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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

Or

Commission File Number: 333-78573

                                                  333-78573-01

MUZAK HOLDINGS LLC

MUZAK HOLDINGS FINANCE CORP

(Exact Name of Registrants as Specified in their charter)

3318 LAKEMONT BLVD.

FORT MILL, SC 29708

(803) 396-3000

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

Securities registered pursuant to Section 12(g) of the Act: None

Securities registered pursuant to Section 12(b) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934)  Yes ¨   No x

Muzak Holdings Finance Corp. meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

None

MUZAK HOLDINGS LLC

MUZAK HOLDINGS FINANCE CORP

FORM 10-K INDEX

Safe Harbor Statement

This Form 10-K contains statements which, to the extent they are not historical facts (such as when we describe what we “believe,” “expect,” or “anticipate” will occur), constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Safe Harbor Acts”). All forward-looking statements involve risks and uncertainties. The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the Safe Harbor Acts.

Risks and uncertainties that could cause actual results to vary materially from those anticipated in the forward-looking statements included in this Form 10-K include, but are not limited to, industry-based factors such as the level of competition in the business music industry, competitive pricing, concentrations in and dependence on satellite delivery capabilities, rapid technological changes, the impact of legislation and regulation, as well as factors more specific to the Company such as the substantial leverage and debt service requirements, restrictions imposed by the Company’s debt facilities, including financial covenants and limitations on the Company’s ability to incur additional indebtedness, the Company’s history of net losses, the Company’s future capital requirements, the Company’s dependence on license agreements, and risks associated with economic conditions generally. The Registrants do not undertake any obligation to update any such statements unless required by law.

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PART I

Muzak LLC (“Muzak”) is the leading provider of business music programming in the United States based on market share. Muzak is a wholly owned subsidiary of Muzak Holdings LLC, previously known as ACN Holdings, LLC. ACN Holdings, LLC was formed in September 1998 pursuant to the laws of Delaware and Muzak LLC began its operations on October 7, 1998 with the acquisition of independent franchisees from Audio Communications Network, Inc. On March 18, 1999, Muzak Limited Partnership merged with and into Audio Communications Network LLC. At the time of the merger, ACN changed its name to Muzak LLC. We refer to Muzak Holdings and its subsidiaries collectively as the “Company”. Based on our analysis of available competitor information, we believe that, together with our franchisees, we have a market share of approximately 60% of the estimated number of U.S. business locations currently subscribing to business music programming.

Our two core products are Audio Architecture^SM and Voice^SM. We provide our products to numerous types of businesses including specialty retailers, restaurants, department stores, supermarkets, drug stores, financial institutions, hotels, health and fitness centers, business offices, manufacturing facilities and medical centers, among others. During 2004, our top twenty clients represented less than 21% of our revenues with no single client representing more than 5% of our revenues. Our clients typically enter into a non-cancelable five-year contract that renews automatically for at least one additional five-year term unless specifically terminated at the initial contract expiration date. Our average length of service per Audio Architecture client is approximately 10 years. We believe that our clients use our products because they recognize them as a key element in establishing their desired business environment, in promoting their corporate identities and in strengthening their brand images at a low monthly cost.

We also sell, install, and maintain equipment, such as sound systems, noise masking, and drive-thru systems. We provide these services primarily for our existing clients.

We provide our products and services domestically through our integrated, nationwide network of Company owned territories and franchisee territories. We believe our nationwide network is the largest in the industry and provides us with a key competitive advantage in effectively marketing and servicing clients ranging from local accounts with single or multiple locations to national accounts with significant geographic presences. In 2004, 95% of our revenues were generated by our owned operations and the remaining 5% were generated from fees from our franchisees.

Recent Developments

On April 15, 2005, the Company entered into a new $105.0 million senior secured term loan facility (“New Senior Credit Facility”) payable in quarterly installments of 0.25% beginning September 2005 until final maturity on April 15, 2008. A portion of the proceeds from the New Senior Credit Facility was used to repay in full the outstanding term and revolving loans and associated interest and to collateralize outstanding letters of credit under the Company’s then existing Senior Credit Facility, and to pay related fees and expenses. The then existing Senior Credit Facility has been terminated.

On February 2, 2005, David Unger, a member of the Board of Directors resigned his position as director. Mr. Unger’s resignation was received by the Company via electronic mail on February 2, 2005. The circumstances which the Company believes caused the resignation were Mr. Unger’s insistence that the Company establish an audit committee and his belief that the Company was not timely reporting material business developments to the board of directors. As the Company does not have securities listed on a national securities exchange, it is not required to have a separate audit committee. The Company believes that necessary safeguards are in place as its board of directors functions as the audit committee. Further, the Company believes that the board is fully apprised of all material business developments in a timely manner and that it discloses material issues in its filings with the Securities and Exchange Commission in accordance with securities laws and regulations.

On January 20, 2005, the Company received an amended and restated secured promissory note (“revised note”) from the purchaser of the Company’s closed circuit television systems (“CCTV”) product line. The revised note is secured by the inventory and recurring revenue contracts sold to the purchaser on March 1, 2004 as well as by all inventory and recurring revenue contracts acquired by the purchaser subsequent to the sale. The terms of the revised note of $1.9 million require principal payments to commence on March 31, 2005 and are payable quarterly thereafter until the note is paid in full on March 31, 2007. The first principal payment was received by the Company in March 2005. Each quarterly principal payment increases in amount such that payments to be received in 2005, 2006, and 2007 are $0.5 million, $1.1 million, and $0.3 million, respectively. In addition, on January 20, 2005 the Company received an executed guaranty agreement from a third party of $0.5 million as further security for the note receivable from the purchaser of the CCTV assets. The guaranty will continue in full force and effect until the purchaser’s obligations under the amended and restated promissory note are fully paid, performed, and discharged.

The industry-wide agreement between business music providers and the American Society of Composers, Authors, and Publishers (“ASCAP”) expired in May 1999. The Company has continued to pay ASCAP royalties at the 1999 rates for all periods through December 31, 2004. While the Company began negotiations with ASCAP in June 1999, ASCAP commenced a rate court proceeding in 2003 to establish a new royalty rate. During the fourth quarter of 2004, the Company and ASCAP pursued further

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settlement negotiations and advanced their conversations toward reaching a new five-year music license agreement. The culmination of such efforts has resulted in a recent agreement in principle that will result in more favorable license fees. The Company anticipates that a final license agreement will be executed prior to the end of the second quarter of 2005. In the interim, payments will be made in accordance with the agreement in principle and the parties will postpone any further activities in the pending rate court proceeding. In addition, in January 2005, the Company made a payment for settlement of all claims for open audit periods prior to January 1, 2005, and as a result, ASCAP no longer has the right to audit royalty payments made by the Company prior to January 1, 2005. As part of this audit settlement, the interim license rates for all periods prior to January 1, 2005 are considered final and not subject to any retroactive adjustments.

The industry-wide agreement between business music providers and Broadcast Music, Inc. (“BMI”) expired in December 1993. Until recently, the Company was operating under an interim agreement pursuant to which the Company continued to pay royalties at the 1993 rates. As previously disclosed, the Company and BMI reached an agreement in principle in August 2004 on the terms of a new, five-year music license, and on December 31, 2004 the definitive license was executed. The term of the agreement extends from July 1, 2004 through June 30, 2009, and the agreement provides for an annual license fee of $6.0 million per annum for the five year period. The fixed license fee of $6.0 million per annum is subject to an annual 8% cap on net subscriber growth. In the event that the Company’s subscriber growth exceeds 8% per annum or in the event that the Company was to acquire a franchisee or a competitor, the license fee would be subject to adjustment. Although the interim license rates for all periods prior to July 1, 2004 are considered final, and as a result, not subject to any retroactive adjustments, BMI has the right to audit open periods from January 1, 2002 onward.

On November 9, 2004, the Company amended the following aspects of its then existing Senior Credit Facility: (i) amended financial covenants for the third quarter of 2004 and prospectively to make such covenants less restrictive (ii) revised the maturity dates of the revolver and its $35.0 million term loan facility (“Term Loan B”) to May 2007 and November 2007, respectively, (iii) increased Term Loan B margins to 4.25% in the case of Eurodollar loans and 3.25% in the case of Base Rate Loans (iv) amended the definition of consolidated EBITDA to exclude up to $1.9 million in restructuring charges, and (v) reduced the revolving commitment from $60.0 million to $55.0 million. The Company incurred fees of $0.2 million in connection with this amendment. In addition, the Company recorded a loss on extinguishment of debt of $0.2 million, which was comprised of the write off of deferred financing fees associated with the reduction in revolving commitment. As previously discussed, this senior credit facility was terminated on April 15, 2005.

Effective August 2004, the Company reorganized into five functional areas: Sales, Operations, Administration, Client Service, and Product and Marketing. The Company also centralized the administrative function and certain aspects of operations, such as purchasing and scheduling, at its home office. In connection with this reorganization, the Company incurred charges of $1.8 million associated with severance and other termination benefits, relocation costs, duplicate salaries, and temporary facility requirements.

On May 10, 2004, the Company amended its then existing Senior Credit Facility to include a Term Loan B in the amount of $35.0 million payable in quarterly installments beginning June 30, 2006 until final maturity on November 21, 2007, as amended. The proceeds of the term loan were used to repurchase $32.7 million in aggregate outstanding principal amount of the Company’s 13% Senior Discount Notes due 2010 and to pay associated interest and expenses. The Company recorded a loss on extinguishment of debt of $1.7 million in connection with this transaction. The loss on extinguishment of debt is comprised of $1.0 million premium paid on the repurchase and $0.7 million write off of deferred financing fees. We incurred financing fees of $1.4 million in connection with this transaction. As previously discussed, this Senior Credit Facility was terminated on April 15, 2005.

Products

Audio Architecture is business music programming designed to enhance a client’s brand image. Our in-house staff of audio architects analyzes a variety of music to develop and maintain 77 core music programs in 10 genres ranging from current top of the charts hits to jazz, classic rock, urban, country, Latin, classical music and others. Our audio architects change our music programs on a daily basis, incorporating newly released original artists’ music recordings and drawing from our extensive music library. In designing our music programs, our audio architects use proprietary computer software that allows them to access the extensive library. Our library contains subjective and objective data (commonly referred to as meta data) unique to each recording that enables us to avoid repetition and manage tempo, mood, and music variety to provide clients with high quality, seamlessly arranged programs. The combination of our proprietary software and our library’s meta data is driving new efficiencies in programming and enabling us to offer unique experiences to a greater number of clients. In addition, we offer individual music programs to clients who seek further customization beyond that offered by our core music programs.

Voice is telephone music and marketing on-hold, as well as in-store messaging. Our Voice staff creates customized music and messages that allow clients’ telephone systems to deliver targeted music and messaging during their customers’ time on hold. In addition, they also provide customized in-store messages that allow our clients to deliver targeted music and messaging to support their in-store point of sale merchandising. Our fully integrated sound studios and editing and tape duplication facilities provide flexibility in responding to clients’ needs. Our telephone and satellite delivery technologies allow us to expeditiously change our clients’ music and messages.

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In connection with the sale of our Audio Architecture and Voice products, we sell or provide various system-related products, principally sound systems. As part of a typical music programming contract, we provide music receiving or playback equipment to our client. Our business music clients generally purchase audio equipment, such as sound systems, from us that supplements the music receiving or playback equipment.

We also sell, install and maintain non-music related equipment, such as drive-thru systems, intercom and paging systems. We provide these services for our business music and other clients. Maintenance of program-receiving equipment that we provide to business music clients is typically included as part of the overall music service. Installation and maintenance of audio or other equipment not directly related to reception of our business music service is provided on a contractual or time-and-materials basis. All of the equipment is manufactured by third parties, although some items bear the MUZAK^® brand name.

We offer drive-thru systems maintenance service. This service provides for the maintenance and repair of intercom systems, headsets and radio transmitters commonly used in drive-thru systems found at our quick service restaurant clients. We receive recurring monthly revenues for each client location typically under a five-year contract. We respond to our clients’ repair calls which typically involve the repair of headsets. In most cases we are able to exchange the damaged headset for an operable headset which we send to our clients through overnight delivery. Our staff repairs the damaged item which then becomes available for future distribution to another client. We believe that quick turnaround is important to our clients as a significant portion of their revenues is derived from their drive-thru windows.

Nationwide Franchise Network

Our franchise network is nationwide, and we believe that this network is a strength that distinguishes us from our competitors. Our business relationships with our franchisees are governed by license agreements that have renewable ten-year terms. Under these agreements, the franchisee is granted an exclusive license to offer and sell our Audio Architecture and Voice products, as well as other products. The franchisee is also permitted to use our registered trademarks within a defined territory which allows us to promote a uniform Muzak brand image nationally. The agreements also contain terms relating to distribution of services via our direct broadcast satellite distribution system and reciprocal exclusivity provisions which preclude franchisees from selling products which compete with our Audio Architecture and Voice products.

Pursuant to the agreements, each franchisee pays us a monthly fee based on the number of businesses within its territory and a monthly royalty equal to approximately 10% of its billings for music services. Typically, this combined fee and royalty payment represents approximately $5 per month per client location. However, this monthly royalty is subject to adjustments, as we charge the franchisee additional amounts for on-premise tape services and other services. The agreements also provide franchisees with guidelines regarding coordination of sales, installation and service to national client locations.

Distribution Systems

We transmit our offerings through various mediums including direct broadcast satellite transmission, local broadcast transmission, audio and videotapes and compact discs. During 2004, we served our music client locations through the following means: approximately 83% through direct broadcast satellite transmission, approximately 4% through local broadcast technology, and approximately 13% through on-premises tapes or compact discs.

Our transmissions via direct broadcast satellite to clients are primarily from transponders leased from Microspace Communications Corporation (“Microspace”) and EchoStar Satellite Corporation (“EchoStar”). Microspace provides us with facilities for uplink transmission of medium-powered direct broadcast satellite signals to the transponders. Microspace, in turn, leases its transponder capacity on satellites operated by third parties. Such satellites include the Galaxy IIIC satellite operated by PanAmSat, through which a majority of our direct broadcast satellite client locations are served, and AMC-1, operated by SES Americom.

In January 2001, we began utilizing transponder capacity on Telstar 4 in order to provide the signal for certain of our client locations. On September 19, 2003, Telstar 4 experienced a technical malfunction. We secured comparable transponder capacity through Microspace on AMC-1, a digital satellite of SES Americom. We successfully restored service, which required re-pointing of satellite dishes, to all affected client locations within nine days. At the time of the disruption, we had insurance on Telstar 4 that provided $1.5 million of coverage for re-pointing efforts. We received reimbursement of our $1.5 million claim on March 25, 2004.

To mitigate our expenditures in the event of a future satellite disruption, we have secured insurance to cover our re-pointing costs of up to $5.0 million in the event of a Galaxy IIIC satellite failure. In addition, we have secured insurance coverage on AMC-1 to cover costs up to $2.9 million in the first quarter of 2005 stepping up to $3.8 million by the end of 2005.

The term of our transponder lease with Microspace for the Galaxy IIIC satellite is projected to end in 2016 while the lease for AMC-1 is projected to end in 2011. Microspace can terminate its agreements with us immediately upon termination of its underlying agreements with PanAmSat and SES Americom. We regularly review the availability of alternate transponders.

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As part of our arrangements with EchoStar, we furnish 60 music channels to commercial subscribers and 52 of the 60 music channels to residential subscribers over EchoStar’s satellite system. Pursuant to the agreements with EchoStar, EchoStar pays us a programming fee for each of its residential subscribers and pays us, and our franchisees, a commission for sales made by EchoStar or its agents to commercial subscribers in the respective territories. We pay EchoStar a fee for uplink transmission of music channels to our clients and we rent space at EchoStar’s Cheyenne, Wyoming uplink facility. We also pay EchoStar a royalty and combined access fees on music programs sold by the Company, which are distributed by EchoStar to commercial subscribers. The term of each of our agreements with EchoStar is dependent upon the life of one of its satellites, which is estimated to cease operations sometime in 2010. During the first quarter of 2004, EchoStar informed us that it had agreed to distribute Sirius Satellite Radio’s programming to EchoStar’s residential subscribers. At that time we believed that such programming would replace our music channels offered to EchoStar’s residential subscribers and, possibly, EchoStar’s commercial subscribers. As of December 31, 2004, EchoStar has continued to utilize our music channels for EchoStar’s residential and commercial subscribers, and we do not foresee a change in such use in the near future. Even if EchoStar were to discontinue utilizing our programming, EchoStar would remain obligated to uplink and provide space segment to distribute our 60 music channels currently being offered to our commercial subscribers over EchoStar’s satellite system. In any event, we believe that any future discontinuation of our programming to EchoStar’s commercial and/or residential subscribers would not have a material financial impact on the Company.

EchoStar has agreed that it will not provide transponder space to, enter into or maintain distributor agreements or relationships with, or enter into any agreements for the programming or delivery of any audio services via direct broadcast satellite frequencies with, a specified group of our competitors. We have agreed that we will not secure transponder space for, enter into or maintain distributor agreements or relationships with, or enter into any agreement for the programming or delivery of any of our services with any competitor of EchoStar via direct broadcast satellite frequencies or with specified competitors of EchoStar via specified frequencies.

Competition

We compete with many local, regional, national and international providers of business music services. National competitors include DMX Music, Inc., PlayNetworks, and In-Store Broadcasting Network (“IBN”). Local and regional competitors are typically smaller entities that target businesses with few locations.

We compete on the basis of service, the quality and variety of our music programs, versatility and flexibility, the availability of our non-music services and, to a lesser extent, price. Even though we are seldom the lowest-priced provider of business music in any territory, we believe that we can compete effectively due to the widespread recognition of the Muzak name, our nationwide network, the quality and variety of our music programming, the talent of our audio architects and our multiple delivery systems.

On February 14, 2005, DMX Music, Inc. announced it had signed an asset purchase agreement for the sale of all of its domestic and international operations with THP Capstar, Inc. DMX Music Inc.’s domestic companies voluntarily filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. We do not know how the bankruptcy, the sale process, or DMX Music, Inc. under THP Capstar’s ownership will impact competition.

We also compete with companies that are not principally focused on providing business music services. Such competitors include Sirius Satellite Radio, XM Radio, traditional radio broadcasters that encourage workplace listening, video services that provide business establishments with music videos or television programming, and performing rights societies (ASCAP, BMI, and SESAC) that license business establishments to play sources such as CD’s, tapes, MP3 files, and the radio. While we believe that we compete effectively against such services for many of the same reasons stated above, such competitors have established client bases and are continually seeking new ways to expand such client bases and revenue streams.

There are numerous methods by which our existing and future competitors can deliver programming, including various forms of direct broadcast satellite services, wireless cable, fiber optic cable, digital compression over existing telephone lines, advanced television broadcast channels, digital audio radio service and the Internet. We cannot assure you that we will be able to:

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Sales and Marketing

We employ a direct sales process in marketing products, which is focused on securing new client contracts and renewing existing contracts. Once we obtain a new client, there are only minimal maintenance costs associated with that client. As a result, we continually try to increase not only our market share but also the market penetration of both business music and marketing on-hold and in-store messaging products.

We publish targeted, industry specific marketing materials and conduct extensive training of our sales force. Client agreements typically have a non-cancelable term of five years and renew automatically for at least one additional five-year term unless specifically terminated at the initial contract expiration date. We have local and national sales forces. Local account executives typically focus on clients that have fewer than 50 locations, which may include individual franchisees of national chains. In addition, we have various other sales positions to support the sales process, including sales leads and sales managers.

National Salesforce

Our national sales group is responsible for securing new national and key accounts and maintaining our existing client base of national and key accounts. We have a total of five account executives focused exclusively on selling services to clients that have approximately 50 or more locations. Each owned operation and franchisee is responsible for installing and servicing the national accounts within its territory.

Local Salesforce

As of December 31, 2004, we had a team of 191 local sales account executives. Local account executives typically focus on clients that have fewer than 50 locations, which may include individual franchisees of national chains. Our local account executives are compensated on commission.

Music Licenses

We pay performance royalties to songwriters and publishers through contracts negotiated with performing rights societies such as ASCAP, BMI, and the Society of European Stage Authors and Composers (“SESAC”). We also license rights to re-record and distribute music from a variety of sources such as record companies and publishers when we provide our services via recorded media.

The industry-wide agreement between business music providers and the American Society of Composers, Authors, and Publishers (“ASCAP”) expired in May 1999. The Company has continued to pay ASCAP royalties at the 1999 rates for all periods through December 31, 2004. While the Company began negotiations with ASCAP in June 1999, ASCAP commenced a rate court proceeding in 2003 to establish a new royalty rate. During the fourth quarter of 2004, the Company and ASCAP pursued further settlement negotiations and advanced their conversations toward reaching a new five-year music license agreement. The culmination of such efforts has resulted in a recent agreement in principle that will result in more favorable license fees. The Company anticipates that a final license agreement will be executed prior to the end of the second quarter of 2005. In the interim, payments will be made in accordance with the agreement in principle and the parties will postpone any further activities in the pending rate court proceeding. In addition, in January 2005, the Company made a payment for settlement of all claims for open audit periods prior to January 1, 2005, and as a result, ASCAP no longer has the right to audit royalty payments made by the Company prior to January 1, 2005. As part of this audit settlement, the interim license rates for all periods prior to January 1, 2005 are considered final and not subject to any retroactive adjustments.

The industry-wide agreement between business music providers and Broadcast Music, Inc. (“BMI”) expired in December 1993. Until recently, the Company was operating under an interim agreement pursuant to which the Company continued to pay royalties at the 1993 rates. As previously disclosed, the Company and BMI reached an agreement in principle in August 2004 on the terms of a new, five-year music license, and on December 31, 2004 the definitive license was executed. The term of the agreement extends from July 1, 2004 through June 30, 2009, and the agreement provides for an annual license fee of $6.0 million per annum for the five year period. The fixed license fee of $6.0 million per annum is subject to an annual 8% cap on net subscriber growth. In the event that the Company’s subscriber growth exceeds 8% per annum or in the event that the Company was to acquire a franchisee or a competitor, the license fee would be subject to adjustment. Although the interim license rates for all periods prior to July 1, 2004 are considered final, and as a result, not subject to any retroactive adjustments, BMI has the right to audit open periods from January 1, 2002 onward.

In the years ended December 31, 2004 and 2003, the Company incurred expense of $13.6 million and $9.5 million, respectively, in royalties to ASCAP, BMI, SESAC, and the record companies. Although the Company began incurring the higher royalties associated with the new BMI agreement in July 2004, these incremental fees were not paid until January 2005. In addition, we reduced our reserve for prior period licensing royalties and related expenses by $1.5 million due to the resolution and closure of certain audit periods.

In October 1998, the Digital Millennium Copyright Act was enacted. The Act provides for a statutory license from the copyright owners of master recordings to make and use ephemeral copies of such recordings. Ephemeral copies refer to temporary copies of master sound recordings made to enable or facilitate the digital transmission of such recordings.

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In June 2002, a ten percent (10%) ephemeral royalty rate was established which covered the period from October 1998 through December 31, 2002. In connection with the establishment of such rate, we accrued royalties owed and remitted a payment on October 20, 2002 for royalties payable. With respect to future revenue subject to such ephemeral royalty rate, we believe our exposure is minimal, as the Company believes its current satellite technologies do not require use of ephemeral copies. Nonetheless, there can be no assurances that the collective for the copyright owners will refrain from investigating or otherwise challenging the applicability of the statute to our satellite technologies.

Government Regulation

We are subject to governmental regulation by the United States and the governments of other countries in which we provide services. We provide music services in a few areas in the United States through 928 to 960 megahertz frequencies licensed by the Federal Communications Commission (“FCC”). Additionally, the FCC licenses the frequencies used by satellites on which we transmit direct broadcast satellite services in the United States. If the FCC or any other person revokes or refuses to extend any of these licenses, we would be required to seek alternative transmission facilities. Laws, regulations and policies, or changes therein, in other countries could also adversely affect our existing services or restrict the growth of our business in these countries.

Employees

As of December 31, 2004, we had 1,385 full-time and 51 part-time employees. 150 of our technical and service personnel are union members. These personnel belong to 14 bargaining units, 13 of which are represented by the International Brotherhood of Electrical Workers and one of which is represented by the Communication Workers of America. All of our union contracts are current with the exception of a ratified but yet to be finalized contract with the local covering our operations in the District of Columbia and surrounding areas. We believe that our relations with our employees and with the unions that represent them are generally good.

Available Financial Information

The Company’s most recent quarterly report on Form 10-Q can be found on the Company’s website, www.muzak.com and on the SEC’s website, www.sec.gov. The Company’s 2004 annual report on Form 10-K will be available on the Company’s website as soon as reasonably practical.

The Company leases its headquarters located at 3318 Lakemont Boulevard, Fort Mill, South Carolina. The telephone number of our headquarters is (803) 396-3000. Our headquarters consists of approximately 100,000 square feet which accommodates our executive offices, operations, national sales, marketing, technical, finance and administrative staffs, and a warehouse. We also have local sales offices in various locations, and lease space at two satellite uplink facilities and warehouses in various locations. Approximately 95% of the total square footage of all of the Company’s facilities is leased and the remainder is owned.

The Company considers all of its properties, both owned and leased, suitable for its existing needs.

Muzak and CVS Pharmacy, Inc. are co-defendants in a lawsuit filed by DMX Music, Inc. in Los Angeles County Superior Court on July 25, 2003. DMX Music, Inc. is asserting claims against CVS Pharmacy, Inc. for breach of contract and breach of the covenant of good faith and fair dealing while asserting claims against Muzak for predatory pricing, unfair business practices, intentional interference with contract, and intentional interference with prospective economic advantage. The case has arisen as a result of a Request for Proposal prepared by CVS Pharmacy, Inc. in 2001 that solicited bids for music programming. DMX Music, Inc. contends that Muzak improperly entered into two contracts with CVS Pharmacy, Inc. subsequent to such Request for Proposal. While damages have yet to be definitively alleged, DMX Music, Inc. is seeking an award of no less than $3.0 million for lost profits, treble damages and an injunction prohibiting Muzak from allegedly selling its services below cost. While it is unable to predict the outcome of this case, Muzak contends that DMX Music. Inc.’s assertions, claims, and allegations against Muzak are without merit and is vigorously contesting the same. While the parties participated in mediation in October of 2004, they were unable to reach a settlement. A trial date is currently set for July 2005.

Muzak and the Company are co-defendants in a lawsuit filed in the U.S. District Court, Northern District of Illinois, Eastern Division, by Sound of Music, Ltd., a former franchisee of Muzak. Sound of Music, Ltd. is asserting claims against Muzak and the Company for violation of Federal securities laws, breach of contract and common law fraud. The case has arisen as a result of Sound of Music, Ltd.’s sale of substantially all of its MUZAK^® related assets to Muzak and the Company in 2001. Sound of Music, Ltd. commenced this lawsuit more than three years after the parties consummated the purchase and sale transaction and now contends that it did not receive the total consideration promised and that the value of certain Class A units of the Company received in consideration for the assets was misrepresented. Sound of Music, Ltd. is seeking damages in excess of $1 million. While it is unable to predict the outcome of this case, the Company contends that Sound of Music, Ltd.’s assertions, claims, and allegations against Muzak and the

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Company are without merit and is vigorously contesting the same. While discovery in this case has yet to commence, preliminary motions have been filed.

In March 2004, a jury found against Muzak and another defendant in Bono vs. Muzak LLC et-al and awarded the plaintiff approximately $0.4 million in damages for claims of sexual harassment and battery. In April 2005, the Company and Bono entered into a settlement agreement under which Muzak will pay $0.7 million, which includes an amount for damages as well as the plaintiff’s legal fees. The Company expects to pay such settlement during the second and third quarters of 2005.

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

None.

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PART II

The Company does not have an established trading market for its equity securities. The equity securities of the Company are held by MEM Holdings LLC, AMFM Systems Inc., New York Life Capital Partners, Northwestern Mutual Life Insurance Company, BancAmerica Capital Investors I, L.P., and by current or former management. ABRY Broadcast Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM Holdings.

The Company’s bank agreement, the indentures with respect to the Senior Notes and Senior Subordinated Notes of Muzak and Muzak Finance Corporation, the indenture with respect to the Company’s Senior Discount Notes, and the Securities Purchase Agreement between the Company and BancAmerica Capital Investors I, L.P, and various Investors, restrict the ability of the Company to make dividends and distributions in respect of their equity.

During 2004, the Company repurchased 153.5 Class B-1 Units, 153.4 Class B-2 Units, and 153.4 Class B-3 Units from members of management.

All of such repurchases were deemed exempt from registration under the Securities Act by virtue of Section 4 (2) thereof, as transactions not involving a public offering.

The five year selected financial data below has been revised to reflect a restatement. In preparing the Company’s 2004 year end financial statements and supporting schedules, an issue was discovered pertaining to revenue and accounts receivable cutoff procedures dating back to the time of the merger of Audio Communications Network and Muzak Limited Partnership in March 1999. In addition, it was determined that the redeemable Class A units should be presented outside of members’ deficiency on the consolidated balance sheets. See Note 2 to the Consolidated Financial statements for a more detailed discussion of this restatement.

Set forth below is Selected Financial Data for the Company for the years ended December 31, 2004, 2003, 2002, 2001, and 2000. The table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this report.

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Beginning accumulated deficit as of December 31, 1999 was $30.4 million and was $33.8 million as adjusted for the correction of the error.

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

During 2004, the Company recorded $6.6 million and $0.5 million of impairment charges relating to deferred production costs and a note receivable from the purchaser of the Company’s CCTV assets, respectively. Approximately $2.0 million of the $6.6 million impairment of deferred production costs represents cash expenditures during 2004. In addition, the Company recorded $1.5 millions of charges to reflect the write-off of capitalized installation labor upon client contract terminations.

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The Company has restated the consolidated balance sheet as of December 31, 2003 and the consolidated statements of income, consolidated statements of changes in members’ deficiency and consolidated statements of cash flows for the years ended December 31, 2003 and 2002 and the first three interim quarters in 2004 in this Annual Report on Form 10-K. The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the financial statements and related financial information contained in such reports should no longer be relied upon. Management’s discussion and analysis of financial condition and results of operations reflects the financial statements as restated. See Note 2 to the Consolidated Financial statements for a more detailed discussion of this restatement.

Business Overview

Muzak is the leading provider of business music programming in the United States based on market share. We believe that, together with our franchisees, we have a market share of approximately 60% of the estimated number of U.S. business locations currently subscribing to business music programming.

For a typical Audio Architecture client generated by our owned operations, we make an initial one-time investment of approximately $1,200 (including equipment, installation labor, and sales commissions, net of installation fees) and currently generate approximately $45 of contribution per month per client location. This allows us to recover our investment in that location within 24 months and generate a 63.3% annual return on investment per Audio Architecture client location, based on an average client relationship of 10 years.

For a typical Voice client generated by our owned operations, we make an initial one-time investment of approximately $740 (including equipment, installation labor and sales commissions, net of installation fees) and currently generate approximately $45 of contribution (gross revenues less direct variable costs) per month per client location. This allows us to recover our investment in that location within 16 months and generate a 99% annual return on investment per Voice client location based on a typical five-year contract term.

For clients generated by our franchisees, we receive a net monthly fee of approximately $5 for each Audio Architecture client location and a fee for each program that we produce for a Voice client. The initial one-time investment for a new Audio Architecture or Voice client location generated by a franchisee is borne exclusively by the franchisee.

Revenues, Cost of Revenues, Expenses and New Client Investments

Revenues from franchisees and from the sale of music and other business services represented 74.8 % of our total revenue in 2004, while equipment and other services revenue represented the remaining 25.2% of our total revenue in 2004.

Revenues

Our music and other business services revenue is generated from:

We derive equipment and related services revenues from the sale of audio system-related products such as sound systems, noise masking, and intercoms, and certain non audio system related products to business music clients and other clients. Equipment and related services revenues also include revenue from the installation, service and repair of equipment installed under a client contract. Installation, service and repair revenues consist principally of revenues from the installation of sound systems and other equipment that is not expressly part of a client contract. Installation revenues from sales of music and other business services are deferred and recognized over the term of the respective contracts.

Costs of Revenues

The cost of revenues for music and other business services consists primarily of broadcast delivery, programming and licensing associated with providing music and other business programming to a client or a franchisee. The cost of revenues for equipment represents the purchase cost plus handling, and shipping expenses. The cost of revenues for related services, which includes installation, service and repair, consists primarily of service and repair labor and labor for installation that is not associated with new

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client locations. The costs for installation that are associated with new client locations are capitalized as part of property and equipment and are depreciated over the initial contract term.

Expenses

Selling, general and administrative expenses include salaries, benefits, commissions, travel, marketing materials, training and occupancy costs associated with staffing and operating local sales offices. These expenses also include personnel and other costs in connection with our headquarters functions. Subscriber acquisitions costs (sales commissions) are amortized as a component of selling, general and administrative expense over the initial contract term. If a client’s contract is terminated early, the unamortized sales commission is typically recovered from the salesperson. Any remaining subscriber acquisition costs are reduced to reflect the termination of the client contract.

New Client Investment

The majority of our investments are comprised of our initial outlay for each new client location. We incur these costs only after receiving a signed contract from a client. Our typical initial one-time client installation investment per client location (including equipment, installation labor and sales commissions, net of installation fees) is approximately $1,200 and $740 per Audio Architecture and Voice client location, respectively. The cost of equipment and labor installed at the client’s premises is recorded within property and equipment and amortized over five years. In the event of a contract termination, we can typically recover and reuse the installed equipment. Subscriber acquisitions costs incurred in connection with acquiring new client locations are amortized as a component of selling, general and administrative expense over the initial contract term. If a client’s contract terminates early, the unamortized sales commission is typically recovered from the salesperson. Any remaining subscriber acquisition and capitalized installation labor costs are reduced to reflect the termination of the client contract.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and the financial condition. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, fixed assets and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions which could materially affect the financial statements.

Credit Allowance. The Company evaluates the need for a reserve against revenues for estimated losses resulting from the inability of clients to make required payments under their contracts. This analysis takes into consideration trends in accounts receivable agings, cancellation rates, and the reasons for cancellations. Such allowances include client balances that are not otherwise taken into account in establishing the allowance for doubtful accounts.

Allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments under their contracts. Management evaluates the credit risk and financial viability of the client to estimate the allowance.

Allowance for inventory. The Company maintains allowances for inventory for estimated losses resulting from obsolescence or shrinkage. Management evaluates the adequacy of this allowance by assessing the age and utility of its existing inventory.

Property and equipment. The Company has significant property and equipment on its balance sheet which is primarily comprised of equipment provided to subscribers and the labor associated with the installation of the equipment provided to subscribers. The Company capitalizes labor by identifying the labor hours tracked by our technicians for installations of equipment provided to subscribers for receipt of the Company’s products. If a client contract terminates early, the Company estimates and records a charge in selling, general, and administrative expenses to reflect the write-off of the unamortized capitalized installation labor. Due to the significant volume of transactions that occurs each year for both new installations and cancellations, we do not track costs specifically by customer contract, and therefore estimates are required to determine the costs to expense for cancellations when a client contract terminates early. Upon a contract cancellation, the Company retrieves the equipment provided to the client from the client location to be re-used at another client location. Additionally, the valuation and classification of these assets and the assignment of useful depreciable lives involves judgment and the use of estimates. Changes in business conditions, technology, or customer preferences could potentially require future adjustments to asset valuations.

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Intangible Assets. The Company has significant intangible assets on its balance sheet that include goodwill and other intangibles resulting from numerous acquisitions. The valuation and classification of these assets and the assignment of useful amortization lives involves significant judgments and the use of estimates. The testing of these intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. The Company’s assets are tested and reviewed for impairment on an ongoing basis under the established accounting guidelines. Changes in business conditions could potentially require future adjustments to asset valuations.

Deferred Subscriber Acquisition Costs. The Company has significant deferred subscriber acquisition costs on its balance sheet, which consist of commissions incurred in connection with acquiring new subscribers. The deferred subscriber acquisition costs are amortized into selling, general, and administrative expenses over the life of the client contract or five years, whichever is shorter, on a straight-line basis. If a client contract terminates early, the unamortized subscriber acquisition cost is typically recovered from the salesperson. Any remaining subscriber acquisition costs are reduced to reflect the termination of the client contract.

Contingencies. The Company is involved in various claims and lawsuits arising out of the normal conduct of its business. The Company reviews a claim and records a charge when it is both probable and can be reasonably estimated. The determination of when a claim is both probable and can be reasonably estimated is based upon numerous factors including information available, historical experience, and the advice of internal and external counsel. Management’s evaluation of a claim may change based upon changes in these and other factors.

Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues. Revenues increased 4.6% to $245.9 million in 2004 from $235.0 million in 2003. Music and other business services revenue increased 5.4% from $175.0 million in 2003 to $184.4 million in 2004. This increase is due to a net increase in the number of client locations at consistent prices and to existing client rate increases. $1.8 million, or approximately 1% of the music and other business service revenue increase is attributable to net rate changes during 2004. Our music and other business service revenue growth of 5.4% is lower than historical periods due to fewer new client installations as our cancellation rate of 10.1% was consistent with 2003 levels. The reduction in new client locations added was primarily due to disruptions associated with the reorganization and the centralization of the scheduling function at the home office. During 2004, we added, net of cancellations, 3,400 Audio Architecture, 4,700 Voice, and 500 other locations.

Equipment and labor revenues increased 2.3% over 2003 despite the sale of the Company’s CCTV product line in early 2004. The CCTV product line contributed approximately $7.0 million in equipment and labor revenues during 2003. This increase is due to the sale of system related products, such as sound systems that support our core products as well as non-music related equipment such as drive-thru systems and plasma screens.

Cost of Revenues. Cost of music and other business services revenues increased $2.6 million to $34.9 million in 2004 from $32.3 million in 2003. Cost of music and other business services revenues as a percentage of revenues was 18.9% and 18.5% in 2004 and 2003, respectively. This increase is due to incremental royalty expenses of $1.6 million relating to our new licensing agreement with BMI, an increase in amounts due to licensing collectives and record companies as a result of more clients opting to receive music via an on-premise device, as well as to an increase in the amounts paid in 2004 for licensing royalties based on a detailed review of the amounts owed to licensing collectives in late 2003. These increases are offset by a $1.5 million reduction in licensing royalty accruals in the fourth quarter of 2004 due to the closure of certain audit periods.

Costs of equipment and related services revenue increased 13.7% to $56.9 million in 2004 from $50.1 million in 2003. Costs of equipment and related services as a percentage of revenues increased from 83.4% in 2003 to 92.6% in 2004. This 9.2 percentage point increase is due to the following: (i) 3.6% is due to lower new client installations resulting in excess installation labor capacity as well as capitalized installation labor impairment charges associated with client contract terminations (ii) 2.5% is due to the equipment sales at lower margins and (iii) the remaining 3.1% is attributable to higher salaries and related benefits for our technicians. The reduction in new client installations is due to implementation challenges associated with the centralization of the scheduling function and the learning curve for the new employees performing this function. The lower margin equipment sales was primarily due to the sale of music receiving equipment that we typically provide as part of the music service and to the sale of more drive-thru systems to the quick service industry during 2004, which carry lower margins than our typical equipment sales.

Selling, General, and Administrative Selling, general, and administrative expenses increased 9.2% to $88.0 million in 2004 from $80.6 million in 2003. Amortization of deferred subscriber acquisition costs, a non-cash component of selling, general, and administrative expenses was relatively flat at $15.8 million in 2004 as compared to $15.6 million 2003 due to 1999 subscriber acquisition costs becoming fully amortized during 2004. The remaining increase of $7.2 million is comprised of the following: (i) $1.8 million of costs associated with the Company’s reorganization (ii) $0.6 million impairment on a note receivable from the purchaser of our CCTV assets (iii) $2.5 million of professional fees, including legal and accounting expenses (iv) $2.3 million bad

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debt expense and (v) $0.6 million increase in insurance premiums. These increases of $7.8 million are offset by reductions in sales and administrative workforces during the fourth quarter of 2003 and throughout 2004. The increase in professional fees is primarily due to legal costs incurred in connection with rate court proceedings and various lawsuits as well as to an increase in accounting fees due to the ongoing implementation of standards imposed by the Sarbanes Oxley legislation.

Impairment charge. The Company recorded a $6.6 million impairment of its deferred production costs during the fourth quarter of 2004. Historically, deferred production costs were incurred to create master music programs for future distribution to the Company’s clients. As a result of technological enhancements in the Company’s processes for creating and distributing many of its core music programs, the use of master recordings in the music creation and delivery process has been substantially eliminated.

Deprecation and amortization expense. Depreciation and amortization expense was $60.0 million and $63.7 million in 2004 and 2003, respectively. Depreciation expense decreased $0.6 million to $44.6 million in 2004 from $45.2 million in 2003. This decrease is due to the 1999 subscriber investments becoming fully depreciated during 2003 and 2004. Amortization expense decreased $3.1 million to $15.4 million in 2004 from $18.5 million in 2003 due to several trademarks and non-compete agreements becoming fully amortized during 2003 and 2004.

Interest expense. Interest expense increased $3.9 million or 9.7% in 2004 as compared to 2003. The increase is due to the issuance of our 10% Senior Notes and repayment of our previous Senior Credit Facility in 2003 and overall higher indebtedness. The Old Senior Credit Facility bore interest rates at the Company’s choice of LIBOR or the Base Rate plus a margin, based on the Company’s leverage ratio. In May 2004, the Company issued $35.0 million in term loans and used the proceeds to repurchase $32.7 million in aggregate principal amount of the Company’s 13% Senior Discount Notes.

Loss on extinguishment of debt. The $1.9 million loss on extinguishment of debt in 2004 is comprised of (i) $1.7 million relating to the repurchase of $32.7 million in aggregate principal amount of the Company’s 13% Senior Discount Notes at a premium of $1.0 million and the write off of related deferred financing fees of $0.7 million and (ii) $0.2 million relating to the write off of financing fees associated with the $5.0 million reduction in revolving commitments. The $3.7 million loss on extinguishment of debt in 2003 was recorded in connection with the issuance of 10% Senior Notes due 2009 and was comprised of $5.2 million write off of deferred financing fees related to the then existing Senior Credit Facility, $0.4 million reclassification of other comprehensive loss to earnings, offset by a $1.9 million gain on the repurchase of $18.1 million principal amount of Senior Discount Notes.

Net Loss. Net loss increased $11.3 million to $46.1 million in 2004 from $34.8 million in 2003 due to the reasons stated above.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues. Revenues increased 7.9% to $235.0 million in 2003 from $217.7 million in 2002. Music and other business services revenue increased 7.3% to $175.0 million in 2003. Our 2003 music and other business services revenue growth is consistent with historical periods and validates the stability of our recurring revenue base. This increase is due primarily to a net increase in the number of client locations at consistent prices. In addition, we implemented a rate increase to our existing client base during the year, which increased revenues approximately 1.0% over 2002. During 2003, we were able to reduce our cancellation rate to 10.2% from 10.7% in 2002 and from 11.8% in 2001 as a result of client relations programs throughout the Company. During 2003, we added, net of cancellations, 11,700 Audio Architecture, 5,000 Voice, and 1,700 other locations.

Equipment and related services revenue increased 9.8% or $5.3 million to $60.1 million in 2003. This increase was related to sales of closed circuit television systems (“CCTV”). We began focusing on this product line in late 2002 and made an investment in sales, administrative, and operational resources to support its growth. During 2003, we realized that significant resources were and would continue to be required to address the ever-increasing sophistication and complexity of technology and related product offerings in the CCTV marketplace. In light of the anticipated demands and complexities of this product line, we made a strategic decision to reallocate our capital resources and management efforts to our core products and services and exit the CCTV product line in late 2003. On March 1, 2004, we sold this product line to a third party for $1.9 million in notes receivable.

Cost of Revenues. Cost of music and other business services revenues decreased 6.3% or $2.2 million to $32.3 million in 2003. This reduction reflects the fact that the Company made no increases in reserves for estimated prior period licensing royalties during 2003 while a $3.1 million charge for prior period licensing royalties was recorded in 2002. Excluding the increase in reserves during 2002, cost of music and other business services revenues as a percentage of revenues was 18.5% and 19.2% in 2003 and 2002, respectively. The improvement in margin is due to the leveraging of our fixed cost infrastructure, a reduction in our on premise media fulfillment costs, as well as synergies realized through the use of our voice website for message fulfillment.

Cost of equipment and related services increased 14.5% or $6.3 million in 2003 from 2002. Cost of equipment and related services as a percentage of revenues was 83.4% and 79.9% during the 2003 and 2002 period, respectively. This increase is partially due to additional labor costs incurred during the fourth quarter of 2003 as a result of the September 2003 Telstar 4 satellite disruption. During the nine day period following the satellite disruption our technicians were primarily focused on re-pointing satellite dishes of

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affected client locations. As a result, we incurred additional labor costs of approximately $0.9 million in the fourth quarter in order to meet client installation schedules. The remaining increase is primarily due to costs related to the additional resources needed to support the start-up phase of our CCTV product line.

Selling, General, and Administrative. Selling, general, and administrative expenses were $80.6 million and $72.0 million for the years ended December 31, 2003 and 2002, respectively. This increase is largely attributable to the amortization of sales commissions, a non-cash component of selling, general, and administrative expenses. Amortization of sales commissions was $15.6 million and $12.4 million for the years ended December 31, 2003 and 2002, respectively. This increase is directly related to the increase in music and other business services revenues. Excluding the amortization of sales commissions, selling, general, and administrative expenses increased 9.1% to $65.0 million in 2003 from $59.6 million in 2002. This increase is attributable to the targeted investments made in sales and client relations infrastructure, higher commissions on equipment revenues, a $0.5 million reserve in connection with Bono vs. Muzak, and increased insurance costs. This increase is slightly offset by approximately $0.5 million in savings from bringing in house certain administrative functions previously performed by a third party. Excluding the amortization of sales commissions, selling, general, and administrative expenses as a percentage of revenues were 27.7% and 27.4% for the fiscal years ended December 31, 2003 and 2002, respectively.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $6.4 million to $63.7 million in 2003 from $70.1 million in 2002, a decrease of 9.1%. Depreciation was $45.2 million and $46.9 million in 2003 and 2002, respectively. The decrease is primarily due to subscriber provided equipment becoming fully depreciated in early 2003. Amortization expense decreased $4.7 million to $18.5 million in 2003 due to several non-compete agreements becoming fully amortized in late 2002.

Interest expense. Interest expense increased 10.2% to $40.3 million in 2003 from $36.5 million in 2002. This increase is due to the issuance of our 10% Senior Notes and the repayment of our Old Senior Credit Facility in May 2003 as well as to an overall increase in indebtedness of approximately $25 million. The Old Senior Credit Facility bore interest at the Company’s choice of LIBOR or the Base Rate plus a margin, based on the Company’s leverage ratio. This increase is offset by a $0.7 million reduction in interest expense due to our interest rate swap agreement. The effective interest rate for the years ended December 31, 2003 and 2002 was 9.3%, respectively.

Loss on extinguishment of debt. Loss on extinguishment of debt was $3.7 million for the year ended December 31, 2003. This loss was recorded in connection with the issuance of 10% Senior Notes due 2009 and is comprised of a $5.2 million write off of financing fees related to the Old Senior Credit Facility, $0.4 million reclassification of other comprehensive loss to earnings, offset by a $1.9 million gain on the repurchase of $18.1 million principal amount of Senior Discount Notes.

Income tax benefit. Income tax benefit decreased to $0.6 million from $1.0 million in the years ended December 31, 2003 and 2002, respectively. Although the Company is a limited liability company and is treated as a partnership for income tax purposes, the Company has several subsidiaries that are corporations. The income tax benefit relates to these corporate subsidiaries.

Net Loss. The combined effect of the foregoing resulted in a net loss of $34.8 million and $38.0 million in the years ended December 31, 2003 and 2002, respectively.

2005 Expectations of Results of Operations

We expect that the 2005 business services revenue growth rate will be below historical levels as the Company’s business plan anticipates less growth in new client locations. Although the 2005 growth rate will be consistent with the latter half of 2004, we believe we will be able to maintain this growth rate with a lower cost base. In addition, the business services revenue margin will decrease slightly due to the increases in royalty payments under our new agreements with the licensing societies. We expect that equipment and related services revenue will be flat as compared to 2004 levels. Although the equipment and related services revenue margin will be impacted in the first quarter and will continue to be impacted by lower installation activity, the implementation of certain initiatives should enable the Company to more efficiently manage its resources in the latter half of the year. A majority of the 2004 increase in selling, general, and administrative expenses, excluding the non cash amortization of sales commissions, was due to legal fees incurred in connection with rate court proceedings with the licensing societies and other various lawsuits, as well as bad debt expense and severance and related charges associated with our reorganization efforts. While we believe that we will benefit from decreases in certain selling, general, and administrative expenses such as legal costs, we expect that selling, general, and administrative expenses in 2005 will be similiar to 2004 levels.

Liquidity and Capital Resources

Sources and Uses. Our principal sources of funds have been cash generated from operations and borrowings under the senior credit facility. Cash was primarily used during 2004 to make investments relating to new client locations and to make interest payments on our indebtedness. Cash flows provided by operations were $24.6 million, $27.9 million, and $31.6 million and cash flows used in investing activities were $37.9 million, $41.5 million, and $38.8 million during the years ended December 31, 2004, 2003, and 2002, respectively. During the years ended December 31, 2004, 2003, and 2002, cash flows provided by financing activities were $11.5 million, $14.1 million, and $6.4 million, respectively.

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The majority of our capital expenditures are comprised of the initial one-time investment for the installation of equipment for new client locations. During the year ended December 31, 2004, our total initial investment in new client locations was $46.5 million, which was comprised of equipment and installation costs attributable to new client locations of $29.6 million and $16.9 million in subscriber acquisition costs (included in cash provided by operating activities in the consolidated statement of cash flows) relating to these new locations. The subscriber acquisition costs are capitalized and are amortized as a component of selling, general and administrative expenses over the initial contract term. We also receive installation revenue relating to new locations. This revenue is deferred and amortized as a component of equipment and related services revenue over the initial contract term of five years.

We also invested $2.3 million in system upgrades, furniture and fixtures, and computers to be used at our headquarters Our investment to replenish the equipment exchange pool relating to our drive-thru systems client locations was $3.3 million during 2004. In addition, during 2004, we incurred equipment and installation costs of $1.0 million relating to conversions from one delivery platform to another delivery platform. We used existing receivers for the majority of these conversions, but incurred installation costs and costs associated with procuring satellite dishes.

Due to the centralization of the administrative, purchasing, and scheduling functions, and the associated learning curve of new employees performing these functions, we experienced an increase in both receivables and inventory balances during 2004. However, the centralization has enabled us to implement consistent policies and procedures in all functional areas as well as to standardize product offerings. This should enable the Company to improve working capital balances throughout 2005. In addition, we recently amended a purchase commitment for receivers used on our AMC-1 delivery platform, which will result in a reduction in commitment of $2.6 million during 2005. This commitment is included in unconditional purchase obligations below.

Our future need for liquidity will arise primarily from capital expenditures for investments in new client locations and from interest payments on our indebtedness. The following table summarizes contractual obligations and commitments at December 31, 2004 (in thousands).

We currently anticipate that our total initial investment in new client locations during 2005 will be approximately $43.8 million including $28.1 million of equipment and installation costs attributable to new client locations, and $15.7 million in sales commissions relating to new client locations. The Company is focused on reducing the initial investment associated with new client locations through the re-use of equipment and efficiencies gained from product standardization, vendor consolidation and labor management, and a reduction in the new client location growth rate. In addition, we anticipate our investment in property and equipment to be used at headquarters, equipment for use in the exchange pool for servicing drive-thru systems client locations, and equipment and installation costs for conversions will be approximately $5.0 million.

We currently expect that our primary source of funds will be cash flows from operations and our secondary source to be approximately $21.0 million of net proceeds from our New Senior Credit Facility. As of April 15, 2005, we had outstanding debt of $80.1 million (including letters of credit of $2.6 million) under our $90.0 million then existing Senior Credit Facility. On April 15, 2005, the Company refinanced its then existing Senior Credit Facility with a $105.0 million term loan. A portion of the proceeds was used to repay the existing outstanding term and revolving loans and associated interest and to collateralize outstanding letters of credit under the then existing Senior Credit facility, and to pay related fees and expenses. Total cash available, after giving effect to this refinancing and to existing cash balances as of April 15, 2005, was approximately $27.2 million. Although the Company believes that it will generate positive operating cash flows in fiscal 2005, it expects that a portion of the excess cash resulting from the financing transaction described above will be required to fund its growth in new client locations and debt service for at least the next twelve months.

Overall, the Company’s business plan anticipates reduced growth in new client locations and operational and administrative improvements. Our future performance is subject to industry based factors such as the level of competition in the business music industry, competitive pricing, concentrations in and dependence on satellite delivery capabilities, rapid technological changes, the impact of legislation and regulation, our dependence on license agreements and other factors that are beyond our control. Given that the Company no longer has a revolving credit facility, if it required cash in excess of amounts on hand, it may be required, among other things, to incur additional indebtedness, enter into other financing transactions, defer business opportunities, reduce its expenses, or sell assets.

Mandatory Debt Repayments. The new Senior Credit Facility entered into in April 2005 provides for mandatory prepayments with net cash proceeds of certain asset sales, net cash proceeds of permitted debt issuances, and net cash proceeds from insurance recovery and condemnation events. The 10% Senior Notes mature in February 2009, the 9 ⁷/8% senior subordinated notes mature in March 2009, and the 13% senior

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discount notes mature in March 2010. The indentures governing the 10% Senior Notes, 9 ⁷/8% senior subordinated notes and the 13% senior discount notes provide that in the event of certain asset dispositions, the Company must apply net proceeds first to repay, as required, senior credit facility indebtedness. To the extent the net proceeds have not been applied within 360 days to an investment in capital expenditures or other long term tangible assets used in the business, and to the extent the remaining net proceeds exceed $10.0 million, we must make an offer to purchase outstanding 10% Senior Notes at 100% of the accreted value. To the extent there are excess funds after the purchase of the 10% Senior Notes, the Company must make an offer to purchase 9 ⁷/8% senior subordinated notes at 100% of their principal amount plus accrued interest. To the extent there are excess funds after the purchase of the 9 ⁷/8% senior subordinated notes, the Company must make an offer to purchase outstanding senior discount notes at 100% of the accreted value. The Company must also make an offer to purchase outstanding 10% Senior notes, 9 ⁷/8% senior subordinated notes and the 13% senior discount notes at 101% of their principal amount plus accrued and unpaid interest if a change in control of the Company occurs.

Interest Rate Protection Agreements. The Company’s interest rate swap agreement, entered into in May 2003 to mitigate the fixed interest costs associated with the Senior Notes, ended in November 2004. This interest rate swap agreement effectively exchanged $220.0 million of fixed rate debt at 10.0% for six month LIBOR plus 7.95%.

Related party transactions

The Company has a Management and Consulting Services Agreement (“Management Agreement”) with ABRY Partners, which provides that Muzak will pay a management fee as defined in the Management Agreement. During 2004, 2003 and 2002, Muzak incurred fees and expenses of $0.3 million, $0.4 million, and $0.4 million, respectively under this agreement. Either Muzak or ABRY Partners, with the approval of the Board of Directors of the Company, may terminate the Management Agreement by prior written notice to the other. In addition, we accrued $0.9 million of fees and expenses payable to ABRY Partners for services rendered in connection with the private placement of the Senior Notes during 2003 and accrued $0.1 million for services rendered for financing efforts in 2002.

On May 20, 2003, the Company repaid $10.0 million of junior subordinated unsecured notes (“sponsor notes”) and related interest of $1.9 million to MEM Holdings with the proceeds from the issuance of 10% Senior Notes. The Company originally borrowed this $10.0 million in sponsor notes on March 15, 2002. MEM Holdings is a holding company that owns 64.2% of the voting membership interests in the Company. ABRY Broadcast Partners III, L.P. and ABRY Broadcast Partners II, L.P. are the beneficial owners of MEM Holdings.

Seasonality

Muzak experiences slight seasonality in its equipment and related services revenues and costs of revenues during the third and fourth quarters resulting primarily from our retail client base which constructs and opens new retail stores in time for the fourth quarter holiday season.

Inflation and Changing Prices

We do not believe that inflation and other changing prices have had a significant impact on our operations.

Interest Rate Exposure

As a result of the issuance of 10% Senior Notes in May 2003 and the use of proceeds therefrom, the majority of our debt is fixed rate debt. Our exposure to market risk for changes in interest rates is limited to our Senior Credit Facility. The interest rate exposure for our variable rate debt obligations is currently indexed to LIBOR of one, two, three, six, nine, or twelve months as selected by us, or the Alternate Base Rate as defined. We have used interest rate protection agreements in the past to reduce borrowing rates although none are in effect as of December 31, 2004.

The table below provides information about our debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable interest rates are based on implied LIBOR in the yield curve at the reporting date. The principal cash flows are in thousands.

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See index in Item 15 of this annual report on Form 10-K. Quarterly information (unaudited) is presented in a Note to the consolidated financial statements.

None.

SEC rules require us to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management, our CEO and CFO, to allow timely decisions regarding required disclosure.

The Company’s management and its Board of Directors concluded on March 28, 2005 that the Company’s fiscal year 2003 and 2002 consolidated financial statements should be restated to correct an error resulting from revenue and accounts receivable cut-off procedures as well as a revision in classification to reflect redeemable Class A units outside of members’ deficiency on the consolidated balance sheet.

In preparing our 2004 year end financial statements, we discovered an error pertaining to revenue and accounts receivable cutoff procedures dating back to the time of the merger of Audio Communications Network and Muzak Limited Partnership in March 1999. The error impacted earnings in 1999 and had an immaterial impact on earnings subsequent to 1999. The balance sheet impact of the error is an overstatement of accounts receivable, an overstatement of accrued expenses for the portion of such receivables that related to billings on behalf of our franchisees, and an understatement of inventory and accumulated deficit balances. Because the error in cut-off occurred consistently at each balance sheet date since December 31, 1999, the correction of this error did not result in materially different earnings for the periods reported since 1999. The errors in cut-off related to both our billings for recurring revenue services and equipment and labor revenues. The cutoff error resulted from recording revenues in advance of the period earned. The error relating to recurring services revenue also resulted in an overstatement of amounts payable to our franchisees for billings performed on their behalf.

Based on our evaluation of disclosure controls and procedures, as of the date of the end of the period covered by this Annual Report, our CEO and CFO have concluded that our disclosure controls and procedures were ineffective as a result of the restatement item discussed in the preceding paragraph. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our financial reports have been made known to management, including our CEO and CFO, and other persons responsible for preparing such reports and is recorded, processed, summarized and reported.

Based on management’s evaluation of the restatement item described above, management has determined that a material weakness existed in our internal control over financial reporting. In response to the identified weakness, we have taken steps to strengthen our internal controls over financial reporting, which were implemented in the first quarter of 2005, to prevent recurrence of the circumstances that resulted in our determination to restate our financial statements for the years ended December 31, 2003 and 2002 and the first three quarters of 2004. Our new control procedures provide for formal reconciliation and review procedures surrounding all financial statement accounts on a monthly basis. Such reconciliations are reviewed and approved by a manager in our accounting department. We are reviewing all work orders completed by the end of the period and recording all completed but unbilled equipment revenues to ensure proper cut-off. We believe that our accounting personnel are adequately trained and that we have appropriate staffing levels.

On April 15, 2005, the Company entered into a new $105.0 million senior secured term loan facility (“New Senior Credit Facility”) payable in quarterly installments of 0.25% beginning September 2005 until final maturity on April 15, 2008. A portion of the proceeds from the New Senior Credit Facility was used to repay in full the outstanding term and revolving loans and associated interest and to collateralize outstanding letters of credit under the Company’s then existing Senior Credit Facility, and to pay related fees and expenses. The then existing senior credit facility has been terminated. The New Senior Credit facility is guaranteed by certain of our direct and indirect subsidiaries and is secured by a first priority security interest in (i) substantially all of our tangible and intangible assets and (ii) the capital stock of our subsidiaries. The non-guarantor subsidiary is minor and the consolidated amounts in the Company’s financial statements are representative of the combined guarantor’s financial statements. The New Senior Credit Facility contains a senior secured leverage ratio and various other restrictive covenants, which are customary for such facilities. In addition, the Company is generally prohibited from incurring additional indebtedness, incurring liens, paying dividends or making other restricted payments, consummating asset sales, entering into transactions with affiliates, merging or consolidating with any other person or selling, assigning, transferring, leasing, conveying, or otherwise disposing of assets.

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PART III

Muzak is a wholly owned subsidiary of the Company. The Company is a limited liability company whose affairs are governed by a Board of Directors. The following table sets forth information about the directors of the Company and the executive officers of Muzak as of December 31, 2004. Each of the persons identified below as a director is currently a director of the Company with the exception of Mr. Unger. Mr. Yudkoff is the sole director of Muzak. The election of directors is subject to the terms of the Members Agreement and Securityholders Agreement and is described below under “Item 13. Certain Relationships and Related Transactions.”

The following sets forth biographical information with respect to the directors of the Company and executive officers of Muzak.

Lon E. Otremba has been the Chief Executive Officer of the Company since April 2004 and a Director and the Company’s President since September 2003. He served as Executive Vice President of America Online’s Interactive Marketing Group from May 2002 to September 2003. From January 2002 to April 2002 he served as Executive Vice President of Strategic Planning for America Online’s Local Partnership Group. From November 2000 to January 2002, he served as Chief Executive Officer of BountySystems, Inc. Prior to joining BountySystems, he was President of Mail.com from March 2000 to October 2000 and served as Mail.com’s Chief Operating Officer from October 1997 to March 2000.

Stephen P. Villa has been a Director and our Chief Operating Officer since October 2001 and has been Muzak’s Chief Financial Officer since September 2000. He served as the Chief Financial Officer and Treasurer of Frisby Technologies, Inc., from April 1998 to September 2000. From January 1997 to March 1998, Mr. Villa was the controller of Harman Consumer Group, an operating company of Harman International, Inc., which sells consumer electronic products. From September 1986 through January 1997, Mr. Villa held numerous positions with Price Waterhouse LLP in their New York and Paris offices. Mr. Villa’s last position with Price Waterhouse LLP was audit senior manager.

Scott J. Wolf has been the Company’s Senior Vice President of Sales since August 2004. From April 2004 to August 2004, Mr. Wolf served as the Company’s Senior Vice President of National Sales. Prior to joining the Company in April 2004, Mr. Wolf was the Executive Vice President of Sales for Vivendi Universal’s Music Internet Group from June 2002 to September 2003. From June 1999 to December 2001, he served as the Senior Vice President of Sales and Business Development of NetCreations.

Kenneth F. Kahn has served as Senior Vice President of Product and Marketing since May 2004. From September 2002 to May 2004 he served as the Senior Vice President of the Owned Operations, North Region. From April 2002 to September 2002, he served as Vice President of Sales and Marketing and as Vice President of Marketing from March 1999 to April 2002. Mr. Kahn served as the Vice President of Marketing for Old Muzak from 1997 to March 1999 and as Sales Manager for Old Muzak’s New York office from 1996 to 1997. Prior to joining Old Muzak, Mr. Kahn worked for Emphasis Music, Astroland Amusement Park, and Phase One Distribution.

David M. Moore has served as Chief Technology Officer since November 2004 and served as Senior Vice President of Technical Operations from May 2000 to September 2004. Mr. Moore served as Vice President of the Network Operations Center from March 1999 to May 2000. Mr. Moore served as an Account Executive at Foundation Telecom, Inc. from 1996 to 1997. From 1990 to 1996 and June 1998 to March 1999, Mr. Moore held various positions at Old Muzak.

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Mary Ann Lusk has served as the Company’s Senior Vice President of Client Services since July 2004. Prior to joining Muzak, Ms. Lusk was an independent service consultant from December 2003 to July 2004. From July 2002 to November 2003, Ms. Lusk served as the Vice President of Customer Interaction at CNA Insurance. From September 1995 to December 2001, Ms. Lusk was the Director of Client Service Business Markets for Ameritech Communications.

Thomas J. Gantert has been the Company’s Senior Vice President of Operations since October 2004 and served as the Company’s Vice President of Field Operations from May 2004 to October 2004. From October 2002 to May 2004, he served as the regional general manager of the Company’s Denver, Dallas, Houston, Kansas City, and Omaha offices. From March 1999 to October 2002, Mr. Gantert served as the Regional Vice President of the Company’s California, Portland, Seattle, Denver, Phoenix, Salt Lake City and Boise offices. From December 1986 to March 1999, he held various positions at Old Muzak.

Michael F. Zendan II has been the Company’s Vice President and General Counsel since October 1999. From 1996 to October 1999, Mr. Zendan was Assistant General Counsel (Aerospace) and Assistant Secretary for Coltec Industries Inc., and was Assistant General Counsel (Industrial) for Coltec Industries Inc. from 1994-1996, and served as Attorney and Senior Attorney for Coltec Industries Inc. from 1992-1994.

William A. Boyd has served as Chairman Emeritus since March 2004 and has served on the Board of Directors since March 1999. Mr. Boyd served as the Chief Executive Officer of the Company from March 1999 to March 2004 and was the Chief Executive Officer of Old Muzak from 1997 to March 1999. Mr. Boyd started his career with Muzak in 1969 and has held various positions during his tenure with the Company’s predecessors. In addition, Mr. Boyd owned and operated one of Muzak’s franchises during his Muzak career.

Royce G. Yudkoff has served as Director since March 1999 and as the sole director of Muzak since March 1999. He is the President and Managing Partner of ABRY Partners, a private equity investment firm which focuses exclusively on media and communications companies. Prior to co-founding ABRY Partners, Mr. Yudkoff was a partner at Bain & Company, where he shared significant responsibility for the firm’s media practice. Mr. Yudkoff is presently a director or the equivalent of various companies including Penton Media, Inc., USA Mobility, Inc., and Nexstar Broadcasting Group LLC.

Peni A. Garber has served as Director since March 1999. She is a partner and Secretary of ABRY Partners, a private equity investment firm which focuses exclusively on media and communication companies. She joined ABRY Partners in 1990 from Price Waterhouse, where she served as Senior Accountant in the Audit Division from 1985 to 1990. Ms. Garber is presently a director or the equivalent of CommerceConnect Media Holdings, Inc., Penton Media, Inc., and Dolan Media Company.

Robert P. MacInnis has served as Director since November 2003. He is a partner of ABRY Partners, a private equity firm which focuses exclusively on media and communication companies. Prior to joining ABRY Partners, he was Chief Financial Officer of Weather Services Corporation, an ABRY portfolio company. From 1991 to 1997, he was associated with PricewaterhouseCoopers, where he was a senior manager in the Mergers and Acquisitions Group. Mr. MacInnis is presently a director or the equivalent of various companies including Hispanic Yellow Pages Network LLC and Consolidated Theatres.

David W. Unger served as a Director from March 1999 until his resignation in February 2005. He is the Managing Partner of Avalon Equity Partners and has served in this capacity since its inception in December 1999. Mr. Unger previously served as Vice President of Muzak from March 1999 to August 1999 and was Executive Vice President of Audio Communications Network from May 1997 to March 1999. Prior to May 1997, he was chairman of SunCom Communications, LLC, a franchise of Muzak.

Hilary Kaiser Grove has served as Director since November 2003. She joined ABRY Partners, a private equity firm which focuses exclusively on media and communication companies, in July 1999. Prior to joining ABRY Partners, Ms. Grove was an investment banking analyst at Lehman Brothers in the Media and Telecommunications Group from July 1997 to July 1999. She is a director or the equivalent of CommerceConnect Media Holdings and Billing Services Group, LLC.

Andrew Banks has served as a Director since March 1999. He is Chairman of ABRY Partners. Prior to co-founding ABRY, Mr. Banks was a partner at Bain & Company where he shared significant responsibility for the firm’s media practice.

Audit Committee Financial Expert

Since our equity is not currently listed on or with a national securities exchange or national securities association, we are not required to have an audit committee and therefore do not have an audit committee financial expert. As such, the Board of Directors performs the function of an audit committee.

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Code of Ethics

The Company and Muzak have adopted a code of ethics applicable to the company’s senior financial officers, including the company’s principal executive officer. This Code of Ethics (the “Code”) has been adopted by the Company and Muzak in accordance with Section 406 of the Sarbanes-Oxley Act of 2002, and the rules issued by the Securities and Exchange Commission thereunder. We make such code available free of charge within the “Investor Relations” information section of our internet website, at www.muzak.com. We intend to disclose any amendments to our code of ethics that would otherwise be disclosed on Form 8-K and any waiver from a provision of that code granted to our executive officers or directors that would otherwise be disclosed on Form 8-K on our internet website within five business days following such amendment or waiver. The information contained on or connected to our internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the Securities and Exchange Commission.

The following table sets forth information concerning the compensation of Muzak’s Chief Executive Officer and Muzak’s four most highly compensated executive officers, at December 31, 2004, for services in all capacities to the Company.

Summary Compensation Table

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Voting and Terms of Office

Pursuant to the Amended and Restated Limited Liability Company Agreement of the Company, each director of the Company is designated as either a “Class A Director” or a “Class B Director.” Each Class A Director is entitled to three votes and each Class B Director is entitled to one vote. Any decisions to be made by the Board of Directors, requires the approval of a majority of the votes of the Board of Directors. The authorized number of each class of directors is three Class A Directors, Messrs. Banks and Yudkoff and Ms. Garber, and five Class B Directors, Messrs. Boyd, Villa, MacInnis, Otremba, and Mrs. Grove. The number of directors may be increased or decreased by the Board of Directors. Directors hold office until their respective successors are elected and qualified or until their earlier death, resignation or removal.

Management Employment Agreements

William A. Boyd. Pursuant to the employment agreement dated as of March 16, 2001, as subsequently amended, by and among Mr. Boyd, the Company and Muzak, Muzak agreed to employ Mr. Boyd as Chairman Emeritus until his resignation, death, disability or termination of employment. Under the employment agreement, Mr. Boyd is:

Lon E. Otremba. Pursuant to the employment agreement dated as of September 29, 2003 by and among Mr. Otremba, the Company and Muzak, Muzak agreed to employ Mr. Otremba as President until his resignation, death, disability or termination of employment. Under the employment agreement, Mr. Otremba is:

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If Muzak terminates Mr. Otremba’s employment without “cause,” Mr. Otremba will be entitled to receive his base salary for a period of one year thereafter.

Stephen P. Villa. Pursuant to the employment agreement dated as of November 5, 2002, as subsequently amended, by and among Mr. Villa, the Company and Muzak, Muzak agreed to employ Mr. Villa as Chief Operating Officer and Chief Financial Officer until his resignation, death, disability or termination of employment. Under the employment agreement, Mr. Villa is:

If Muzak terminates Mr. Villa’s employment without “cause,” Mr. Villa will be entitled to receive his base salary for a period of one year thereafter.

Other Executive Officers. Each of Messrs., Kahn and Wolf is a party to an employment agreement with the Company, the terms of which are the same in all material respects. Each agreement may be terminated at any time by either party. Under the agreements, the executive is:

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The following table sets forth information regarding the beneficial ownership of the Class A and Class A-1 units of the Company, which are the only outstanding membership interests in the Company with voting rights, as of March 15, 2005, by:

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Members Agreement

The Company, MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership, CMS Diversified Partners, L.P. and Stephen Jones are parties to a Second Amended and Restated Members Agreement dated as of October 18, 2000. Pursuant to the Members Agreement, MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership, CMS Diversified Partners, L.P. and Stephen Jones have agreed to vote their equity interests in the Company to elect Mr. Unger and Mr. Boyd to the Board of Directors of the Company. The Members Agreement also contains:

The voting restrictions will terminate with respect to Mr. Unger upon the first to occur of an Approved Company Sale or a specified liquidity event with respect to Mr. Unger’s Class A units, and with respect to Mr. Boyd upon the earlier of an Approved Company Sale and the date on which he ceases to serve as the CEO of the Company. The co-sale, drag along, transfer restrictions and rights of first refusal will terminate upon consummation of the first to occur of a Qualified Public Offering, as defined in the Members Agreement, or an Approved Company Sale.

Securityholders Agreement

The Company, MEM Holdings, AMFM Systems and other investors are parties to an Amended and Restated Securityholders Agreement dated as of March 15, 2002. Pursuant to the Securityholders Agreement, the parties have agreed to vote their equity interests in the Company to establish the composition of the Board of Directors of the Company and to provide observer rights for specified investors to attend meetings of the Board of Directors. The Securityholders Agreement also contains:

The voting restrictions will terminate upon an Approved Company Sale. The co-sale rights will terminate upon the consummation of the first to occur of an initial Public Offering by the Company, as defined in the Securityholders Agreement, or an Approved Company Sale. The drag along rights, preemptive rights and the rights of first offer will terminate on the consummation of the first to occur of a Qualified Public Offering, as defined in the Securityholders Agreement, or an Approved Company Sale.

Indemnification

Muzak’s Limited Liability Company Agreement dated as of March 18, 1999, as amended, provides for indemnification of directors and officers, including advancement of reasonable attorney’s fees and other expenses, in connection with all claims, liabilities and expenses arising out of the management of Muzak’s affairs. Such indemnification obligations are limited to the extent Muzak’s assets are sufficient to cover such obligations. Muzak carries directors and officers insurance that covers such exposure for indemnification up to certain limits. As of December 31, 2004 and 2003, we had accrued $50,000 to cover indemnification.

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Registration Agreement

The Company, MEM Holdings, Mr. Koff, Mr. Boyd, Mr. Unger, Music Holdings Corp., AMFM Systems, Inc, and other investors are parties to a Second Amended and Restated Registration Agreement dated as of October 18, 2000. Pursuant to this Registration Agreement, the holders of a majority of the ABRY Registrable Securities, as defined in the Registration Agreement, may request a demand registration under the Securities Act of all or any portion of the ABRY Registrable Securities:

In accordance with the Registration Agreement, the holders of a majority of AMFM Registrable Securities, as defined in the Registration Agreement, may request a demand registration under the Securities Act of all or any portion of the AMFM Registrable Securities on Form S-1 or any similar long-form registration and on Form S-2 or S-3 or any similar short-form registration. In addition, the holders of at least 60% of the Preferred Registrable Securities, as defined in the Registration Agreement, may request a demand registration under the Securities Act of all or any portion of the Preferred Registrable Securities on Form S-1, but the registration will be affected as a short-form registration, if available. All holders of Registrable Securities, as defined in the Registration Agreement, will have “piggyback” registration rights, which entitle them to include their Registrable equity securities in registrations of securities by the Parent, subject to the satisfaction of specified conditions.

The Company is responsible for all expenses incident to its performance under the Registration Agreement, including without limitation all registration and filing fees, and expenses of compliance with securities or blue sky laws, printing expenses, fees of counsel for the Company and the holders of Registrable securities and all independent certified public accountants and underwriters.

ABRY Partners Management and Consulting Services Agreement

Pursuant to an Amended and Restated Management and Consulting Services Agreement between ABRY Partners and the Company dated March 18, 1999, ABRY Partners is entitled to a management fee when, and if, it provides advisory and management consulting services to the Company. During 2004, 2003 and 2002, Muzak incurred fees and expenses of $0.3 million, $0.4 million, and $0.4 million, respectively under this agreement. Either ABRY Partners or the Company, with the approval of the Board of Directors of the Company, may terminate the Management Agreement by prior written notice to the other. In addition, during 2003, the Company incurred fees and expenses of $0.9 million payable to ABRY Partners for services rendered in connection with the private placement of the Senior Notes and incurred fees of $0.1 million for services rendered for financing efforts during 2002.

Related Party Debt

On March 15, 2002, Muzak borrowed $10.0 million from MEM Holdings in the form of junior subordinated unsecured notes, which we refer to as the sponsor notes. We repaid the sponsor notes together with accrued interest with the proceeds of the Senior Notes offering in May 2003.

From July 1, 1999 through November 24, 1999, the Company borrowed an aggregate amount of $30.0 million from MEM Holdings in the form of sponsor notes. We repaid $3.0 million of the sponsor note with the proceeds received from a preferred membership unit offering in October 2000. The remaining $27.0 million, plus $6.7 million of accrued interest, was converted into Class A units of the Company in May 2001.

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The following table discloses the aggregate fees for each of the last two fiscal years for professional services rendered by our principal accountant:

Audit- related fees relate to professional services rendered by our principal accountant in conjunction with the issuance of the 10% Senior Notes in May 2003.

Since our equity interests are not currently listed on or with a national securities exchange or national securities association, we are not required to have an audit committee and therefore do not have an audit committee financial expert. As such, the Board of Directors performs the function of an audit committee. Prior to engaging our principal accountant to render audit or non-audit services, the engagement as well as charges for such services is approved by our Board of Directors. All fees incurred during 2004 were pre-approved by the Board of Directors.

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PART IV

(a)(1) Financial Statements:

All other schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required, are inapplicable, or the information is included in the Consolidated Financial Statements or the Notes thereto.

(a)(2) Exhibits:

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 15^th day of April 2005.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the 15th day of April 2005.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members

of Muzak Holdings LLC:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Muzak Holdings LLC (the “Company”) and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Company has restated its consolidated financial statements for the years ended December 31, 2003 and 2002.

PricewaterhouseCoopers LLP

Charlotte, North Carolina

April 15, 2005

F-1

MUZAK HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS

(In thousands)