• 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.

Among our leading products are SmartMusic® learning software for band, jazz band, orchestra and choir and Finale® music notation software.
The first nine months of 2008 resulted in continued sales growth for SmartMusic and a slight decline in sales of Finale products. We achieved an overall increase of approximately 7% in net revenue compared to the first nine months of 2007. Gross margin percentages were comparable at 85% for both the first nine months of 2008 and 2007. Operating expenses increased 8% in the first nine months of 2008, primarily due to increased salaries and benefits related to increased headcount to support our direct sales initiative and improvements to systems infrastructure. As a result of the factors mentioned, net income in the first nine months of 2008 was $11,000, compared to a net income of $161,000 for the same period last year.
MakeMusic develops and markets two product lines, SmartMusic and Finale products, that reinforce each other's features and competitiveness. We believe these innovative products will allow us to continue to achieve positive operating results. The well-established Finale family of music notation software products provides a solid base business that generates cash and has a large customer database. Music notation software is a niche business with limited but steady growth since only a small percentage of musicians ever notate music.
We believe our greatest growth potential lies with SmartMusic, a subscription-based product directed toward the very large and constantly renewing market of teachers and their music students. SmartMusic combines a software application, a library of thousands of titles and skill-development exercises and a web service to provide students with a compelling experience and teachers with a comprehensive solution for music education and assessment.
SmartMusic software enhances and transforms the hours spent practicing by putting students inside a professional band, orchestra or choir so that they can hear how the music is supposed to be performed and how their part fits in. This makes practicing much more fun, 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 fun and productive leads to rapid student skill-development, increased student confidence, higher student retention and stronger music programs.
SmartMusic Impact™ is a web-based service designed to manage student assignments, grades and recordings while documenting the progress of each student. This provides music educators and students with exciting new possibilities to assist in developing strong music programs and complying with accountability requirements. SmartMusic provides access to an ever increasing library of band and orchestra literature. Each large ensemble title includes individual part assignments authored by respected educators, thereby providing music teachers with a time-saving solution for preparing selections for the next public performance. SmartMusic Impact enables teachers to easily send assignments to each of their students. Students complete the assignment on their home computer provided that they have a SmartMusic subscription, or on a school computer equipped with SmartMusic. Submitted assignments are automatically graded and posted in the teacher's Impact Gradebook thereby providing teachers with the visible means for measuring student achievement.
During the third quarter of 2007, we implemented a direct sales initiative for SmartMusic. We hired salespeople to focus on school district sales activities and introduced site licenses offering discounts for volume purchases. As of September 30, 2008 we had executed 189 site licenses.
As of September 30, 2008, the total number of SmartMusic subscriptions was 98,119, a 30% increase compared to 75,741 subscriptions as of September 30, 2007. We reported 9,165 educator accounts as of September 30, 2008, a 33% increase over 6,901 educator accounts in the prior year. The number of educators that had issued a SmartMusic assignment as of September 30, 2008 was 827 compared to 503 in the prior year. The number of Impact teachers, defined as teachers who are using Impact to deliver and manage student assignments to fifty students or more, was 247 as of September 30, 2008. This is an annual statistic, counting only teachers who have issued assignments to 50 or more students during a school fiscal year. Therefore, this is a gain of 247 Impact teachers during the quarter as the number of Impact teachers restarts at zero on July 1 of each year to correspond with the start of the school year. At September 30, 2007 we reported 159 Impact teachers.
The 33% annual growth rate in educator accounts as of September 30, 2008 has the potential for sizable growth in student subscriptions. However, this growth depends upon teachers increasing their utilization of Impact as the means to set up their classes, enroll students and issue frequent SmartMusic assignments. To date, there are not

enough teachers that have actively utilized Impact to reflect a significant growth rate in subscriptions and has contributed to student subscriptions lagging behind our expectations.
There is evidence, however, that the target business model is emerging. As stated above, 827, or 9%, of the teachers who have purchased SmartMusic have utilized Impact and they have 32,156 students receiving SmartMusic assignments. The total subscriptions associated with these Impact accounts are 30,217.
To accelerate the adoption of this target business model and address the lower than expected subscription rates, we intend to increase the focus of our direct sales force on existing SmartMusic teachers that have not yet utilized Impact in their curriculum, as well as develop a training program to assist teachers in getting started with SmartMusic and Impact. In addition, our development efforts will be focused on improving and simplifying the SmartMusic purchase processes, Impact class set-up, student Impact enrollment and SmartMusic assignments. The overall objective is to make these processes easy and intuitive for both teachers and students.
The following table illustrates the net new SmartMusic subscription data for the quarter July 1, 2008 through September 30, 2008:

                                                                                  3 months
                                                                                    ended
                                                                                  9/30/2008
  7/1/2008           New           Renewed      Subscriptions     9/30/2008        Net New
Subscriptions   Subscriptions   Subscriptions       Ended       Subscriptions   Subscriptions
   95,632          20,347          20,017          37,877          98,119           2,487

We define renewed subscriptions as those subscriptions that customers purchase within the two month period after their prior subscription ended. Because of changes to the start of school from year to year as well as fluctuations in the date that music teachers implement their curriculum, we commonly see subscribers that have a delay of up to two months in renewing their subscription. As a result, we believe that using the above definition of a renewal more accurately reflects the renewal rate for SmartMusic subscriptions. We intend to report SmartMusic subscription renewals on a quarterly basis.
Finale product sales declined by $274,000 to $7,542,000 for the first nine months of 2008, representing a 4% decrease from the comparable period in 2007. While we continue to see stability in our direct sales of Finale products, sales through our channel partners lag behind the previous year. We believe this weakening of sales can be attributed to overall worldwide economic conditions, and is not due to to loss of market share. Additionally, both Allegro and SongWriter are in the second year of their release cycle. We anticipate ongoing weakness until economic conditions improve.
We have achieved positive cash flow from operations for the last four years, including the most recent year ended December 31, 2007. With increased revenues and, in particular, the growth in SmartMusic subscriptions, plus improvements in efficiency over the last few years, we feel that we can continue to achieve positive operating cash flow on an annual basis in the future. In spite of tight budgets in the school systems and current economic conditions, we believe that we can continue annual profitability due to our improvements in operations, established customer base and partnerships within the music industry and education providers.
In our Form 10-KSB filed with the Securities and Exchange Commission for the year ended December 31, 2007, we identified critical accounting policies and estimates for our business that we are incorporating herein by reference.

                            3 Months Ended September 30,                        9 Months Ended September 30,
                                               Incr                                                 Incr
                     2008         2007        (Decr)         %           2008          2007        (Decr)         %
                                                             (In $ thousands)
Notation revenue    $ 3,361      $ 3,514      ($  153 )        -4 %    $  7,542      $  7,816      ($  274 )        -4 %
SmartMusic
revenue               1,133          822          311          38 %       2,874         1,980          894          45 %
Other revenue           271          285          (14 )        -5 %         572           499           73          15 %

Net revenue           4,765        4,621          144           3 %      10,988        10,295          693           7 %
Cost of revenues        726          737          (11 )        -1 %       1,675         1,544          131           8 %

Gross profit          4,039        3,884          155           4 %       9,313         8,751          562           6 %
Percentage of
net sales                85 %         84 %                                   85 %          85 %

Development
expenses              1,182        1,012          170          17 %       3,466         3,017          449          15 %
Selling and
marketing             1,225        1,054          171          16 %       3,365         3,014          351          12 %
General
administrative          675          815         (140 )       -17 %       2,515         2,642         (127 )        -5 %

Total operating
expense               3,082        2,881          201           7 %       9,346         8,673          673           8 %

Operating income
(loss)                  957        1,003          (46 )         5 %         (33 )          78         (111 )      -142 %
Other income             14           28          (14 )       -50 %          50            85          (35 )       -41 %

Net income
before taxes        $   971      $ 1,031      ($   60 )        -6 %    $     17      $    163      ($  146 )       -90 %
Income tax
provision                 0           (1 )          1        -100 %          (6 )          (2 )         (4 )       200 %

Net income          $   971      $ 1,030      ($   59 )        -6 %    $     11      $    161      ($  150 )       -93 %

Comparison of the three-month and nine-month periods ended September 30, 2008 to the three-month and nine-month periods ended September 30, 2007 Net revenue. Revenue increases are primarily due to our increase in SmartMusic subscriptions and the related sales of accessories. Additionally, we implemented a SmartMusic subscription price increase in July 2008 where teacher subscriptions increased from $100 to $130 per year and student subscriptions increased from $25 to $30 per year. Net revenue increased 3% from $4,621,000 to $4,765,000 when comparing the three months ended September 30, 2008 and 2007 and increased by 7% from $10,295,000 to $10,988,000 when comparing the nine months ended September 30, 2008 and 2007.
Our quarterly revenues 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 upgrade releases of Finale, which typically occur in the third quarter; timing of customer purchases of new SmartMusic subscriptions and accessories, which increase significantly during the fall back to school period; and school budget cycles, which typically run from July 1 to September 30. The net revenue by quarter is summarized in the table below.

                                           2007                                      2008
                          Q1          Q2          Q3          Q4          Q1          Q2          Q3
                                     (In $ thousands)                          (In $ thousands)
   Notation revenue     $ 2,553     $ 1,748     $ 3,514     $ 3,165     $ 2,556     $ 1,625     $ 3,361
   SmartMusic revenue       588         571         822         919         882         859       1,133
   Other revenue            130          84         285         201         184         117         271

   Net revenue          $ 3,271     $ 2,403     $ 4,621     $ 4,285     $ 3,622     $ 2,601     $ 4,765

Notation revenue decreased by $153,000 to $3,361,000 when comparing the three-month periods ended September 30, 2008 and 2007 and decreased by $274,000 to $7,542,000 when comparing the nine-month periods ending September 30, 2008 and 2007. Notation revenue decreases are due the decline in our channel sales due to economic conditions and the release cycle of our products. Notation revenue for the three and nine months ended September 30, 2007 included the release of Allegro® 2007 as well as higher sales from the release of Finale Songwriter™which was released late in 2006. New versions of these products have historically been released biannually.
SmartMusic revenue increased by $311,000 to $1,133,000 when comparing the three-month periods ended September 30, 2008 and 2007 and increased by $894,000 to $2,874,000 when comparing the nine-month periods ended September 30, 2008 and 2007. The increase in SmartMusic revenue reflects the continued growth of the SmartMusic product that was originally launched in 2001 and the SmartMusic Impact™ product that was released in 2007. We also introduced SmartMusic site licenses in September 2007 with the intent of encouraging school district deployments of SmartMusic student subscriptions. The special site license pricing is two-tiered: Level 1 is 100 or more subscriptions that reduces all prices by 15%; Level 2 is 500 or more subscriptions that reduces all prices by 25%. Additionally, in 2007, we established a direct sales force focused on district level sales. As of September 30, 2008, there were 189 site licenses for SmartMusic with average subscriptions per license as of September 30, 2008 of 115 and average potential total of 187 subscriptions per license.
SmartMusic is sold to schools, students and music organization members on a subscription basis. Revenue for these subscriptions is recognized over the life of the subscription which is typically 12 months. Total earned SmartMusic subscription revenue for the nine months ended September 30, 2008 was $2,216,000, an increase of $743,000, or 50%, over the nine months ended September 30, 2007. Total unearned SmartMusic subscription revenue (deferred revenue) was $1,966,000 as of September 30, 2008, an increase of $599,000, or 44%, over the balance at September 30, 2007. Deferred SmartMusic revenue represents the future revenue to be recorded on current subscriptions.
SmartMusic has shown sustained growth since its launch. As of September 30, 2008, 9,165 schools have purchased SmartMusic, an increase of 33% over the 6,901 schools that had purchased it as of September 30, 2007. Total SmartMusic subscriptions as of September 30, 2008 number 98,119, representing a net gain of 22,378, or 30%, over the September 30, 2007 subscription count of 75,741.
In April 2007, we launched SmartMusic Impact, a web-based service that is designed to manage student assignments, recordings and grades while documenting the progress of each student. With the release of SmartMusic Impact, we began tracking teachers that use SmartMusic as well as the number of those teachers who are using Impact to deliver and manage student assignments to 50 or more students (Impact teachers). As of September 30, 2008, we had 247 Impact teachers with an average of 46 student subscriptions per teacher. This is an annual statistic, counting only teachers who have issued assignments to 50 or more students during a school fiscal year. Therefore, this is a gain of 247 Impact teachers during the quarter as the number of Impact teachers restarts at zero on July 1 of each year to correspond with the start of the school year. At September 30, 2007 we reported 159 Impact teachers with an average of 44 student subscriptions per teacher. We believe that not enough teachers have actively utilized Impact to reflect a significant growth rate in subscriptions as of September 30, 2008 and we continue to focus specific marketing activities on SmartMusic and Impact, including development of training materials to facilitate teachers and students getting started with our products. Additionally we intend to increase the focus of our direct sales force on existing SmartMusic teachers that have not yet utilized Impact in their curriculum and anticipate continued growth in the number of new subscriptions in the future.
Many SmartMusic customers, especially new customers, also purchase accessories (primarily microphones and foot pedals) that are used with the software. Revenue for the sales of accessories, included in the SmartMusic revenue category, for the three months ended September 30, 2008, was $356,000, which was $70,000, or 24%, greater than revenue of $286,000 for SmartMusic accessories in the three months ended September 30, 2007. Revenue for the sales of accessories for the nine months ended September 30, 2008, was $647,000, which was $143,000, or 28%, greater than revenue of $504,000 for SmartMusic accessories in the nine months ended September 30, 2007. This increase is due to the increase in SmartMusic subscribers. Additionally, we increased the standard price of microphones from $15.00 to $19.95 in January 2008. Because we expect continuing growth in the number of new SmartMusic subscriptions, we also anticipate increases in the amount of revenue we receive from the sales of accessories.

Gross profit. Gross profit in the three-month period ended September 30, 2008 increased by $155,000 to $4,039,000 compared to the three-month period ended September 30, 2007. The increase in gross profit for the three months ended September 30, 2008 is a result of the increase in net revenue and increased gross margin percentages. Gross margin percentages have improved on our notation products as we have a higher percentage of direct sales and downloads, which carry a higher sales price and lower product costs. Additionally, our gross margin percentages on SmartMusic increased due to our subscription and microphone price increases. Gross margin as a percentage of sales was comparable at 85% and 84% for the three months ended September 30, 2008 and 2007, respectively.
Gross profit in the nine-month period ended September 30, 2008 increased by $562,000 to $9,313,000 compared to the nine-month period ended September 30, 2007. The increase in gross profit for the nine months ended September 30, 2008 is a result of the increase in net revenue partially offset by higher repertoire development amortization as a result of increased song titles available for SmartMusic and amortization of capitalized development for SmartMusic Impact, which was launched in April 2007. Repertoire development costs are accumulated by title and amortized over a five year period. Repertoire development amortization as a percentage of SmartMusic revenue was comparable at 11% for the current nine-month period and 11% for the same nine-month period last year. We expect amortization related to repertoire development to increase as we continue to add repertoire to SmartMusic. Gross margin as a percentage of sales was comparable at 85% for the nine months ended September 30, 2008 and 2007.
Development expense. Development expenses consist primarily of internal payroll, payments to independent contractors and related expenses for the development and maintenance of our Finale notation, SmartMusic and SmartMusic Impact products, as well as SmartMusic repertoire development, business systems and quality assurance. Development expenses increased 17% to $1,182,000, from $1,012,000, when comparing the three months ended September 30, 2008 and 2007, and increased 15% to $3,466,000 when comparing the nine months ended September 30, 2008 and 2007. Personnel and contract labor costs were higher during the three-month and nine-month periods ended September 30, 2008 compared to the same periods in 2007 due to staff increases necessary to achieve development goals related to simplification of the SmartMusic enrollment and purchase processes. Additionally, our business systems expenses increased due to the June 2008 completion of our server co-location project and expansion of our systems infrastructure to support our anticipated SmartMusic subscription growth and provide redundancy in our server infrastructure. Net content development expenditures of $1,384,000 and $404,000 for the nine months ended September 30, 2008 and 2007, respectively, have been capitalized and are being amortized over their estimated useful life of 5 years. We anticipate increased development costs as we focus our efforts to improve and simplify the SmartMusic purchase processes, Impact set-up, SmartMusic assignments and support our expanded systems infrastructure.
Selling and marketing expense. Selling and marketing expenses primarily consist of marketing, advertising and promotion expenses, business development and customer service activities and payroll. Sales and marketing expenses increased 16% to $1,225,000 in the three-month period ended September 30, 2008, compared to $1,054,000 for the three-month period ended September 30, 2007, and increased 12% to $3,365,000 in the nine months ended September 30, 2008 compared to $3,014,000 for the nine months ended September 30, 2007. The increase in expenses is primarily due to increased costs related to establishing a direct sales force, promotional activities including SmartMusic marketing videos and increased customer support costs as a result of our expanded customer base. We anticipate sales and marketing expenses to increase throughout 2008 compared to 2007 as we plan to strengthen our sales and marketing efforts for SmartMusic site licenses, increase our focus on existing SmartMusic educators that have not yet utilized Impact in their curriculum, establish Impact training materials and ramp up promotional and public relations activities.
General and administrative expense. 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 decreased 17% to $675,000 during the three months ended September 30, 2008, compared to $815,000 for the same period of 2007, and decreased 5% to $2,515,000 during the nine months ended September 30, 2008, compared to $2,642,000 for the same period of 2007. General and administrative costs decreased primarily as a result of a decrease to consulting expenses, which was partially offset by increases to payroll and benefits related expenses. Consulting expenses were higher in 2007 due to Sarbanes Oxley 404 implementation and the adoption of FIN48 which occurred in the first quarter of 2007.

Operating income (loss). Income from operations decreased $46,000 to $957,000 for the three months ended September 30, 2008 compared to income from operations of $1,003,000 in the three months ended September 30, 2007. Loss from operations for the nine months ended September 30, 2008 was $33,000. This is a decrease of $111,000 when compared to income from operations of $78,000 in the nine months ended September 30, 2007. The change in operating performance during the three and nine months ended September 30, 2008, as compared to the same period in 2007, was primarily due to the increased development and selling and marketing costs noted above, offset in part by the continued strong performance of our SmartMusic product.
Net income. Net income in the three months ended September 30, 2008 decreased to $971,000, or $0.21 per basic share and $0.20 per diluted share, compared to net income of $1,030,000, or $0.25 per basic share and $0.22 per diluted share, in the three months ended September 30, 2007. Net income in the nine months ended September 30, 2008 decreased to $11,000, or $0.00 per basic and diluted share, compared to net income of $161,000, or $0.04 per basic and diluted share, in the nine months ended September 30, 2007. The decrease in net income during the three-month and nine-month periods ended September 30, 2008 was mainly due to the same factors noted above in "Operating income (loss)." Liquidity and capital resources. Net cash provided by operating activities was $1,152,000 for the nine months ended September 30, 2008, compared to $1,101,000 of cash provided by operating activities for the nine months ended September 30, 2007. The increase in cash provided in the first nine months of 2008 compared to the same period in 2007 is due in part to higher deferred revenue resulting from increased subscription activity partially offset by lower net income for the 2008 period.
Net cash used in investing activities was $1,707,000 for the nine months ended September 30, 2008, versus $682,000 cash used in investing activities for the comparable period in 2007. The increase is primarily due to the increase in capitalization of software development, primarily for repertoire development, and increased investment in our business operating systems as we completed the server co-location project and expansion of our systems infrastructure to support our anticipated SmartMusic subscription growth. Our capitalized repertoire development costs are expected to decrease as we shift our repertoire development from concert band to orchestra while reducing the total number of titles being released. Additionally, we intend to reduce external contractor costs in support of repertoire development and have this work performed . . .