MakeMusic, Inc. Announces Third Quarter 2007 Results

23% Increase in SmartMusic Subscription Revenue;
15% Increase in Total Revenue

MakeMusic, Inc. (Nasdaq:MMUS) today announced financial results for the three months and nine months ended September 30, 2007. Net revenues for the three and nine months ended September 30, 2007 were $4,621,000 and $10,295,000, a 15% and 11% increase respectively, compared to $4,025,000 and $9,259,000 for the same periods last year. The company also announced for the three and nine months ended September 30, 2007 net income of $1,030,000 and $161,000, or $0.25 and $0.04 per basic share and $0.22 and $0.04 per diluted share, respectively. These results represent an improvement over the reported net income of $843,000 and net loss of $181,000, or $0.22 and $(0.05) per basic share and $0.19 and $(0.05) per diluted shares, respectively, for the same periods last year.

The increase in net revenue during the third quarter and first nine months of the year was attributed to the release of Finale® 2008, sales growth in other notation products and sales growth in SmartMusic® sales. Finale 2008 was released on July 2, 2007. This was one month earlier than last year’s launch of Finale 2007 which occurred in August 2006. The earlier launch resulted in stronger third quarter notation sales for 2007 as compared to 2006. Notation revenue increased by $306,000 to $3,514,000 when comparing the three-month periods ended September 30, 2007 and 2006, and increased by $504,000 to $7,816,000 when comparing the nine-month periods ended September 30, 2007 and 2006. Sales growth occurred in our other notation products with Allegro®, PrintMusic® and Finale SongWriter™ all experiencing revenue increases over the prior year.

SmartMusic revenue includes SmartMusic subscription revenue and accessories related to the SmartMusic product. As of September 30, 2007, we had 75,741 active SmartMusic subscriptions, a 38% increase over the 54,821 active subscriptions as of September 30, 2006. Total SmartMusic revenue increased by $201,000, or 32%, to $822,000 for the three months ended September 30, 2007 compared to same period in 2006. Total SmartMusic revenue for the nine-month period ended September 30, 2007 increased by $422,000, or 27%, compared to the first nine months in 2006. As disclosed in our annual report on Form 10-KSB, we were anticipating the release of SmartMusic 10.0 and SmartMusic Impact™ in early 2007. We released these products in April and experienced growth in revenue beginning the fall of 2007 with back-to-school teacher and student purchases as well as strong microphone accessory sales.

The SmartMusic subscription service continues to show steady growth and represents an increasing share of net revenue. Subscription revenue was $536,000 for the three months ended September 30, 2007, a 23% increase over subscription revenue of $435,000 during the same period in 2006. Subscription revenue was $1,473,000 for the nine months ended September 30, 2007, a 25% increase over subscription revenue of $1,179,000 during the same period in 2006.

During the third quarter of 2007, we implemented a direct sales strategy for SmartMusic. Salespeople were hired to focus on school district sales activities and site licenses were introduced offering volume pricing. Total schools using SmartMusic reached 6,901 as of September 30, 2007 compared to 5,507 as of September 30, 2006. Additionally, with the release of SmartMusic 10.0 and SmartMusic Impact in April 2007, the company began tracking and reporting Impact Teachers. Impact Teachers are teachers using SmartMusic 10.0 who have issued assignments to 50 or more students. As of September 30, 2007 there were 159 Impact Teachers, and the average number of student subscriptions per Impact Teacher was 44. This compares to 26 Impact Teachers with 29 average student subscriptions as of June 30, 2007.

Gross profit for the three-month period ended September 30, 2007 increased by $400,000 to $3,884,000 compared to the three months ended September 30, 2006, and improved by $799,000 to $8,751,000 for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in gross profit for the three and nine months ended September 30, 2007 is due to the increase in revenues.

Operating expenses for the three- and nine-month periods ended September 30, 2007 were $2,881,000, and $8,673,000, respectively, an 8% and 6% increase from $2,672,000 and $8,208,000 for the same periods last year, respectively. Development expenses for the three and nine months ended September 30, 2007 increased by $111,000 and $394,000, respectively, when compared to the same periods last year. Development expenses continue to increase as we expand our SmartMusic repertoire and increase business systems costs in support of SmartMusic Impact. Sales and marketing expenses remained mostly flat for the quarter but decreased by $74,000 for the first nine months of 2007 compared to the same period last year. General and administrative expenses for the three and nine months ended September 30, 2007 increased by $95,000 and $145,000, respectively, when compared to the same periods last year. General and administrative expenses increased in the third quarter when compared to the same period last year primarily as a result of an increase in consulting expenses for our Sarbanes-Oxley 404 implementation and legal expenses relating to our S-3 registration statement. Costs increased during the first nine months mainly due to our Sarbanes-Oxley 404 implementation and consulting expenses relating to FIN48 adoption.

Net cash provided by operating activities was $1,101,000 for the nine-month period ended September 30, 2007 compared to $306,000 of cash provided in operating activities in the nine months ended September 30, 2006. The improvements in cash in 2007 compared to 2006 are primarily a result of the improvement of net income for the period, increase in SmartMusic subscriptions resulting in increases in deferred revenue and improved cash collections resulting in reduced accounts receivable.

“It is rewarding and exciting to see the growth in SmartMusic,” stated John Paulson, chief executive officer. “We believe two factors are driving this growth. First, the addition of titles for large ensembles (band, jazz ensemble, orchestra and, eventually, choir) means that SmartMusic can, for the first time, support the core curricula of these popular music classes. Second, the SmartMusic Impact grade book allows teachers to easily post student assignments and track student grades. The combination of SmartMusic and Impact means that teachers can individualize instruction and measure student achievement. They finally have the practical means to comply with growing demands for teacher accountability.”

About MakeMusic, Inc.

MakeMusic®, Inc. is a world leader in music-education technology whose mission is to enhance and transform the experience of making, teaching and learning music. Among its leading products are Finale®, a best-selling music notation software, and SmartMusic®, the music learning software for band, orchestra and choir. MakeMusic maintains its corporate headquarters in Minneapolis. Further information about the company can be found at www.makemusic.com.