153~~150,000 for the ~~six~~nine months ended ~~June~~ September 30, 2011.

The future utilization of NOL carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code. This section generally relates to a 50 percent change in ownership of a company over a three-year period. The acquisition of additional shares by a greater than 5% shareholder in January 2007 resulted in an “ownership change” under Section 382. Therefore, the limitation caused by the January 2007 ownership change continues to apply against the Company’s NOLs pre-dating the ownership change date. An updated Section 382 analysis was recently completed in February 2012. The results of that analysis indicate that no further “ownership changes” under Section 382 have occurred. ~~Therefore, the limitation caused by the January 2007 ownership change continues to apply against the Company’s NOLs pre-dating the ownership change date.~~

At December 31, 2011, the Company had a cumulative 382 limitation of approximately $5,075,000. Unless another 50 percent ownership change is triggered in the future, for each of the years ending after December 31, 2011, the Company’s annual 382 limitation is $978,000 until the carryover period expires.

On February 21, 2012, our Board of Directors adopted a Tax Asset Protection Plan (the “Plan”) intended to protect our tax assets. The Plan is designed to reduce the likelihood that we experience an additional ownership change by discouraging any person or group from becoming a 5-percent shareholder and dissuading existing 5-percent or greater shareholders from acquiring additional shares of MakeMusic’s common stock. The Plan will expire and terminate on the earliest of February 20, 2015 or, if applicable, the date on which our Board of Directors determines that the Plan is no longer necessary for the preservation of our tax benefits. For more information regarding the Plan, please refer to our Current Report on Form 8-K filed on February 22, 2012, together with the exhibits attached thereto.

Note 4

Stock-Based Compensation. The MakeMusic, Inc. 2003 Equity Incentive Plan (the “2003 Plan”), as amended, reserves a total of 1,500,000 shares of our common stock for issuance under stock options, restricted stock, performance awards and stock appreciation rights. The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which recommends to the Board persons eligible to receive awards and the number of shares and/or options subject to each award, the terms, conditions, performance measures, and other provisions of the award. Readers should refer to Note 5 of our financial statements on Form 10-K for the fiscal year ended December 31, 2011 for additional information related to our stock-based compensation plans.

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period, which is generally the vesting period. For the three months ended ~~June~~September 30, 2012 and 2011, we recognized $4624,000 and $~~114~~75,000, respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, we recognized $~~148~~171,000 and $~~184~~293,000, respectively, of expense related to stock-based compensation.

Stock Options

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table.

	June 30,			June 30,
	September 30,			September 30,
	2012			2011
Black-Scholes Model:
Risk-free interest rate		0.57	%		1.2115	%
Expected life, in years		3.4			4.23
Expected volatility		57.08	%		7069.5185	%
Dividend yield		0.00	%		0.00	%

Expected volatility is based on the historical volatility of our share price in the period prior to option grant equivalent to the expected life of the options. The expected term is based on management’s estimate of when the option will be exercised which is generally consistent with the vesting period. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Equity Award Activity

The following table represents stock option and restricted stock activity under the 2003 Plan for the ~~six months~~nine months ended ~~June~~September 30, 2012:

	SharesReservedfor FutureGrant			2003 PlanRestricted Shares			Plan OptionShares			WeightedAverageOptionExercisePrice		WeightedAverageRemainingContractLife
At December 31, 2011		230,957			145,430			522,971		$	5.36		4.7 Years
Authorized		—			—			—			—
Granted		(141,953	)		3,099			138,854		$	4.42
Expired		22,664			—			(22,664	)	$	8.50
Cancelled		~~185~~194,~~362~~952			(38,412	)		(~~146~~156,~~950~~540	)	$	4.98
Exercised		—			—			—		$	—0.00
At June 30, 2012		297,030			110,117			492,211		$	5.07		4.1 Years
At September 30, 2012		306,620			110,117			482,621		$	5.07		3.8 Years
Outstanding Exercisable at June 30, 2012								321,234		$	5.40		3.0 Years
Outstanding Exercisable at September 30, 2012								327,503		$	5.35		2.9 Years

At ~~June~~September 30, 2012, the aggregate intrinsic value of options outstanding was $24,000, and the aggregate intrinsic value of options exercisable was $2324,000.

At ~~June~~September 30, 2012, there was $~~301~~236,000 of unrecognized compensation cost related to nonvested share-based option payments which is expected to be recognized over a weighted-average period of 21.09 years. At ~~June~~September 30, 2012, there was $2014,000 of unrecognized compensation cost related to the issuance of restricted stock which is expected to be recognized over a weighted-average period of 1.53 years.

Note 5

Segment Reporting.

MakeMusic reports results of operations by two unique reportable segments, Notation and SmartMusic.

The Notation segment includes the design, development and sales and marketing of music notation software in the Finale family of music notation software products, MusicXML and Dolet software and Garritan sound libraries.

The SmartMusic segment includes the design, development, amortization of capitalized song title development and sales and marketing of the subscription-based SmartMusic product line and related accessories.

The costs included in each of the reportable segments’ operating results include the direct costs of the products sold to customers and operating expenses managed by each of the reportable segments.

The remaining activities are included in “Other.” These are unallocated expenses which include costs related to selling and corporate functions, including general and administrative, marketing and business systems functions that are not directly attributable to a particular segment. Unallocated expenses are reported in the reconciliation of the segment totals to to consolidated totals as “Other” items. As a result, reportable segment results of operations are not representative of the operating profit of the products in these reportable segments.

MakeMusic does not allocate its balance sheet assets by segment because such information is not available nor is it used by the chief operating decision maker. Therefore, information relating to segment assets is not presented.

The following table presents results of operations by reportable segment (in thousands):

	For the 3 Months Ended June 30, 2012												For the 6 Months Ended June 30, 2012
	For the 3 Months Ended September 30, 2012												For the 9 Months Ended September 30, 2012
	Notation			SmartMusic			Other			Total			Notation			SmartMusic			Other			Total
NET REVENUE	$	2,~~118~~377		$	12,~~905~~438		$	0		$	4,~~023~~815		$	46,~~389~~766		$	36,~~835~~273		$	0		$	813,~~224~~039
COST OF REVENUES		~~155~~159			~~403~~694			0			~~558~~853			~~348~~507			~~881~~1,575			0			12,~~229~~082
GROSS PROFIT		12,~~963~~218			1,~~502~~744			0			3,~~465~~962			46,~~041~~259			24,~~954~~698			0			610,~~995~~957
Percentage of Net Revenue		93	%		7972	%		0	%		8682	%		9293	%		7775	%		0	%		8584	%
OPERATING EXPENSES:
Development expenses		~~724~~725			~~759~~790			~~346~~456			1,~~829~~971			12,~~528~~254			12,~~307~~097			~~650~~1,106			35,~~485~~457
Selling and marketing expenses		~~584~~588			~~726~~822			~~266~~436			1,~~576~~846			1,~~203~~791			12,~~464~~286			~~592~~1,028			35,~~259~~105
General and administrative expenses		195			1127			1,~~541~~091			1,~~571~~123			3439			2653			24,~~994~~085			34,~~054~~177
Patent litigation expense		0			0			0			0			0			0			0			0
Total Operating Expenses		1,~~327~~318			1,~~496~~639			21,~~153~~983			4,~~976~~940			24,~~765~~084			24,~~797~~436			46,~~236~~219			914,~~798~~739
Income/(Loss) from Operations		~~636~~900			6105			(21,~~153~~983	)		(~~1,511~~978	)		12,~~276~~175			~~157~~262			(46,~~236~~219	)		(23,~~803~~782	)
Other Income/(Expense)		0			0			~~573~~358			~~573~~358			0			0			1,~~025~~384			1,~~025~~384
NET INCOME/(LOSS)	$	~~636~~900		$	6105		($	(1,~~580~~625	)	($	~~938~~(620	)	$	12,~~276~~175		$	~~157~~262		($	3(4,~~211~~835	)	($	1(2,~~778~~398	)
	For the 3 Months Ended September 30, 2011												For the 9 Months Ended September 30, 2011
	Notation			SmartMusic			Other			Total			Notation			SmartMusic			Other			Total
NET REVENUE	$	1,647		$	2,158		$	0		$	3,805		$	5,653		$	5,459		$	0		$	11,112
COST OF REVENUES		128			655			0			783			392			1,519			0			1,911
GROSS PROFIT		1,519			1,503			0			3,022			5,261			3,940			0			9,201
Percentage of Net Revenue		92	%		70	%		0	%		79	%		93	%		72	%		0	%		83	%
OPERATING EXPENSES:
Development expenses		442			290			239			971			1,419			1,053			799			3,271
Selling and marketing expenses		411			666			307			1,384			1,216			1,655			761			3,632
General and administrative expenses		17			25			865			907			59			61			2,884			3,004
Patent litigation expense		0			0			0			0			0			0			225			225
Total Operating Expenses		870			981			1,411			3,262			2,694			2,769			4,669			10,132
Income/(Loss) from Operations		649			522			(1,411	)		(240	)		2,567			1,171			(4,669	)		(931	)
Other Income/(Expense)		0			0			(35	)		(35	)		0			0			(241	)		(241	)
NET INCOME/(LOSS)	$	649		$	522		$	(1,376	)	$	(205	)	$	2,567		$	1,171		$	(4,428	)	$	(690	)

	For the 3 Months Ended June 30, 2011												For the 6 Months Ended June 30, 2011
	Notation			SmartMusic			Other			Total			Notation			SmartMusic			Other			Total
NET REVENUE	$	1,672		$	1,641		$	0		$	3,313		$	4,006		$	3,301		$	0		$	7,307
COST OF REVENUES		119			415			0			534			267			861			0			1,128
GROSS PROFIT		1,553			1,226			0			2,779			3,739			2,440			0			6,179
Percentage of Net Revenue		93	%		75	%		0	%		84	%		93	%		74	%		0	%		85	%
OPERATING EXPENSES:
Development expenses		460			337			288			1,085			977			763			560			2,300
Selling and marketing expenses		365			429			221			1,015			809			985			454			2,248
General and administrative expenses		24			15			950			989			43			34			2,020			2,097
Patent litigation expense		0			0			0			0			0			0			225			225
Total Operating Expenses		849			781			1,459			3,089			1,829			1,782			3,259			6,870
Income/(Loss) from Operations		704			445			(1,459	)		(310	)		1,910			658			(3,259	)		(691	)
Other Income/(Expense)		0			0			5			5			0			0			205			205
NET INCOME/(LOSS)	$	704		$	445		($	1,454	)	($	305	)	$	1,910		$	658		($	3,054	)	($	486	)

Note 6

Goodwill.

Goodwill represents the cost in excess of fair value of the tangible and identified intangible assets of businesses acquired. In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is not amortized but rather is reviewed for impairment annually in the fourth quarter of MakeMusic’s fiscal year, or more often if indicators of impairment exist.

Note 7

Business Acquisitions.

On December 30, 2011, we acquired all of the outstanding stock of Garritan Corporation, a privately held software musical instrument company (“Garritan”). In addition, during November 2011 we acquired select assets from Recordare, LLC, an internet music publishing and software company (“Recordare”). The acquisitions provide new products, technology, brands and resources that are complementary to MakeMusic and provide growth opportunities for the future. The combined purchase price was $2,500,000, including, in connection with the acquisition of Garritan, $125,000 which is subject to an 18-month holdback. The holdback is payable in shares of MakeMusic’s common stock, ~~with~~based on a share price equal to $4.52, which represented the average closing price of MakeMusic common stock for the 20 trading days prior to the closing of the acquisition. Net cash paid upon closing of the transactions was $2,344,000 which includes the purchase price, net of the 18-month holdback, and cash received.

The fair value of assets acquired and liabilities assumed from Garritan and Recordare include the following:


	(In thousands)
Cash	$	31
Accounts Receivable		46
Capitalized software products		990
Finite life intangible assets		1,020
Goodwill		853
Deferred tax liability		(440	)

	$	2,500

The Garritan operations results are included in the consolidated financial statements since the date of acquisition on December 30, 2011. The table below reflects our pro forma combined results of operations for the ~~six~~three and nine months ended ~~June~~September 30, 2011 (in thousands, except per share data) as if the acquisition had taken place on January 1, 2011.

	Pro FormaFor the six months endingJune 30, 2011(In thousands except loss pershare)
	Pro Formafor the threemonths endedSeptember 30, 2011			Pro Formafor the ninemonths endedSeptember 30, 2011
Net Revenue	$	73,~~639~~965		$	11,604
Net Loss	$	(~~481~~196	)	$	(677	)
Basic Loss per Common Share	$	(0.1004	)	$	(0.14	)

Combined results for the Company and Garritan for the ~~six~~three and nine months ended ~~June~~September 30, 2011 were adjusted for the following in order to create the unaudited pro forma results in the table above:

• Elimination of $85,000 and $13,000, respectively, for the three and nine months ended September 30, 2011 in sales of product by Garritan Corporation to MakeMusic, Inc. and the corresponding cost of revenues that would be eliminated in consolidation.

• Adjustment of $208,000 and $22,000, respectively, for the three and nine months ended September 30, 2011 for amortization based on the fair value of assets acquired and estimated useful lives.

• Additional compensation expense of $4415,000 and $47,000, respectively, for the three and nine months ended September 30, 2011.

• A reduction of $42,000 and $6,000, respectively, for the three and nine months ended September 30, 2011 to eliminate depreciation expense for property and equipment not acquired in the transaction.

• A reduction in interest income of $73,000 and $10,000, respectively, for the three and nine months ended September 30, 2011 associated with the reduction of the Company’s cash used in funding the acquisition.

• Tax expense of $375,000 and $8,000, respectively, for the three and nine months ended September 30, 2011 using an effective tax rate of 37% for each of the respective periods.

The pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the first quarter of 2011. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived. Goodwill represents the cost in excess of fair value of the tangible and identified intangible assets of businesses acquired. In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is not amortized but rather is reviewed for impairment annually in the fourth quarter of MakeMusic’s fiscal year, or more often if indicators of impairment exist.

Note 8 Subsequent Events.

On July 15, 2012, MakeMusic received a proposal from LaunchEquity Partners, LLC to acquire the operating assets of MakeMusic, excluding cash, and assume the related liabilities of MakeMusic, free and clear of all liens and encumbrances, for $13.5 million. The proposal contemplates that MakeMusic would adopt a plan of liquidation, which would include a distribution of MakeMusic’s then available cash to existing shareholders. LaunchEquity and certain of its affiliates currently collectively own approximately 28% of MakeMusic’s outstanding common stock.

MakeMusic’s Board of Directors has appointed a Special Committee of independent, disinterested directors to review and consider the proposal, in consultation with financial and legal advisors, and determine the course of action that it believes is in the best interests of MakeMusic and its shareholders. The Board has authorized the Special Committee to consider the full range of available strategic alternatives. The Special Committee is continuing to evaluate strategic alternatives including, but not limited to, the July 15, 2012 proposal from its largest shareholder, LaunchEquity Partners, LLC, other potential strategic transactions to realize the long-term value of MakeMusic, or continuing as an independent, public company with our current growth plans. The Board and Special Committee believe that completing the strategic review process is one way to ensure that MakeMusic stockholders have the best opportunity to realize a full and fair value for their investment. The Special Committee has retained Lazard Middle Market LLC, a subsidiary of Lazard Ltd, to advise the Special Committee during the process. No assurance can be given as to whether this process will result in a proposed transaction, whether any transaction that may be proposed as a result of such process would be acceptable to the Company, the Special Committee and the Board, or whether any such proposed transaction will be announced or consummated.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

MakeMusic’s mission is to develop and market solutions that transform how music is composed, taught, learned and performed. This is accomplished by:

•

Providing integrated technology, content and web services to enhance and expand how music is taught, learned and prepared for performance.

•

Providing music education content developers with a technology-enriched publishing platform that leverages their copyrighted assets while simultaneously increasing the content and value of the SmartMusic library.

•

Offering software solutions for engraving and electronically distributing sheet music.

MakeMusic develops and markets two product lines, notation and SmartMusic, that reinforce each other’s features and competitiveness. The notation product line includes the well-established Finale® family of music notation software products which are utilized by music colleges and composers around the world in the creation of music scores. Finale serves a large and stable customer base, and generates revenue through sales of new version releases. Also included in the notation product line is ~~MusicXMLTM~~MusicXML™, the industry standard open format for notation software and Garritan TM sound sample libraries.

SmartMusic^® is a subscription-based product directed toward the very large and constantly renewing market of music students and music teachers. SmartMusic combines a software application with a library of thousands of music titles and skill-development exercises. It provides students and musicians with a compelling practice or audition experience and music teachers with the efficiency and effectiveness to reach more students and assess student achievement and growth.

In the fourth quarter of 2011, we announced the acquisition of select assets of Recordare, LLC and the acquisition of Garritan Corporation. We believe these acquisitions provide new products, technology, brands and employees that are complementary to MakeMusic and provide growth and technology opportunities for the future.

13Our first nine months of 2012 resulted in a growth in sales for MakeMusic. Overall, net revenue increased 17% during the first nine months of 2012 as compared to the first nine months of 2011. SmartMusic revenue grew 15% due to our year over year subscription growth from 176,352 subscriptions to 201,838 subscriptions. Notation revenue increased 20% primarily due to added sales of Garritan sound libraries, resulting from the acquisition of Garritan Corporation, and sales of Finale 2012 due to the timing of our release cycle. This increase was offset by lower sales of Finale PrintMusic as this product has not been updated since September 2010. Additionally, there were lower sales of Finale NotePad compared to the first nine months of 2011 because we began offering the product as a free download effective with the release of Finale NotePad 2012 on February 15, 2012. Gross margin percentages were generally comparable at 84% in the first nine months of 2012 and 83% in the first nine months of 2011.

Operating expenses increased in the first nine months of 2012 across all operating categories. Development expenses were greater primarily due to personnel costs resulting from the addition of the Chief Technology Officer position, which was open until August of 2011, and added personnel and development costs to support technology initiatives, the addition of the Garritan sound libraries and MusicXML technologies. Selling and marketing expenses increased as a result of the planned expansion of our direct sales force, expanded product management capabilities, re-branding and company-wide strategic sales and marketing initiatives. General and administrative expenses increased primarily due to increased legal and consulting fees relating to the Tax Asset Protection Plan that became effective February 21, 2012, increased accounting fees for reporting requirements relating to the acquisition of Garritan Corporation, expenses relating to the departure of our Chief Executive Officer in June 2012 including legal fees and accrued severance expenses, and expenses relating to the financial and legal advisory services for the

~~Our~~ Special ~~first~~Committee’s ~~six~~evaluation ~~months~~ of ~~2012~~strategic ~~resulted~~alternatives in(the a“Strategic ~~growth~~Alternatives”). inThe ~~sales~~Strategic ~~for~~Alternatives ~~MakeMusic.~~evaluation ~~Overall~~includes, ~~net revenue~~but ~~increased~~is ~~13%~~not ~~during~~limited ~~the~~to, ~~first~~evaluation ~~six months~~ of ~~2012 as compared to~~ the proposal ~~first~~from ~~six months of 2011. SmartMusic revenue grew 16% due to~~ our ~~year~~largest ~~over~~shareholder, ~~year~~Launch ~~subscription~~Equity ~~growth from 173~~Partners,~~295~~ ~~subscriptions to 185~~LLC,~~968~~ ~~subscriptions.~~other ~~Notation~~potential ~~revenue increased~~strategic ~~10%~~transactions ~~primarily~~to ~~due~~realize tothe ~~added~~long-term ~~sales~~value of ~~Garritan sound libraries resulting from~~ the ~~acquisition~~Company, ofor ~~Garritan~~continuing ~~Corporation. This increase was offset by lower sales of Finale PrintMusic~~ as ~~this~~an ~~product~~independent, ~~has~~public ~~not~~company ~~been~~with ~~updated~~the ~~since~~Company’s ~~September~~current ~~2010~~growth plans. ~~Additionally,~~In ~~there were lower sales of Finale NotePad compared to~~ the first ~~half~~nine months of 2011, ~~because~~ we ~~began~~incurred ~~offering~~expenses ~~the product as a free download effective with the release~~ of ~~Finale~~$225,000 ~~NotePad~~relating ~~2012~~to ona ~~February 15,~~patent ~~2012~~infringement settlement. ~~Gross~~There ~~margin percentages~~ were no comparable atexpenses ~~85%~~ in the first ~~six~~nine months of 2012 ~~and 85% in the first six months of 2011~~.

~~Operating~~Our ~~expenses~~net ~~increased~~ loss before taxes in the first ~~six~~nine months of 2012 ~~due~~was to increased selling and marketing expenses as a result of the planned expansion of our direct sales force and company-wide strategic sales and marketing initiatives. General and administrative expenses increased primarily due to increased legal and consulting fees relating to the Tax Asset Protection Plan that became effective February 21$3, ~~2012~~718,000 ~~increased~~compared ~~accounting fees for reporting requirements relating~~ to ~~the~~$840,000 ~~acquisition and dissolution of Garritan Corporation and expenses relating to the departure of our Chief Executive Officer~~ in ~~June 2012, including legal fees and accrued severance expenses~~2011. ~~Development~~The ~~expenses~~tax ~~were~~benefit ~~greater~~ in the first ~~six~~ nine months of 2012 ~~primarily~~was ~~due~~$1,320,000 compared to ~~personnel costs resulting from the Chief Technology Officer position~~$150,000 ~~which was open~~ in the first ~~six~~nine months of 2011,. ~~and~~As ~~added~~a ~~personnel~~result ~~and~~of ~~development~~the ~~costs~~factors tomentioned, ~~support~~we ~~technology~~reported ~~initiatives~~net ~~and~~loss ~~the addition~~ of ~~the~~$2,398,000 ~~Garritan~~in ~~sound libraries and MusicXML technologies. In~~ the first ~~six~~nine months of ~~2011,~~2012 wecompared ~~incurred~~to ~~expenses~~net loss of $~~225~~690,000 ~~relating to a patent infringement settlement. There were no comparable expenses~~ in the first ~~six~~nine months of ~~2012~~2011.

Our net loss before taxes in the first six months of 2012 was $2,751,000 compared to $639,000 in 2011. The tax benefit in the first six months of 2012 was $973,000 compared to $153,000 in the first six months of 2011. As a result of the factors mentioned, we reported net loss of $1,778,000 in the first six months of 2012 compared to net loss of $486,000 in the first six months of 2011.

We believe there is growth potential with SmartMusic software, an interactive music teaching, practicing and learning solution for band, orchestra and vocal programs. SmartMusic is subscription-based software for use in the classroom and in the student’s home. SmartMusic enhances and transforms the hours spent practicing by putting students inside a professional band or orchestra, so that they can hear how the music is supposed to be performed and how their part fits in. This makes practicing much more engaging, causing students to practice longer and more often. SmartMusic also offers a rich variety of effective practice tools that make practice time more efficient and productive. The combination of making practice time more engaging and productive leads to rapid student skill-development, increased student confidence, higher student retention, and stronger music programs.

Teachers use the SmartMusic Gradebook™ capability of the educator’s subscription to issue assignments to students, receive completed assignments from students, assess student achievement, and manage student records. Music teachers are challenged to reach all of their students in the way they passionately desire. The SmartMusic technology allows teachers to be more efficient and effective, allowing them to affect more of their students in ways they never imagined. SmartMusic also addresses the increasing desire and need of administrators to document the assessment of student’s achievement. Assessment standards have become topics of intense interest at the level of state education administrators and MakeMusic is becoming recognized as providing the technology that allows them to accomplish their goals. Students also find that SmartMusic is a more satisfying and helpful way to practice and learn to sing or play a musical instrument. SmartMusic allows practice to be more engaging and rewarding, which results in the acceleration of students’ growth and achievement.

SmartMusic 2012 introduced new vocal and site-reading technology and included site-singing exercises which can be assessed for both pitch and rhythm. Choral directors and general music teachers now have access to the same award-winning interactive technology that has been available to band and orchestra directors.

In July of 2011, we released a mobile application called SmartMusic Inbox^TM. SmartMusic Inbox is a free application for both Android and iOS platforms for mobile use by SmartMusic teachers that enables them to listen and grade assignments with ease and mobility.

14We believe that our technological investments in SmartMusic have created a digital pipeline between our growing subscriber base of more than 200,000 and the music publishers who provide SmartMusic content. This growing platform is a strategic asset for MakeMusic. The following table illustrates our quarterly SmartMusic metrics:


	Sep-11		Dec-11		Mar-12		June-12		Sep-12
Total Subscriptions		176,352		178,609		183,331		185,968		201,838
Subscriptions purchased during quarter		74,550		51,003		24,738		12,738		47,699
Educator Accounts		9,744		10,544		11,326		11,201		12,565

Our educational sales organization focuses on direct school district sales in the United States and Canada, aiming at the 17,000 schools who match our ideal demographic profile. We increased the size of our educational sales force from 7 to 13 in 2011 to strengthen our strategic sales initiatives. During the first nine months of 2012, we hired a sales executive to lead our sales and business development initiatives.

WeThe ~~believe~~following ~~that~~table ~~our~~illustrates ~~technological~~the ~~investments~~total innet new SmartMusic ~~have~~educator ~~created~~subscriptions afor ~~digital pipeline~~each ~~between~~quarter ~~our~~during ~~growing~~the ~~subscriber~~year ~~base~~ended ~~of more than 185~~December 31,~~000~~ 2011 and the ~~music~~quarters ~~publishers~~ended ~~who~~March 31, ~~provide~~2012, June 30, ~~SmartMusic~~2012 ~~content.~~and ~~This~~September 30, ~~growing platform is a strategic asset for MakeMusic. The following table illustrates our quarterly SmartMusic metrics~~2012:

	Jun-11		Sep-11		Dec-11		Mar-12			Jun-12
Quarter End Date	BeginningSubscriptions		NewSubscriptions		RenewedSubscriptions		RenewalRate			SubscriptionsEnded		Quarter EndSubscriptions		QuarterlyNet NewSubscriptions
Total Subscriptions		173,295		176,352		178,609		183,331			185,968
3/31/2011		12,360		741		2,026		77	%		2,618		12,509		149
Subscriptions purchased during quarter		24,487		74,550		51,003		24,738			12,738
6/30/2011		12,509		742		2,232		86	%		2,591		12,892		383
Educator Accounts		9,633		9,744		10,544		11,326			11,201
9/30/2011		12,892		1,420		3,957		80	%		4,972		13,297		405
12/31/2011		13,297		894		2,616		79	%		3,327		13,480		183
3/31/2012		13,480		878		2,067		76	%		2,726		13,699		219
6/30/2012		13,699		675		2,033		76	%		2,662		13,745		46
9/30/2012		13,745		1,614		4,752		86	%		5,515		14,596		851

~~Our~~We ~~educational~~define ~~sales~~renewed ~~organization~~subscriptions ~~focuses~~as onthose ~~direct~~subscriptions that educators purchase within the two-month period after their prior subscription ended. Because of changes to the start of school ~~district~~from ~~sales~~year to year, ~~aiming~~fluctuations atin the 17date that music teachers implement their curriculum,~~000~~ ~~schools~~and promotional programs that encourage early renewals, the ~~who~~majority ~~match~~of ~~our~~subscribers ~~ideal~~renew ~~demographic~~their ~~profile~~subscriptions within approximately a two-month window of the anniversary date of their previous subscription rather than exactly on the anniversary date. As Wea ~~increased~~result, we believe that using the ~~size~~above definition of ~~our~~a ~~educational~~renewal ~~sales~~more ~~force~~accurately reflects the renewal rate for SmartMusic educator subscriptions. In the third quarter of 2012, the educator renewal rate was 86%. This is an improvement from 7a torenewal 13rate of 76% in ~~2011~~each of the first and second quarters of 2012 and is comparable to ~~strengthen~~the ~~our~~renewal ~~strategic~~rate ~~sales~~in ~~initiatives~~the second quarter of 2011. During the ~~first~~second ~~six~~quarter ~~months~~ of ~~2012~~2011, we ~~hired~~implemented a ~~sales~~subscription ~~executive~~promotion tofor ~~lead~~ our ~~sales~~customers ~~and~~that provided for a 15-month subscription for the price of 12 ~~business~~months. ~~development~~We ~~initiatives~~believe that some SmartMusic customers not only renewed early as a result of this promotion but also increased the number of subscriptions purchased during that period. The subscriptions renewed in the second quarter of 2011 under the 15-month subscription promotion renewed during the third quarter of 2012.

~~The~~In ~~following~~2012, ~~table~~we ~~illustrates~~are ~~the~~focused ~~total~~on ~~net~~four ~~new~~strategic initiatives ~~SmartMusic~~that ~~educator~~include ~~subscriptions~~enhancing ~~for each~~our ~~quarter~~technology ~~during~~architecture, ~~the~~extending ~~year~~our ~~ended~~core ~~December 31,~~product ~~2011~~value ~~and~~into ~~the~~new ~~quarters~~product ~~ended~~innovations ~~March 31~~and platforms, ~~2012~~developing new and ~~June 30,~~leveraging ~~2012:~~existing distribution channels and strengthening our marketing strategy focusing on our brand promise. We are making investments in each of these initiatives to provide anticipated growth opportunities in the future.

Quarter End Date	BeginningSubscriptions		NewSubscriptions		RenewedSubscriptions		RenewalRate			SubscriptionsEnded		Quarter EndSubscriptions		QuarterlyNet NewSubscriptions
3/31/2011		12,360		741		2,026		77	%		2,618		12,509		149
6/30/2011		12,509		742		2,232		86	%		2,591		12,892		383
9/30/2011		12,892		1,420		3,957		80	%		4,972		13,297		405
12/31/2011		13,297		894		2,616		79	%		3,327		13,480		183
3/31/2012		13,480		878		2,067		76	%		2,726		13,699		219
6/30/2012		13,699		675		2,033		76	%		2,662		13,745		46

We have achieved positive cash flow from operations for the last seven years, including the most recent year ended December 31, 2011. Our quarterly results will fluctuate as a result of the seasonality of the education market and timing of our Finale release cycle. Due to current economic conditions, concerns over school budgets and our planned strategic investments, we are cautious regarding our future financial projections. We expect increased revenues and, in particular, growth in SmartMusic subscriptions and sound library sales from the acquisition of Garritan Corporation. However, our investments in our operations and technology have and will continue to result in reduction in cash balances during 2012.

We define renewed subscriptions as those subscriptions that educators purchase within the two-month period after their prior subscription ended. Because of changes to the start of school from year to year, fluctuations in the date that music teachers implement their curriculum, and promotional programs that encourage early renewals, the majority of subscribers renew their subscriptions within approximately a two-month window of the anniversary date of their previous subscription rather than exactly on the anniversary date. As a result, we believe that using the above definition of a renewal more accurately reflects the renewal rate for SmartMusic educator subscriptions. In the second quarter of 2012, the educator renewal rate was unchanged from the first quarter of 2012. The educator renewal rate was 76% for each of the quarters ended March 31, 2012 and June 30, 2012. The educator renewal rate in the second quarter of 2012 decreased compared to the second quarter of 2011 rate of 86%. During the second quarter of 2011, we implemented a subscription promotion for our site agreement customers that provided for a 15-month subscription for the price of 12 months. We believe that some SmartMusic site agreement customers not only renewed early as a result of this promotion but also increased the number of subscriptions purchased during that period.

In 2012, we are focused on four strategic initiatives that include enhancing our technology architecture, extending our core product value into new product innovations and platforms, developing new and leveraging existing distribution channels and strengthening our marketing strategy focusing on our brand promise.

We have achieved positive cash flow from operations for the last seven years, including the most recent year ended December 31, 2011. Our quarterly results will fluctuate as a result of the seasonality of the education market and timing of our Finale release cycle. Due to current economic conditions, concerns over school budgets and our planned strategic investments, we are cautious regarding our future financial projections. We expect increased revenues and, in particular, growth in SmartMusic subscriptions and sound library sales from the acquisition of Garritan Corporation. However, we are making investments in our operations and technology which we expect will result in reduction in cash balances during 2012.

In our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011, we identified critical accounting policies and estimates for our business that we are incorporating herein by reference.

1514

Results of Operations

Comparison of the three and ~~six~~nine-month periods ended ~~June~~September 30, 2012 to the three and ~~six~~nine-month periods ended ~~June~~September 30, 2011

Net Revenue ($ in thousands)
	3 Months Ended June 30,									6 Months Ended June 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	2,118	$	1,672	$	446		27	%	$	4,389	$	4,006	$	383		10	%
SmartMusic		1,905		1,641		264		16	%		3,835		3,301		534		16	%
Total	$	4,023	$	3,313	$	710		21	%	$	8,224	$	7,307	$	917		13	%

Net Revenue ($ in thousands)

Net revenue for the three months ended June 30, 2012 increased 21% compared to net revenue for the three months ended June 30, 2011 and increased 13% when comparing the six months ended June 30, 2012 and 2011.


	3 Months Ended September 30,									9 Months Ended September 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	2,377	$	1,647	$	730		44	%	$	6,766	$	5,653	$	1,113		20	%
SmartMusic		2,438		2,158		280		13	%		6,273		5,459		814		15	%

Total	$	4,815	$	3,805	$	1,010		27	%	$	13,039	$	11,112	$	1,927		17	%

~~Notation~~Net revenue ~~increased~~for ~~by $446,000 to $2,118,000 when comparing~~ the three~~-month~~ ~~periods~~months ended ~~June~~September 30, 2012 ~~and~~increased ~~2011~~27% ~~and~~compared ~~by $383,000,~~ to ~~$4,389,000,~~net ~~when~~revenue ~~comparing~~ for the ~~six~~three months ended ~~June~~September 30, ~~2012~~2011 and ~~2011. Increases during the quarter were due to~~ increased ~~direct~~17% Finale sales and $271,000 of added Garritan sound libraries sales due to the acquisition of Garritan Corporation. These increases were partially offset by lower Finale PrintMusic sales as this product has not been updated since September 2010. Additionally, Finale NotePad sales are lower when ~~compared~~comparing to the ~~second~~nine ~~quarter of 2011 because we began offering the product as a free download effective with the release of Finale NotePad 2012 on February 15, 2012. Increases during the six~~ months ended ~~June~~September 30, 2012 ~~were primarily due to $483,000 added sales of Garritan sound libraries resulting from the acquisition of Garritan Corporation. This increase was offset by lower sales of Finale PrintMusic~~ and ~~Finale NotePad compared to the six months ended June 30,~~ 2011.

~~SmartMusic~~Notation revenue ~~for~~increased ~~the~~by ~~three months ended June 30, 2012 was~~ $1730,~~905,~~000, anto ~~increase of~~ $~~264~~2,377,000, orwhen ~~16%,~~comparing ~~over~~ the three-month ~~months~~ periods ended ~~June~~September 30, ~~2011~~2012 and an2011 ~~increase~~and ofby $~~534~~1,113,000, ~~or 16%,~~ to $36,~~835~~766,000, when comparing the ~~six~~nine months ended ~~June~~ September 30, 2012 and 2011. ~~The~~Sales ~~increase~~of Finale in ~~revenue is due to~~ the ~~growth~~third quarter of ~~total~~2012 ~~SmartMusic~~were ~~subscriptions.~~higher ~~SmartMusic~~than ~~subscriptions have~~the ~~increased~~comparable ~~due~~quarter inof ~~part~~2011 toas ~~our~~customers ~~direct~~anticipated ~~sales~~the ~~force~~release ~~which~~of ~~focuses~~the onnew ~~district-level~~product ~~sales.~~version ~~Revenue~~in ~~for~~October ~~these~~2011 ~~subscriptions~~which isslowed ~~recognized~~sales ~~over~~in the ~~life~~third quarter of last ~~the subscription which is typically 12 months~~year. ~~Total~~Other ~~earned~~increases ~~SmartMusic~~during ~~subscription revenue for~~ the ~~three-month period ended June 30,~~ 2012 ~~was~~quarter included $1216,~~787,~~000, anof ~~increase~~added ofGarritan ~~$296,000,~~sound orlibraries ~~20%,~~sales ~~over~~due to the ~~three-month~~acquisition ~~period~~of ~~ended~~Garritan ~~June 30,~~Corporation in December 2011. ~~Total~~These ~~earned~~increases ~~SmartMusic~~were ~~subscription~~partially ~~revenue~~offset ~~for~~by ~~the~~lower ~~six-month~~Finale ~~period~~PrintMusic ~~ended~~sales ~~June 30, 2012~~as ~~was~~this ~~$3,494,000,~~product anhas ~~increase~~not ofbeen ~~$574,000,~~updated orsince ~~20%,~~September ~~over~~2010. ~~the~~Additionally, ~~six-month~~Finale ~~period~~NotePad ~~ended~~sales ~~June 30,~~are ~~2011.This~~lower ~~increase~~when ~~was~~compared ~~due~~ to the ~~increase~~third inquarter ~~the total number~~ of ~~subscriptions~~2011 ~~and~~because ~~average~~we ~~sales~~began ~~price~~offering ~~per~~the ~~subscription.~~product ~~Total~~as ~~unearned~~a ~~SmartMusic subscription~~free ~~revenue~~download ~~(deferred~~effective ~~revenue)~~with ~~was~~the ~~$2,947,000~~release as of ~~June 30,~~Finale NotePad 2012, anon ~~increase of $248~~February 15,~~000,~~ ~~or 9~~2012.~~2%,~~ ~~over~~Increases during the ~~balance~~nine atmonths ~~June~~ended September 30, ~~2011~~2012 ~~and~~were aprimarily ~~decrease~~due ofto ~~$1,338,000,~~increased ordirect ~~31%,~~Finale ~~compared~~sales toand ~~the balance of~~ $4699,~~285,~~000 ~~at December 31,~~added ~~2011~~sales ~~due~~of toGarritan ~~seasonality.~~sound ~~Deferred~~libraries ~~SmartMusic~~resulting ~~revenue~~from ~~represents~~ the ~~future~~acquisition ~~revenue~~of toGarritan Corporation. beThis ~~recorded~~increase onwas ~~current~~offset ~~subscriptions~~by ~~and~~lower ~~fluctuates~~sales ~~based~~of onFinale ~~new~~PrintMusic ~~subscription~~and ~~sales,~~Finale ~~the~~NotePad ~~total~~compared ~~number~~to ~~of subscriptions and~~ the ~~remaining~~nine ~~life~~months ~~of those~~ended ~~subscriptions~~September 30, 2011.

SmartMusic ~~has~~revenue ~~shown~~for ~~sustained~~the three months ended September 30, 2012 was $2,438,000, an increase of $280,000, or 13%, over the three months ended September 30, 2011 and an increase of $814,000, or 15%, to $6,273,000, when comparing the nine months ended September 30, 2012 and 2011. The increase in revenue is primarily due to the growth ~~since~~of ~~its~~total ~~launch~~SmartMusic subscriptions. ~~More~~SmartMusic ~~than~~subscriptions ~~11,200~~have ~~educators~~increased ~~had~~due ~~purchased~~in part to our direct sales force which focuses on district-level sales. During the third quarter of 2012, we also began selling SmartMusic assubscriptions and accessories through a dealer channel. Revenue for subscriptions is recognized over the life of ~~June~~the subscription which is typically 12 months. Total earned SmartMusic subscription revenue for the three-month period ended September 30, 2012 was $1,835,000, an increase of 16$221,000, or 14%, over the 9three-month period ended September 30,~~630~~ ~~educators~~2011. ~~that~~Total earned ~~had~~SmartMusic ~~purchased~~subscription itrevenue asfor the nine-month period ended September 30, 2012 was $5,330,000, an increase of ~~June~~$795,000, or 18%, over the nine-month period ended September 30, 2011.This increase was due to the increase in the total number of subscriptions and average sales price per subscription. Total unearned SmartMusic ~~subscriptions~~subscription revenue (deferred revenue), including deferred subscription sales to our dealer channel, was $4,900,000 as of ~~June~~September 30, 2012, ~~number~~an increase ~~185~~of $898,~~968~~000, ~~representing~~or a22%, ~~net~~over ~~gain~~the balance at September 30, 2011 and an increase of 12$615,~~673~~000, or 714%, ~~over~~ compared to the ~~June~~balance of $4,285,000 at December 3031, 2011. Deferred SmartMusic revenue represents the future revenue to be recorded on current subscriptions and fluctuates based on new subscription ~~count~~sales, ofsubscriptions ~~173~~sold to our music instrument dealer channel,~~295~~ the total number of subscriptions and the remaining life of those subscriptions. We experience seasonal fluctuations in deferred SmartMusic revenue due to the majority of subscriptions purchased during the fall back-to-school season.

~~Many~~ SmartMusic ~~customers,~~has ~~especially~~shown ~~new~~sustained ~~customers,~~growth ~~also~~since ~~purchase accessories~~its ~~(primarily microphones) that are used with the software~~launch. ~~Revenue~~The ~~for~~number ~~the sales~~ of ~~accessories,~~educators ~~included~~who inhad ~~the~~purchased SmartMusic ~~revenue~~as ~~category,~~of ~~for the quarter ended June~~September 30, 2012 was ~~$90~~12,~~000~~565, ~~which~~an ~~was~~increase ~~a decrease~~ of ~~$22,000, or 20~~29%~~, from~~ over the ~~revenue of $112~~9,~~000~~744 ~~for~~educators ~~SmartMusic~~that ~~accessories~~had inpurchased ~~the~~it ~~quarter~~as ~~ended~~of ~~June~~September 30, 2011. ~~Revenue~~Total ~~for~~SmartMusic ~~the~~subscriptions ~~sales~~as of ~~SmartMusic accessories for the six months ended June~~September 30, 2012 ~~was~~number ~~$264~~201,~~000~~838, ~~which~~representing ~~was~~ a ~~decrease~~net gain of $625,~~000~~486, or 214%, ~~from $270,000~~over ~~of SmartMusic accessories revenue in~~ the ~~six months ended June~~ September 30, 2011. ~~This~~subscription ~~decrease~~count ~~is primarily due to a decrease in the number~~ of ~~net new subscriptions added during the three and six months ended June 30~~176, ~~2012 as compared to the number of net new subscriptions added during the same periods of the prior year~~352.

Many SmartMusic customers, especially new customers, also purchase accessories (primarily microphones) that are used with the software. Revenue for the sales of accessories, included in the SmartMusic revenue category, for the quarter ended September 30, 2012 was $475,000, which was an increase of $65,000, or 16%, from the

revenue of $410,000 for SmartMusic accessories in the quarter ended September 30, 2011. Revenue for the sales of SmartMusic accessories for the nine months ended September 30, 2012 was $739,000, which was an increase of $60,000, or 9%, from $679,000 of SmartMusic accessories revenue in the nine months ended September 30, 2011. This increase is primarily due to an increase in the number of net new subscriptions added during the three and nine months ended September 30, 2012 as compared to the number of net new subscriptions added during the same periods of the prior year and sales of accessories to our dealer channel in the third quarter of 2012.

Gross profit ($ in thousands)


	3 Months Ended September 30,									9 Months Ended September 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	2,218	$	1,522	$	696		46	%	$	6,259	$	5,261	$	998		19	%
SmartMusic		1,744		1,500		244		16	%		4,698		3,940		758		19	%

Total	$	3,962	$	3,022	$	940		31	%	$	10,957	$	9,201	$	1,756		19	%

Gross profit in the three months ended September 30, 2012 increased by $940,000, to $3,962,000, compared to the three months ended September 30, 2011. Gross profit for notation increased by $696,000, to $2,218,000, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 primarily due to the increase in notation revenue attributed to increased Finale sales and the acquisition of Garritan Corporation. Gross profit for SmartMusic increased by $244,000, to $1,744,000, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 due to the increase in SmartMusic revenue. Gross profit in the nine months ended September 30, 2012 increased by $1,756,000, to $10,957,000, compared to the nine months ended September 30, 2011. Gross profit for notation increased $998,000, to $6,259,000 for the nine months ended September 30, 2012 compared to the same period in 2011 primarily due to the increase in notation revenue attributed to increased Finale sales and the acquisition of Garritan Corporation. Gross profit for SmartMusic increased $758,000, to $4,698,000 for the nine months ended September 30, 2012 compared to the same period in 2011 due to the increase in SmartMusic revenue.

Cost of revenue includes product costs, royalties paid to publishers, amortization of capitalized software development costs for repertoire and SmartMusic Gradebook and Garritan software development costs, shipping, and credit card fees. Capitalized SmartMusic repertoire is amortized over a five-year period. Repertoire development amortization as a percentage of SmartMusic revenue was 13% for the nine months ended September 30, 2012 and 12% for the nine months ended September 30, 2011. Total gross margins as a percentage of sales were 82% and 79%, respectively, for the three months ended September 30, 2012 and 2011 and 84% and 83%, respectively, for the nine-month periods ended September 30, 2012 and 2011. Gross margins for notation as a percentage of sales were generally comparable at 93% and 92%, respectively, for the three-month periods ended September 30, 2012 and 2011 and were 93% for each of the nine months ended September 30, 2012 and 2011. Gross margins for SmartMusic as a percentage of sales were 72% and 70%, respectively, for the three months ended September 30, 2012 and 2011 and were 75% and 72%, respectively, for the nine months ended September 30, 2012 and 2011. We expect future gross margins as a percentage of sales to remain generally comparable with historical levels.

Development expense ($ in thousands)


	3 Months Ended September 30,									9 Months Ended September 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	725	$	442	$	283		64	%	$	2,254	$	1,419	$	835		59	%
SmartMusic		790		290		500		172	%		2,097		1,053		1,044		99	%
Other		456		239		217		91	%		1,106		799		307		38	%

Total	$	1,971	$	971	$	1,000		103	%	$	5,457	$	3,271	$	2,186		67	%

Development expenses increased 103% to $1,971,000, from $971,000, when comparing the three months ended September 30, 2012 and 2011. Development expenses increased 67% to $5,457,000, from $3,271,000, when comparing the nine months ended September 30, 2012 and 2011. Development expenses consist primarily of internal payroll, payments to independent contractors and related expenses for the development and maintenance of our Finale notation, Garritan sound libraries, MusicXML, SmartMusic and SmartMusic Gradebook products, as well as non-capitalized SmartMusic repertoire development, business systems and quality assurance. Notation development expenses increased due to personnel costs relating to the Chief Technology Officer position, which was open until August of 2011, mobile application development and added personnel and contractor costs to support our technology

Gross profit ($ in thousands)
	3 Months Ended June 30,									6 Months Ended June 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	1,963	$	1,553	$	410		26	%	$	4,041	$	3,739	$	302		8	%
SmartMusic		1,502		1,226		276		23	%		2,954		2,440		514		21	%
Total	$	3,465	$	2,779	$	686		25	%	$	6,995	$	6,179	$	816		13	%

architecture modernization and the Garritan sound libraries and MusicXML technologies. SmartMusic development expenses increased primarily due to personnel costs relating to the Chief Technology Officer position and contract labor to support our strategic developments. During the quarter ended September 30, 2012, 129 new SmartMusic large ensemble band, jazz ensemble, and orchestra titles with pre-authored assignments were released, as compared to no new large ensemble titles released in the quarter ended September 30, 2011. A total of 3,280 large ensemble titles are available in SmartMusic as of September 30, 2012.

~~Gross~~Selling ~~profit~~and inmarketing ~~the~~expense ~~three months ended June 30, 2012 increased by~~ ($~~686,000,~~ to $3,465,000, compared to the three months ended June 30, 2011. Gross profit for notation increased by $410,000, to $1,963,000, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 primarily due to the increase in ~~notation~~ ~~revenue~~thousands) attributed to the acquisition of Garritan Corporation. Gross profit for SmartMusic increased by $276,000, to $1,502,000, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due to the increase in SmartMusic revenue. Gross profit in the six months ended June 30, 2012 increased by $816,000, to $6,995,000, compared to the six months ended June 30, 2011. Gross profit for notation increased $302,000, to $4,041,000 for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to the increase in notation revenue attributed to the acquisition of Garritan Corporation. Gross profit for SmartMusic increased $514,000, to $2,954,000 for the six months ended June 30, 2012 compared to the same period in 2011 due to the increase in SmartMusic revenue.

Cost of revenue includes product costs, royalties paid to publishers, amortization of capitalized software development costs for repertoire and SmartMusic Gradebook and Garritan software development costs, shipping, and credit card fees. Capitalized SmartMusic repertoire added into SmartMusic is amortized over a five-year period and repertoire development amortization as a percentage of SmartMusic revenue was 11% for the six months ended June 30, 2012 and 12% for the six months ended June 30, 2011. Total gross margins as a percentage of sales were generally comparable at 86% and 84%, respectively, for the three months ended June 30, 2012 and 2011 and 85% for each of the six-month periods ended June 30, 2012 and 2011. Gross margins for notation as a percentage of sales were 93% for each of the three-month periods ended June 30, 2012 and 2011 and were generally comparable at 92% and 93%, respectively, for the six months ended June 30, 2012 and 2011. Gross margins for SmartMusic as a percentage of sales were 79% and 75%, respectively, for the three months ended June 30, 2012 and 2011 and were 77% and 74%, respectively, for the six months ended June 30, 2012 and 2011.


	3 Months Ended September 30,									9 Months Ended September 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	588	$	407	$	181		44	%	$	1,791	$	1,216	$	575		47	%
SmartMusic		822		670		152		23	%		2,286		1,655		631		38	%
Other		436		307		129		42	%		1,028		761		267		35	%

Total	$	1,846	$	1,384	$	462		33	%	$	5,105	$	3,632	$	1,473		41	%

Development expense ($ in thousands)
	3 Months Ended June 30,									6 Months Ended June 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	724	$	460	$	264		57	%	$	1,528	$	977	$	551		56	%
SmartMusic		759		337		422		125	%		1,307		763		544		71	%
Other		346		288		58		20	%		650		560		90		16	%
Total	$	1,829	$	1,085	$	744		69	%	$	3,485	$	2,300	$	1,185		52	%

Selling and marketing expenses primarily consist of marketing, advertising and promotion expenses, business development, product management and customer service activities and payroll. Sales and marketing expenses increased 33%, to $1,846,000, for the three months ended September 30, 2012 compared to $1,384,000 for the three months ended September 30, 2011. Selling and marketing expenses increased 41%, to $5,105,000, during the nine months ended September 30, 2012, compared to $3,632,000 for the nine months ended September 30, 2011. Notation selling and marketing expenses increased primarily due to company-wide strategic marketing initiatives, Garritan product promotions and expanded product management capabilities. SmartMusic selling and marketing expenses increased due to increased personnel relating to our direct sales organization, expanded product management capabilities and strategic sales and marketing initiatives for SmartMusic. Other selling expenses increased primarily due to website, company-wide branding and social media investments.

~~Development~~General ~~expenses increased 69% to $1,829,000, from $1,085,000, when comparing the three months ended June 30, 2012~~ and ~~2011.~~administrative ~~Development~~expense ~~expenses increased 52% to~~ ($~~3,485,000,~~ from $2,300,000, when comparing the six months ended June 30, 2012 and 2011. Development expenses consist primarily of internal payroll, payments to independent contractors and related expenses for the development and maintenance of our Finale notation, Garritan sound libraries, MusicXML, SmartMusic and SmartMusic Gradebook products as well as non-capitalized SmartMusic repertoire development, business systems and quality assurance. Notation development expenses increased due to personnel costs relating to the Chief Technology Officer position, which was open in ~~the~~thousands) first and second quarters of 2011, and added personnel and contractor costs to support technology initiatives and the Garritan sound libraries and MusicXML technologies. SmartMusic development expenses increased primarily due to personnel costs relating to the Chief Technology Officer position and contract labor to support our strategic developments. During the quarter ended June 30, 2012, 120 new SmartMusic large ensemble band, jazz ensemble, and orchestra titles with pre-authored assignments were released, comparable to 119 new large ensemble titles in the quarter ended June 30, 2011. A total of 3,151 large ensemble titles are available in SmartMusic as of June 30, 2012.


	3 Months Ended September 30,										9 Months Ended September 30,
	2012		2011		Incr (Decr)			%			2012		2011		Incr (Decr)			%
Notation	$	5	$	16	$	(11	)		-69	%	$	39	$	59	$	(20	)		-34	%
SmartMusic		27		27		0			0	%		53		61		(8	)		-13	%
Other		1,091		864		227			26	%		4,085		2,884		1,201			42	%

Total	$	1,123	$	907	$	216			24	%	$	4,177	$	3,004	$	1,173			39	%

General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel, professional services, facility costs, amortization of certain intangible assets with finite lives, bad debt and other general corporate expenses. General and administrative expenses increased by 24% to $1,123,000 during the three months ended September 30, 2012 compared to $907,000 for the same period of 2011. General and administrative expenses increased by 39% to $4,177,000 during the nine months ended September 30, 2012, compared to $3,004,000 for the same period of 2011. Other general and administrative costs increased during the nine months ended September 30, 2012 primarily due to legal and consulting fees relating to the Tax Asset Protection Plan that was effective February 21, 2012, accounting fees for reporting requirements relating to the acquisition of Garritan Corporation, legal fees and accrued severance expenses relating to the departure of our Chief Executive Officer in June 2012 and financial and legal advisory services related to the evaluation of Strategic Alternatives.

Patent litigation accrual

Patent litigation costs of $225,000 were included in operating expenses during the nine months ended September 30, 2011. There were no comparable expenses in the nine months ended September 30, 2012.

Selling and marketing expense ($ in thousands)
	3 Months Ended June 30,									6 Months Ended June 30,
	2012		2011		Incr		%			2012		2011		Incr		%
Notation	$	584	$	365	$	219		60	%	$	1,203	$	809	$	394		49	%
SmartMusic		726		429		297		69	%		1,464		985		479		49	%
Other		266		221		45		20	%		592		454		138		30	%
Total	$	1,576	$	1,015	$	561		55	%	$	3,259	$	2,248	$	1,011		45	%

Income/(Loss) from operations ($ in thousands)

Selling and marketing expenses primarily consist of marketing, advertising and promotion expenses, business development, product management and customer service activities and payroll. Sales and marketing expenses increased 55% to $1,576,000 for the three months ended June 30, 2012 compared to $1,015,000 for the three months ended June 30, 2011. Selling and marketing expenses increased 45%, to $3,259,000, during the six months ended June 30, 2012, compared to $2,248,000 for the six months ended June 30, 2011. Notation selling and marketing expenses increased primarily due to company-wide strategic marketing initiatives. SmartMusic selling and marketing expenses increased due to increased personnel relating to our direct sales organization and strategic sales and marketing initiatives for SmartMusic. Other selling expenses increased primarily due to website, company-wide branding and social media investments.


	3 Months Ended September 30,												9 Months Ended September 30,
	2012			2011			Incr (Decr)			%			2012			2011			Incr (Decr)			%
Notation	$	900		$	649		$	251			39	%	$	2,175		$	2,567		$	(392	)		-15	%
SmartMusic		105			522			(417	)		-80	%		262			1,171			(909	)		-78	%
Other		(1,983	)		(1,411	)		(572	)		41	%		(6,219	)		(4,669	)		(1,550	)		33	%

Total	$	(978	)	$	(240	)	$	(738	)		308	%	$	(3,782	)	$	(931	)	$	(2,851	)		306	%

General and administrative expense ($ in thousands)
	3 Months Ended June 30,										6 Months Ended June 30,
	2012		2011		Incr(Decr)			%			2012		2011		Incr(Decr)			%
Notation	$	19	$	24	($	5	)		-21	%	$	34	$	43	($	9	)		-21	%
SmartMusic		11		15		(4	)		-27	%		26		34		(8	)		-24	%
Other		1,541		950		591			62	%		2,994		2,020		974			48	%
Total	$	1,571	$	989	$	582			59	%	$	3,054	$	2,097	$	957			46	%

Net loss from operations increased by $738,000 to $978,000 for the three months ended September 30, 2012 compared to $240,000 in the three months ended September 30, 2011. Net loss from operations increased by $2,851,000 to $3,782,000 for the nine months ended September 30, 2012 compared to $931,000 in the nine months ended September 30, 2011. The notation segment results for the third quarter of 2012 reflect an increase in income from operations due to increased revenues, which was offset by increased development and selling and marketing expenses. The notation segment results for the nine months ended September 30, 2012 reflect a decrease in income from operations due to increased development and selling and marketing expenses, which was offset by increased revenues. Income from operations for SmartMusic decreased during the three and nine-month periods ended September 30, 2012 when compared the same periods in 2011. SmartMusic revenue increases due to the increased number of subscriptions, which were offset by the increased development and selling and marketing expenses. The increase in the loss from other activities was due to increased legal and consulting fees relating to the Tax Asset Protection Plan effective February 21, 2012, accounting fees for reporting requirements relating to the acquisition of Garritan Corporation, legal fees and accrued severance expenses relating to the departure of our Chief Executive Officer in June 2012 and financial and legal advisory services related to the evaluation of Strategic Alternatives.

General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel, professional services, facility costs, amortization of certain intangible assets with finite lives, bad debt and other general corporate expenses. General and administrative expenses increased by 59% to $1,571,000 during the three months ended June 30, 2012 compared to $989,000 for the same period of 2011. General and administrative expenses increased by 46% to $3,054,000 during the six months ended June 30, 2012, compared to $2,097,000 for the same period of 2011. Other general and administrative costs increased during the six months ended June 30, 2012 primarily due to legal and consulting fees relating to the Tax Asset Protection Plan that was effective February 21, 2012, accounting fees for reporting requirements relating to the acquisition and dissolution of Garritan Corporation and legal fees and accrued severance costs relating to the departure of our Chief Executive Officer in June 2012.

Patent litigation accrual

Patent litigation costs of $225,000 were accrued and included in operating expenses during the six months ended June 30, 2011. There were no comparable expenses in the six months ended June 30, 2012.

Income (Loss) from operations ($ in thousands)
	3 Months Ended June 30,												6 Months Ended June 30,
	2012			2011			(Decr)			%			2012			2011			(Decr)			%
Notation	$	636		$	704		($	68	)		-10	%	$	1,276		$	1,910		($	634	)		-33	%
SmartMusic		6			445			(439	)		-99	%		157			658			(501	)		-76	%
Other		(2,153	)		(1,459	)		(694	)		-48	%		(4,236	)		(3,259	)		(977	)		-30	%
Total	($	1,511	)	($	310	)	($	1,201	)		-387	%	($	2,803	)	($	691	)	($	2,112	)		-306	%

Net loss from operations increased by $1,201,000 to $1,511,000 for the three months ended June 30, 2012 compared to $310,000 in the three months ended June 30, 2011. Net loss from operations increased by $2,112,000 to $2,803,000 for the six months ended June 30, 2012 compared to $691,000 in the six months ended June, 2011.The notation segment results for the second quarter of 2012 and six months ended June 30, 2012 reflect a decrease in

income from operations due to increased development and selling and marketing expenses offset by increased revenues. Income from operations for SmartMusic decreased during the three and six-month periods ended June 30, 2012 when compared the same periods in 2011. SmartMusic revenue increases due to the increased number of subscriptions were offset by the increased development and selling and marketing expenses. The increase in the other loss is due to increased legal and consulting fees relating to the Tax Asset Protection Plan effective February 21, 2012, accounting fees for reporting requirements relating to the acquisition and dissolution of Garritan Corporation and legal fees and accrued severance expenses relating to the departure of our Chief Executive Officer.

Net Loss

Net loss in the three months ended ~~June~~September 30, 2012 was $~~938~~620,000, or $0.1913 per basic and diluted share, compared to net loss of $~~305~~205,000, or $0.0604 per basic and diluted share, in the three months ended ~~June~~September 30, 2011. Net loss for the ~~six~~nine months ended ~~June~~September 30, 2012 was $12,~~778~~398,000, or $0.3649 per basic and diluted share, compared to net loss of $~~486~~690,000, or $0.1014 per basic and diluted share, in the same period of 2011. The increase in net loss in the first quarter of 2012 is primarily due to increased operating expenses as explained above. The net tax benefit was $~~546~~347,000 in the three months ended ~~June~~September 30, 2012 and $1,320,000, on a net ~~tax benefit of $973~~basis,~~000~~ for the ~~six~~ nine months ended ~~June~~September 30, 2012, compared to a net tax expense of $203,000 and net tax benefit of $~~153~~150,000, respectively, for the three and ~~six~~nine months ended ~~June~~September 30, 2011. The increased tax benefit is attributed to the greater loss from operations.

Liquidity and capital resources

Net cash used in operating activities was $21,~~255~~601,000 for the ~~six~~nine months ended ~~June~~September 30, 2012, compared to $1713,~~657,~~000 of cash used in operating activities in the ~~six~~nine months ended ~~June~~ September 30, 2011. The increase in cash used in the first ~~six~~nine months of 2012 compared to the same period in 2011 is primarily due to the greater net loss reported in the first ~~six~~nine months of 2012 and ~~greater~~ ~~decrease~~the increase in deferred ~~SmartMusic~~income ~~revenue~~ taxes, partially offset by increased accrued liabilities relating to legal ~~expenses~~fees and severance ~~costs~~expenses.

Net cash used in investing activities was $1,~~115~~797,000 for the ~~six~~nine months ended ~~June~~September 30, 2012, compared to $~~395~~692,000 cash used in investing activities for the comparable period of 2011. The increase is primarily due to an increase in capitalization of software development, primarily relating to the technology architecture modernization relating to our notation business, repertoire development and Garritan sound libraries. Our spending on repertoire development increased due to the overall number of titles being developed.

Net cash used in financing activities was $4,000 in the first ~~six~~nine months of 2012 compared to $~~303~~246,000 in the first ~~six~~nine months of 2011. During the first ~~six~~nine months of 2011, $291,000 was used to repurchase company shares under the Stock Repurchase Program. The Stock Repurchase Program was discontinued effective May 6, 2011. Therefore, no cash was used to repurchase shares during the first ~~six~~nine months of 2012.

Cash and cash equivalents as of ~~June~~September 30, 2012 was $5,~~922~~894,000 compared to $9,~~296~~881,000 as of December 31, 2011. The decrease in cash is due to seasonality and increased operational spending during the first six months of 2012. Our quarterly revenues and operating cash flows are typically seasonal, with the first and second quarters being historically lower than the third and fourth quarters. This seasonal pattern is primarily due to timing of the historical upgrade releases of Finale, which in recent years has occurred in the second or third quarters, and school budget cycles. We are not anticipating a major Finale product release during 2012 as we focus on upgrading the underlying technology, file format and further product enhancements for future releases.

We18 are investing in our technology, development and sales and marketing initiatives, and while we expect an increase in our revenues and, in particular, continued growth in SmartMusic subscriptions, plus sales of Garritan sound libraries, we expect an overall reduction in our cash balances over the next twelve months.

nine months of 2012. Our quarterly revenues and operating cash flows are typically seasonal, with the first and second quarters being historically lower than the third and fourth quarters. This seasonal pattern is primarily due to timing of the historical upgrade releases of Finale, which in recent years has occurred in the second or third quarters, and school budget cycles. We are not anticipating a major Finale product release during 2012 as we focus on upgrading the underlying technology, file format and further product enhancements for future releases. The next Finale release is anticipated mid-2013.

We are investing in our technology, development and sales and marketing initiatives, and while we expect an increase in our revenues and, in particular, continued growth in SmartMusic subscriptions, plus sales of Garritan sound libraries, we expect an overall reduction in our cash balances until our next Finale release. Nevertheless, we expect that our revenues will yield sufficient cash to finance our operations for the next twelve months.

Item 4.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The individual serving in the roles of principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covering this report. Based on this evaluation, the individual serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including the individual serving as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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

Forward Looking and Cautionary Statements

The preceding discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Management’s Discussion and Analysis may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “anticipate,” and similar words or expressions. The forward-looking statements in this report generally relate to: our expectations relating to the synergies that exist between our two product lines,; future operating results, including revenues, cash flows from operations and gross margins; revenue growth from new SmartMusic subscriptions; our expectations with regard to the growth potential of SmartMusic and the growth opportunities created by our recent acquisitions; our expectations, including release dates, regarding our future product offerings; our ~~intent to expand our notation platform; our~~ expectations regarding ~~our~~ our target business model, ~~future subscription growth for SmartMusic~~ and ~~our ability to leverage the SmartMusic platform; our plans relating to marketing and sales efforts, including staff increases; our plans regarding~~ strategic initiatives, including enhancement of our technology architecture, product innovation and extension to new platforms, development and leveraging of existing distribution channels, and strengthening of our marketing strategy; ~~and~~ our beliefs relating to adequacy of capital resources; and the Board and Special Committee’s evaluation of strategic alternatives. Forward-looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements. MakeMusic cautions investors that many important factors have affected, and in the future could affect our actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this release and elsewhere by MakeMusic or on its behalf. These factors include, but are not limited to: unforeseen capital demands; the market acceptance of Finale, SmartMusic, SmartMusic Gradebook and other products; the success of our direct sales efforts; our ability to leverage our recent acquisitions; ~~the~~risks and uncertainties relating to a possible transaction and process of exploring strategic alternatives; the maintenance of strategic partnerships and customer relationships; our ability to license titles from music publishers; the effectiveness of, and our ability to implement, our target business model; our ability to execute strategic development plans with regard to technology and product improvements and the strengthening of marketing and distribution; the limited and fluctuating sales of certain of our products; the intense competition that we face; the rapid technological changes and obsolescence in the software industry; our dependence on key personnel and the proprietary nature of our technology; other general business and economic conditions (including changes to discretionary spending by schools and students); ; and those factors described from time to time in our reports to the Securities and Exchange Commission (including our Annual Report on Form 10-K). It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. As such, investors should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or potentially inaccurate assumptions that investors should take into account when making ~~investment~~ investment decisions. Shareholders and other readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We do not intend to update publicly or revise any forward-looking statements.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In the ordinary course of business, we may be party to additional legal actions, proceedings, or claims. Corresponding costs are accrued when it is reasonably possible that loss will be incurred and the amount can be precisely or reasonably estimated. We are not ~~aware~~currently ofparty to any ~~actual or threatened litigation that would have a~~ material ~~adverse~~legal ~~effect on its financial condition or results of operations~~proceedings.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

There were no sales of unregistered equity securities during the quarter ended ~~June~~September 30, 2012.

Issuer Purchases of Equity Securities

There were no stock repurchases in the quarter ended ~~June~~September 30, 2012.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

See the attached exhibit index.

SIGNATURES

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

Date: August 10, 2012		MAKEMUSIC, INC.
Date: November 13, 2012	MAKEMUSIC, INC.
	By:	~~By:~~/s/ Karen L. VanDerBosch	~~/s/ Karen L. VanDerBosch~~
	Karen L. VanDerBosch, Chief Financial Officer and Chief Operating Officer		~~Karen L. VanDerBosch, Chief Financial Officer and Chief Operating Officer~~
	(Principal Executive Officer, Principal Financial Officer and Principal Operating Officer)		~~(Principal Executive Officer, Principal Financial Officer and Principal Operating Officer)~~

EXHIBIT INDEX

Form 10-Q

The quarterly period ended ~~June~~September 30, 2012

ExhibitNo.		Description
Exhibit No.		Description
10.1		Separation Agreement and Release between the Registrant and Karen T. van Lith dated June 22, 2012 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated June 22, 2012.
31.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer and Principal Financial Officer ~~Pursuant~~pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**		Financial statements from this Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) condensed balance sheets, (ii) condensed statement of operations, (iii) condensed statements of cash flows, and (iv) the notes to the condensed financial statements.
		* Filed herewith. ** Furnished herewith

* Filed herewith.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller Reporting Company

Filing Compare · MAKEMUSIC, INC.