MakeMusic, Inc. Announces Quarter and Six-Month Results; 42% Increase in SmartMusic Revenue; 15% Increase in Total Revenue

MakeMusic, Inc. (Nasdaq:MMUS) today announced financial results for the three months and six months ended June 30, 2006. Net revenues for the three months ended June 30, 2006, were $2,147,000, a 6% increase compared to $2,023,000 in the prior year second quarter. Net revenues for the six months ended June 30, 2006, were $5,235,000, an increase of 15% over the six months ended June 30, 2005.

The company also announced a net loss of $714,000, or 18 cents per basic and diluted share, for the second quarter of 2006, including approximately $78,000 in non-cash stock-based compensation expense, or 2 cents per share, reflecting stock option expensing under FAS 123(R), which was implemented January 1, 2006. These results represent an improvement of $177,000, or 8 cents per basic and diluted share, over the net loss of $891,000, or 26 cents per basic and diluted share, reported in the second quarter of 2005. Net loss for the six months ended June 30, 2006, was $1,024,000, or 26 cents per basic and diluted share, compared to a net loss of $1,500,000, or 44 cents per basic and diluted share, in the first six months of 2005.

The increase in net revenue during the second quarter was attributable to continued growth of $156,000 in SmartMusic(R) revenue. For the six-month period ended June 30, 2006, the company also achieved an increase of $412,000 in notation revenue as a result of a very good performance from Finale(R) 2006. The company began shipping Finale 2006 in July 2005, with exceptional new features and functionality that have resulted in a strong revenue performance in the last four quarters. Finale 2006 continues to historically be the company's best-selling version of this industry-leading music notation software.

The SmartMusic subscription service continues to show steady growth and represents an increasing share of net revenue. SmartMusic subscription revenue was $743,000 in the six months ended June 30, 2006, a 40% increase over subscription revenue of $532,000 in the six months ended June 30, 2005. Total SmartMusic revenue, including accessories related to the SmartMusic product, increased by 49% to $472,000 in the three months ended June 30, 2006, and increased by 42% to $938,000 in the six months ended June 30, 2006, compared to the comparable three months and six months in 2005.

As of June 30, 2006, the company had 49,182 active subscriptions, a 25% increase over the 39,340 active subscriptions as of June 30, 2005. Total schools using SmartMusic reached 5,178 during the second quarter of 2006 compared to 3,985 as of June 30, 2005, and the combination of students sponsored by schools and individuals sponsored by associations grew to 30,700 compared to 23,838 as of June 30, 2005.

The company introduced, in December 2005, a price increase that raised school-sponsored student subscriptions from $20 to $25. This increase was done in connection with a simplified pricing structure to remove barriers that may have existed with the prior pricing scheme. In addition, the company has revamped its methodology of tracking subscriptions. The company believes that the total number of schools using SmartMusic and the total number of subscriptions overall are the most meaningful measurements to use when evaluating SmartMusic growth.

Gross profit for the three months ended June 30, 2006, was $1,798,000, or 84% of sales, compared to $1,647,000, or 81% of sales, in the second quarter of 2005. Gross profit for the six months ended June 30, 2006, was $4,468,000, or 85% of sales, compared to $3,702,000, or 81% of sales in the first six months of 2005. The improvement in gross margin percentage during 2006 is primarily the result of the completion of certain amortization costs that were related to the year 2000 reverse merger.

Operating expenses for the quarter were $2,544,000 compared to $2,538,000 in the same quarter last year. Operating expenses for the first six months of 2006 were $5,537,000, an increase of 6% from $5,224,000 in the first half of 2005. Expenses for the first six months increased, as planned, as the company increased its investments in product development, marketing and customer support to manage an expected increase in revenue as the year progresses. General and administrative expense also increased by $91,000 in the first six months, compared to 2005, primarily as a result of stock option expensing under FAS 123(R). Operating expenses for the three-month period ended June 30, 2006 included $178,000 in non-cash depreciation, amortization and option expense and $344,000 in the six-month period ended June 30, 2006, compared to $315,000 in the 2005 second quarter and $626,000 in the first half of 2005.

Net cash used by operating activities was $110,000 in the second quarter of 2006 compared to net cash used by operating activities of $292,000 in the second quarter of 2005. The total cash decreased by $373,000 in the second quarter of 2006 compared to a decrease of $362,000 in the second quarter of 2005. MakeMusic believes that positive operating cash flow is likely on an annual basis going forward but, due to seasonality in notation revenue, the company is not likely to achieve positive operating cash flow in each quarter.

"Even though the second quarter is typically our slowest, Finale 2006 has continued to sell well, making it the best-selling version of Finale ever," stated CEO Bill Wolff. "At this time we are in the final stages of testing Finale 2007, expecting it to ship in August. This release will be supported with new marketing materials, including a dramatic multimedia presentation available at finalemusic.com and on CD."

"We expect to release within the next twelve months the most significant advances ever in SmartMusic. For the first time, SmartMusic will be supporting the core curriculum of all school bands, orchestras and choirs - the titles teachers are preparing for concerts. This will be accomplished through new technologies which utilize audio recordings created by publishers to promote their music. They license these audio recordings to us along with the corresponding Finale files which display onscreen so that SmartMusic can accompany, guide and motivate students as they prepare for concerts via SmartMusic assignments. Posting, tracking and documenting these assignments will be our new web service, SmartMusic Impact(TM). Music teachers will finally have a practical way to document the progress of every student, much like math and science teachers do. Such documentation is becoming critical in this new age of accountability, No Child Left Behind and what-gets-measured-gets-funded. We expect this combination of core curriculum support, SmartMusic assignments managed by Impact, and the wide range of available SmartMusic practice tools to drive significant SmartMusic growth."

About MakeMusic, Inc.

MakeMusic(R), 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(R), the world's best-selling music notation software, and SmartMusic(R), the complete music practice system that features Intelligent Accompaniment(R) and the world's largest interactive accompaniment library. MakeMusic maintains its corporate headquarters in Minneapolis, Minnesota. The company can be reached at www.makemusic.com.

Cautionary Statements

This release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and can be identified by the use of terminology such as "believe," "estimate," "expect," "intend," "may," "could," "will," and similar words or expressions. Our forward-looking statements in this release generally relate to the anticipated effect of Impact on our SmartMusic subscriptions and revenue growth, the timing of new product introduction, and our ability to achieve positive operating cash flow. 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. We caution 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 us or on our behalf. These factors include, but are not limited to, our possible need for and ability to obtain additional capital; the market acceptance of Impact and other of our products; our dependence upon new product development effort; our dependence on releasing annual Finale upgrades; the maintenance of strategic relationships; the success of our SmartMusic subscription business; maintaining license agreements with a limited number of publishers; the limited and fluctuating sales of certain of our products; the intense competition we face; the rapid technological changes and obsolescence in our industry; our dependence on key personnel and the proprietary nature of our technology; other general business and economic conditions; and those risks described from time to time in our reports to the Securities and Exchange Commission (including our Annual Report on Form 10-KSB). It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. As such, investors should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or potentially inaccurate assumptions that investors should take into account when making investment decisions. Shareholders and other readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.


                            MakeMusic, Inc.
                 Condensed Consolidated Balance Sheets
                    (In thousands of U.S. dollars)

                                                  June 30,    Dec. 31,
                                                     2006        2005
                                               -----------------------
                                               (unaudited)
Assets
Cash                                               $2,014      $2,952
Accounts receivable, net of allowances                829       1,004
Inventories, net of reserves                          309         435
Prepaid expenses and other current assets             107         161
                                               -----------------------
Total current assets                                3,259       4,552

Property and equipment, net                           622         323
Goodwill, net                                       3,630       3,630
Capitalized software                                  617         471
Other non-current assets                               72          66
                                               -----------------------
Total assets                                       $8,200      $9,042
                                               =======================

Liabilities and Shareholders' Equity
Current portion of capital lease obligations           $6          $6
Accounts payable                                      215         441
Accrued compensation                                  782         681
Other accrued liabilities                             202         238
Post-contract support                                 181         181
Reserve for product returns                           391         339
Current portion of deferred rent                       20          20
Deferred revenue                                      867         842
                                               -----------------------
Total current liabilities                           2,664       2,748

Capital lease obligations, net of current
 portion                                                6           9
Deferred rent, net of current portion                 110         120
                                               -----------------------
                                                      116         129

Shareholders' Equity:
  Common stock, $0.01 par value:
    Authorized shares - 10,000,000
    Issued and outstanding shares - 3,911,555
     and 3,856,654 in 2006 and 2005,
     respectively                                      39          39
    Additional paid-in capital                     62,751      62,459
    Accumulated deficit                           (57,370)    (56,347)
    Other comprehensive income                          0          14
                                               -----------------------
Total shareholders' equity                          5,420       6,165
                                               -----------------------
Total liabilities and shareholders' equity         $8,200      $9,042
                                               =======================


                               Three Months           Six Months
                              Ended June 30,        Ended June 30,
                                2006       2005       2006       2005
                           ---------- ---------- ---------- ----------
Notation Revenue               1,598      1,627      4,104      3,692
SmartMusic Revenue               472        316        938        661
Other Revenue                     77         80        193        194
                           ---------- ---------- ---------- ----------
NET REVENUE                    2,147      2,023      5,235      4,547

COST OF REVENUES                 349        376        767        845
                           ---------- ---------- ---------- ----------

GROSS PROFIT                   1,798      1,647      4,468      3,702

OPERATING EXPENSES:
Development expenses             834        914      1,722      1,726
Selling and marketing
 expenses                        857        787      2,037      1,811
General and administrative
 expenses                        853        837      1,778      1,687
                           ---------- ---------- ---------- ----------

Total operating expenses       2,544      2,538      5,537      5,224
                           ---------- ---------- ---------- ----------

LOSS FROM OPERATIONS            (746)      (891)    (1,069)     (1522)

Interest income                   32          8         51         31
Other income (expense)             0         (8)         1         (8)
                           ---------- ---------- ---------- ----------
Net loss before income tax      (714)      (891)    (1,017)    (1,499)

Income tax                         0          0          7          1
                           ---------- ---------- ---------- ----------
Net loss                        (714)      (891)    (1,024)    (1,500)
                           ========== ========== ========== ==========

Loss per common share:
Basic                          (0.18)     (0.26)     (0.26)     (0.44)
Diluted                        (0.18)     (0.26)     (0.26)     (0.44)

Weighted average common
 shares outstanding:
Basic                      3,910,490  3,448,132  3,899,360  3,436,695
Diluted                    3,910,490  3,448,132  3,899,360  3,436,695


                            MakeMusic, Inc.
            Condensed Consolidated Statements of Cash Flows
                    (In thousands of U.S. dollars)
                              (Unaudited)

                                     Three    Three      Six      Six
                                    Months   Months   Months   Months
                                     Ended    Ended    Ended    Ended
                                      2006     2005     2006     2005
                                   -----------------------------------
Operating activities
Net loss                              (714)    (891)  (1,024)  (1,500)
Adjustments to reconcile net loss
 to net cash used in operating
 activities:
  Amortization of intangible
   assets                                0      226        0      453
  Depreciation and amortization of
   property and equipment               57       40       98       78
  Other amortization                    38       46       75       89
  Stock based compensation expense      78        3      171        6
  Increase (decrease) in cash
   from:
    Accounts receivable                323      196      176      247
    Inventories                         79     (136)     126     (266)
    Prepaid expenses and other
     current assets                     52       60       43       63
    Accounts payable                    25      (65)    (226)      10
    Accrued liabilities and
     product returns                     8      264       89     (125)
    Deferred revenue                   (36)     (35)      29       53
                                   -----------------------------------
Net cash used in operating
 activities                           (110)    (292)    (443)    (892)

Investing activities
Purchases of property  and
 equipment                            (105)     (91)    (396)    (141)
Capitalized software development
 and other intangibles                (158)     (72)    (217)    (124)
                                   -----------------------------------
Net cash used by investing
 activities                           (263)    (163)    (613)    (265)

Financing activities
Proceeds from stock options and
 warrants exercised                      2       94      121      160
Payments on capital leases              (2)      (1)      (3)      (3)
                                   -----------------------------------
Net cash provided by financing
 activities                              0       93      118      157

                                   -----------------------------------
Net decrease in cash                  (373)    (362)    (938)  (1,000)
Cash, beginning of period            2,386    1,577    2,952    2,215
                                   -----------------------------------
Cash, end of period                  2,014    1,215    2,014    1,215
                                   ===================================

Supplemental disclosure of cash
 flow
Interest paid                            0        2        0        4
Income taxes paid                        1        0        7        1

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