<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the fiscal year ended: December 31, 2005

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                        Commission File Number 000-25977

                                   ----------

                              L Q CORPORATION, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           DELAWARE                                             77-0421089
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NUMBER)

 888 SEVENTH AVE., 17TH FLOOR,
         NEW YORK, NY                                             10019
(ADDRESS OF PRINCIPAL EXECUTIVE                                 (ZIP CODE)
           OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 974-5730

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------                    -----------------------------------------
       None                                            None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         Common Stock, $0.001 par value

                                   ----------

        Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

        Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

        Indicate by check mark 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. [ ]

        Indicate by check mark whether the registrant is a large accelerated
filer or a non-accelerated filer. See definition of "Accelerated" filer and
large accelerated filers in rule 12b-2 of the Exchange Act (check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]

        Indicated by check mark whether the registrant is a shell company (as
defined in Rule 12 b-2 of the Exchange Act). Yes [ ] No [X]

        The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of (the last business day of the
Registrant's most recently completed second fiscal quarter) was approximately
6,139,519 based on the closing price of the Common Stock as reported on The
Nasdaq OTC Bulletin Board for that date.

The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of March 17, 2006: 3,214,408.

================================================================================

<PAGE>

                                TABLE OF CONTENTS

                                                                         PAGE
                                                                         -----

PART I

ITEM 1.    BUSINESS                                                          1
ITEM 1A.   RISK FACTORS                                                      5
ITEM 1B.   UNRESOLVED STAFF COMMENTS                                         7
ITEM 2.    PROPERTIES                                                        7
ITEM 3.    LEGAL PROCEEDINGS                                                 7
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               9

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
             MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES               9
ITEM 6.    SELECTED FINANCIAL DATA                                          11
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS                                      12
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       20
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      20
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE                                       20
ITEM 9A.   CONTROLS AND PROCEDURES                                          20
ITEM 9B.   OTHER INFORMATION                                                20

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT               20
ITEM 11.   EXECUTIVE COMPENSATION                                           23
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT                                                     27
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   29
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES                           30

PART IV.

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                       31

<PAGE>

PART I

ITEM 1.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7, contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934. We caution investors that any forward-looking statements presented in this
Annual Report and presented elsewhere by management from time to time are based
on management's beliefs and assumptions made by, and information currently
available to, management. When used, the words "anticipate", "believe",
"expect", "intend", "may", "plan", "estimate", "project", "should", "will be"
and similar expressions which do not relate solely to historical matters are
intended to identify forward-looking statements. Such statements are subject to
risks, uncertainties and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control, including, but not
limited to, the risks discussed in "Risk Factors" in Item 1A of this Annual
Report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. We expressly disclaim
any responsibility to update forward-looking statements. Accordingly, past
results and trends should not be used by investors to anticipate future results
or trends.

A.       DESCRIPTION OF BUSINESS

Overview

L Q Corporation, Inc. ("Registrant" or the "Company") was incorporated in
California as "Liquid Audio, Inc." in January 1996 and reincorporated in
Delaware in April 1999. In July 1999, we completed our initial public offering
of common stock. Our name was formally changed to "L Q Corporation, Inc." on
January 7, 2004. Our principal executive offices are located at 888 Seventh
Avenue, 17th Floor, New York, NY 10019, and our telephone number is (212)
974-5730.

Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.

From January 2003 until December 30, 2005, we have not operated any business and
have been settling our remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.

On January 6, 2006, a newly formed wholly owned subsidiary of the Registrant
completed the purchase of substantially all of the assets of the Access Control
Products Group or "ACPG" division of Checkpoint Systems, Inc. The assets were
acquired in accordance with an agreement that was entered into on November 4,
2005 between the Registrant and Checkpoint and was treated effective as of
December 30, 2005. Also on January 6, 2006, Registrants 80.5% owned subsidiary
SES Resources International,, Inc. ("SES") completed the acquisition of
substantially all of the assets of SES Resources Ltd, a start up consulting
venture pursuant to the transaction contemplated by an asset purchase agreement
dated as of December 30, 2005 (the "SES Asset Purchase Agreement") to initiate
Registrant's launch into the professional security and services sector. The ACPG
business, which will operate as Sielox(TM) under Registrant's management,
develops, designs and distributes a complete line of open architecture access
control software, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards, which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. SES offers a wide range of professional services including anti-money
laundering and counterfeiting investigatory services, forensic accounting and
emergency preparedness and contingency planning.

Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of the 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of March 17, 2006 was $1.67 per share. The market price of our common
stock as of December 31, 2005 was $1.75 per share.

History

On September 8, 2005, Registrant entered into a non-binding letter of intent
with Checkpoint dated September 7, 2005 to acquire substantially all of the
assets of Checkpoint's Access Control Products Group division. On October 26,
2005, Registrant's Board of Directors approved the transaction and on November
4, 2005 the parties entered into the Checkpoint Asset Purchase Agreement. On
December 30, 2005, Registrant and Checkpoint entered into a First Amendment to
the Checkpoint Asset Purchase Agreement to, among other things, extend the
closing of the acquisition to January 5, 2006. On January 6, 2006, Registrant's
subsidiary, Sielox, LLC,

                                        1
<PAGE>

completed the acquisition from Checkpoint of substantially all of the assets of
the ACPG division, effective as of December 30, 2005. The cash consideration for
the transaction was approximately $2.6 million, subject to post-closing
adjustments, an escrow, and related expenses estimated to be $0.4 million.

Also on January 6, 2006, Registrant's 80.5% owned subsidiary, SES, completed the
acquisition of substantially all of the assets of SES Resources Ltd, a start up
consulting venture. The newly formed business unit specializes in delivering
critical strategic security and business protection solutions based on best
practices developed by accomplished retired law enforcement agents and in
association with an advisory panel comprised of senior executive service level
government risk assessment and law enforcement professionals ("Advisory Panel").
SES' primary areas of specialization are expected to include: corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection; corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services.

SES has established an Advisory Panel which will serve the business with advice
and will identify expert talent throughout the United States and
internationally, to manage and staff client assignments. The Advisory Panel is
in the process of formation and includes Michael J. Thomas a senior executive
service level agent from the U.S. Internal Revenue Service, Andrew J. Scott the
former Chief of Police of Boca Raton, Florida and David Edelson MD, FACP, a
medical doctor who is presently Assistant Clinical Professor at Albert Einstein
College of Medicine. The Advisory Panel is chaired by one of the owners/founders
of SES Resources Ltd, and vice chaired by a former Vice President and Director
of Brinks Inc. SES is in the process of adding additional members to the
Advisory Panel from various law enforcement agencies. For additional
information, please see the section entitled "Certain Relationships and Related
Transactions" below.

Business

Access Control Products Group

The ACPG business was originally acquired by Checkpoint when Checkpoint acquired
Sielox Systems, Inc. of Sunnyvale, California in 1986. At that time, the ACPG
business distributed, developed and manufactured System Five and System Ten
access control systems for automated access to buildings and areas within
buildings. In the late eighties, ACPG introduced the Threshold series for use on
DOS and QNX operating systems and in the middle nineties developed a series of
applications for use on the Windows operating systems. In March 2003, the ACPG
business introduced Pinnacle, the next generation in access control software
solutions. Today ACPG develops, designs and distributes a complete line of open
architecture access control software, including both Pinnacle and the legacy
Enterprise Threshold, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. ACPG generally does not experience seasonality in its business and
there is no single customer which constitutes 10% or more of its revenue.

SES Resources International

The newly formed business unit specializes in delivering critical strategic
security and business protection solutions based on best practices developed by
accomplished retired law enforcement agents and in association with its Advisory
Panel comprised of senior executive service level government risk assessment and
law enforcement professionals. SES' primary areas of specialization include:
corporate investigations (e.g. know your customer, know your employee, know your
vendor reviews); due diligence reviews; forensic accounting; anti-money
laundering investigatory services consistent with the requirements of the
Patriot Act; anti-counterfeiting and intellectual property protection; corporate
health and wellness consultancy; emergency preparedness and contingency
planning; executive staffing solutions; and education and government security
training services.

Industry

Access Control Products Group

As security concerns continue to mount around the world, security access systems
are an important component to a company's or Government Agency's complete
security solution. Organizations continue to invest and upgrade such solutions
and place increased reliance upon such systems. The trend towards integrating
all security solutions including access control, CCTV, burglar and fire alarms
into one system continues to expand.

                                        2
<PAGE>

SES Resources International

Companies and governments are faced with a variety of security concerns and risk
assessment challenges including terrorism, fraud, litigation, compliance,
intellectual property protection, cyber attacks, industrial espionage,
regulatory issues, crisis management and executive security staffing. The
security consulting industry is highly fragmented with various established firms
and a large number of independent organizations with various specializations and
capabilities throughout the United States and around the world.

Strategy

Access Control Products Group

The primary strategy of ACPG is to continue to invest in the Pinnacle software
solution through added features and interfaces with other value added providers
in order to provide enhanced physical access security and event management
systems. ACPG will also continue to provide technical service and training to
ACPG's dealer base and end users and where necessary upgrade its technical
services.

SES Resources International

SES is distinguishing its services and positioning by its diverse services
offering. SES is in the process of identifying Senior Executive Service level
retired law enforcement officers and federal agents with specialization and
experience related to each service offering. SES expects to utilize the
relationships and advice of its Advisory Panel in connection with identifying
such resources. Each resource is expected to participate in SES projects as an
independent contractor on a project by project basis in an effort to match
expert talent with each specific project.

Products

ACPG develops, designs and distributes a complete line of open architecture
access control software, programmable controllers (electronic circuit boards),
and related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations.

ACPG supports both the Pinnacle software solution, introduced in March 2003 and
the Threshold Enterprise solution introduced in 1997. The Pinnacle based system
runs on both Windows Server 2003 and XP Professional. The system is an access
control and event management system with unlimited scalability. The Threshold
Enterprise runs on a Windows NT or 2000 access control platform.

The Pinnacle access control system is extremely flexible and compatible and
offers added functionality including badging utility for use in the design and
production of professional quality badges. The Pinnacle system also has a DVR
interface with video and event management linking. In addition, an interface
with the OASIS mapping utility offers graphical mapping with icon links to over
75 systems from 30 vendors. Other Pinnacle utilities include standalone
applications using the SDK, ever expanding libraries including n-man rule,
report scheduler, door control, EventLink and Administrative Management. The
newly introduced visitor management system allows for integration with
STOPware's lobby visitor management system.

ACPG designs and distributes a complete line of intelligent controllers. This
state of the art technology is available as 16-bit or 32-bit controllers capable
of supporting from 2 to 8 door configurations. In addition, these controllers
support from 4 to 60 alarm monitored inputs and/or controlled outputs and are
configurable to meet any customer requirements. The 32-bit 1200 series
controller can be used in a traditional hardwired environment or LAN/WAN
environment with static IP or DHCP. In addition, ACPG currently offers several
readers that are all compatible with both its Pinnacle and Threshold Enterprise
software solutions. Such readers include the Performa (and legacy Mirage)
readers, a 13.56 MHz reader manufactured by Checkpoint Systems, Inc., a complete
line of HID's 125 KHz Prox and 13.56 MHz iClass readers and cards, AWID's long
range Prox readers, BioScrypt's biometric fingerprint, and Panasonic's Iris Scan
Readers.

Intellectual Property

ACPG is entitled to the exclusive use of certain patents and to the
non-exclusive use of certain patents which were acquired in the acquisition from
Checkpoint. Such patents and other intellectual property are utilized in the
Performa and Mirage ID card readers. ACPG also acquired identified trademarks as
well as licenses for specific intellectual properties which consist of critical
components to the Pinnacle and Threshold Enterprise operating systems. ACPG also
licenses two badging programs which it sells to third parties. ACPG pays
royalties on these licensing contracts.

Registrant has registered domain names for its key businesses including
SESresources.com and Sielox.com.

                                        3
<PAGE>

Technology and Product Development

ACPG's software engineers develop proprietary code for product functionality in
features. Certain product features have been acquired from third parties for
which ACPG pays royalties relative to the feature set embedded within certain
software products.

ACPG expended approximately $1 million ,$1.7 million, and $1.6 million in
product development activities during 2005, 2004 and 2003, respectively. The
emphasis of these activities is the continued broadening of the product lines
offered by ACPG, cost reductions of the current product lines, and an expansion
of the markets and applications for ACPG's products. ACPG's future growth in
revenues will be dependent, in part, on the products and technologies resulting
from these efforts. Registrant expects to continue to invest at comparable
levels in such activities in 2006 (and thereafter) in order to provide
additional functionality to ACPG's offerings to meet the needs of ACPG's
customer base.

Marketing Efforts

ACPG and SES use a combination of internal and subcontract marketing and public
relations agencies. ACPG and SES currently retain LRG Inc. as its public
relations firm focused on the security market. ACPG typically attends two trade
shows a year, ISCW and ASIS International. SES typically attends the Anti-Money
Laundering Conference trade show. ACPG and SES's marketing initiatives include
trade advertising and company websites - www.sielox.com; www.sesresources.com.
In addition, ACPG and SES distribute data sheets, marketing bulletins and
brochures, and launch packages to its current and prospective clients, dealers
and end-users, as appropriate for their respective businesses.

Components

ACPG purchases components from outside suppliers and assembles the electronic
components for legacy controllers and proximity readers at Checkpoint's
facilities in the Dominican Republic and Puerto Rico. The 32-bit controllers are
manufactured to specified designs by a third party. Select readers are also
manufactured in Thailand. As part of the acquisition, Registrant has entered
into a manufacturing agreement with Checkpoint. For non-proximity electronic
access control components, ACPG subcontracts manufacturing activities. All
electronic access control final system assembly and testing is performed at
ACPG's facility in Thorofare, New Jersey. On January 27, 2006, we signed a five
year lease on 8,900 square feet located at 170 Ninth Avenue, Runnemede, New
Jersey. Occupancy at this facility will begin on April 1, 2006. Accordingly,
assembly and testing will be relocated to the Runnemede facility.

Distribution

The sales personnel of the ACPG market electronic access control products to
approximately 200 independent dealers, some of whom are national dealers,
primarily located in the US. ACPG employs regional salespeople who are
compensated by salary plus commissions. Under the independent dealer program,
the dealer takes title to our products and sells them to the end-user customer.
The dealer installs the systems and provides ongoing service to the end-user
customer. The ACPG requires its dealers to be certified in our products and
requires them to attend training classes on our various product offerings.

Competition

ACPG competes with other manufacturers of electronic access control systems as
well as with conventional security systems. Major competitors are GE (the Casi
Rusco and Infographics divisions), Honeywell (the NexWatch and Northern
divisions), United Technologies (the Lenel Systems division), and Tyco (the
Software House and Kantech divisions), as well as many other comparable sized
companies.

SES shall provide services that compete with the services provided by a highly
fragmented market of many firms of various sizes, including investigatory firms
and full service accounting and legal services firms, which provide such
services as part of a broad range of services. Some of the well recognized firms
include Kroll Worldwide, a division of Marsh & McLennan Companies,Inc, and
Guiliani Associates.

        At our September 29, 2003 meeting of our stockholders, our stockholders
approved amendments to our certificate of incorporation to effect a 1-for-250
reverse stock split, to be followed immediately by a 35-for-1 forward stock
split (collectively, the "Reverse/Forward Stock Split"), as well as a reduction
in the number of common shares authorized for issuance from 50,000,000 shares to
30,000,000 shares (the "Share Reduction"). On June 7, 2004, we filed amendments
necessary to implement the Reverse/Forward Stock Split and the Share Reduction,
which took place on July 26, 2004 with an effective date as of June 8, 2004.

                                        4
<PAGE>

        On July 21, 2004, Joseph R. Wright, Jr. was appointed to the Company's
Board of Directors. On December 27, 2004, Mr. Wright resigned from the Board of
Directors of the Company in order to devote additional time to his position as
President, Chief Executive Officer and a director of PanAmSat Corporation, a
global provider of satellite-based video, broadcasting and network distribution
and delivery services.

        On October 7, 2004, James Mitarotonda resigned as our President and
Chief Executive Officer. He continues to serve as a director and Chairman of the
Board. Mr. William Fox, a director of our Company, was appointed as our new
President and Chief Executive Officer on this date.

RISK FACTORS

REGISTRANT MUST OVERCOME PRICING COMPETITION WITH RESPECT TO ITS ACPG PRODUCTS.
COMPETITIVE PRICING PRESSURES CAN CAUSE PROFIT EROSION.

The ACPG products compete against products sold by an increasing number of
competitors on the basis of several factors including price. In order to compete
in the marketplace, ACPG's products must provide superior technology at
competitive prices. Failure to produce cost-effective products could adversely
affect customer demand and adversely affect Registrant's results of operations.
In addition, the competitive business arena could create pricing pressure for
the ACPG products. A reduction in pricing of ACPG's products due to competitive
pressures could have an adverse effect on Registrant's revenues, operating
income and results of operations.

REGISTRANT MUST DEVELOP NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS TO
REMAIN COMPETITIVE. IF REGISTRANT FAILS TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS ON A TIMELY BASIS, IT MAY LOSE MARKET SHARE. REGISTRANT'S
INVESTMENT IN THE PINNACLE SOFTWARE SOLUTION MAY NOT REALIZE A RETURN ON
INVESTMENT.

The market for ACPG's Pinnacle software solution is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Accordingly, our future success
will depend to a substantial extent on our ability to:

        o       Invest significantly in research and product development;
        o       Develop, introduce and support new products and enhancements on
                a timely basis; and
        o       Gain and consecutively increase market acceptance of our
                products.

Registrant's ACPG division is currently developing new products and enhancements
to its existing products. Registrant may not be able to successfully complete
the development and market introduction of new products or product enhancements.
If Registrant fails to develop and deploy new products and product enhancements
on a timely basis, or if Registrant fails to gain market acceptance of its new
products, revenues will decline and Registrant may lose market share to its
competitors. There is no assurance that Registrant will be successful in
marketing and selling its Pinnacle software solution or other new products, that
the revenues from the sales of the Pinnacle software solution or other new
products will justify the investment, or that the sales of Pinnacle will
continue to increase.

THE AVAILABILITY AND PRICING OF COMPONENT PARTS MAY ADVERSELY AFFECT PRODUCTION
AND PROFITABILITY.

Registrant's ability to grow earnings will be affected by increases in the cost
of component parts, including electronic components and circuit boards.
Registrant may not be able to offset fully the effects of higher component parts
through price increases, productivity improvements or cost reduction programs.

FUTURE ACQUISITIONS MAY NOT BE FOUND OR MAY NOT BE SUCCESSFULLY INTEGRATED INTO
REGISTRANT'S BUSINESS AND COULD ADVERSELY AFFECT REGISTRANT'S BUSINESS.

Registrant has pursued, and will continue to pursue, growth opportunities
through attempted acquisition of complementary businesses, products and
technologies. Registrant is unable to predict whether or when any other
prospective acquisition will be completed. The process of integrating an
acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of Registrant's resources and management's
attention. There can be no assurances that management will be able to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into existing operations, or expand into new
markets. Further, once integrated, acquisitions may not achieve levels of
revenues, profitability or productivity comparable to Registrant's existing
business or otherwise perform as expected. The occurrence of any of these events
could harm Registrant's business, financial condition or results of operations.

                                        5
<PAGE>

In addition, future acquisitions may require substantial capital resources,
which may require us to seek additional debt or equity financing. Future
acquisitions by us could result in the following, any of which could seriously
harm our results of operations or the price of our stock:

        o       issuance of equity securities that would dilute our current
                stockholders' percentages of ownership;
        o       large one-time write-offs;
        o       the incurrence of debt and contingent liabilities;
        o       difficulties in the assimilation and integration of operations,
                personnel, technologies, products and information systems of the
                acquired companies;
        o       diversion of management's attention from other business
                concerns;
        o       contractual disputes;
        o       risks of entering geographic and business markets in which we
                have no or only limited prior experience; and
        o       potential loss of key employees of acquired organizations.

THE ACPG BUSINESS HAS INCURRED NET LOSSES. THERE IS NO ASSURANCE THAT IT WILL
TURN PROFITABLE IN THE FUTURE.

Registrant (including the ACPG operations) has incurred losses in the past and
may incur losses in the future. The ACPG business incurred net losses in 2005,
2004 and 2003. In 2005, the ACPG business's net loss was approximately $(1.0)
million. In 2004, the ACPG business's net loss was approximately $(1.4) million.
In 2003, the ACPG business's net loss was approximately $(0.9) million.
Continued or increased net losses could have a material adverse effect on
Registrant's business, financial condition and results of operations and the
value and market price of Registrant's common stock.

REGISTRANT'S SUCCESS IN THE SES BUSINESS DEPENDS ON ITS ABILITY TO EXPAND THE
SES ADVISORY PANEL.

Registrant may not be able to identify additional senior executive service law
enforcement agents who are able to serve as Advisors on the Advisory Panel. Such
inability would harm the development of the SES business in general, and prevent
Registrant from distinguishing itself in the marketplace in particular, which
could adversely affect revenues and results of operations.

SES IS A NEWLY FORMED BUSINESS.

As a newly formed organization, SES has no independent record of performance in
the various service categories it has identified. As a new business, SES may not
be successful in being engaged by prospective clients, which would have an
adverse affect on revenues and results of operations.

SOME OF REGISTRANT'S COMPETITORS HAVE GREATER RESOURCES THAN REGISTRANT, WHICH
MAY LIMIT ITS ABILITY TO EFFECTIVELY COMPETE WITH THEM.

Some of Registrant's competitors have greater financial, personnel and other
resources than Registrant, which may limit its ability to effectively compete
with them. For example, Registrant's main competitors in the ACPG business
include Tyco International Ltd. and Honeywell International Inc. These and other
large competitors may be able to:

        o       Respond more quickly to new or emerging technologies or changes
                in customer requirements;
        o       Benefit from greater economies of scale;
        o       Offer more aggressive pricing; and/or
        o       Devote greater resources to the promotion of their products.

REGISTRANT IS DEPENDENT ON ITS KEY PERSONNEL, THE LOSS OF WHOM COULD NEGATIVELY
AFFECT BUSINESS.

Registrant is dependent on its key personnel, including general management,
software and hardware engineers, technical support and sales executives, who
have significant industry experience, knowledge and know how. The loss of these
key personnel could negatively affect business and results of operations.

                                        6
<PAGE>

REGISTRANT'S STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET, AND IS
THEREFORE SIGNIFICANTLY LESS LIQUID THAN BEFORE.

Registrant's common stock has been delisted from trading on The NASDAQ National
Market by reason of not maintaining listing requirements due to the lack of
tangible business operations and significantly reduced market price of the
common stock. As a result, Registrant's common stock currently trades over the
counter on the NASDAQ OTC Bulletin Board, and the ability of Registrant's
stockholders to obtain liquidity and consistent market prices for Registrant's
shares has been significantly impaired.

REGISTRANT INCURS THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING AND
OTHER REQUIREMENTS.

As a public company, Registrant incurs significant legal, accounting, and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules
subsequently implemented by the Securities and Exchange Commission and NASDAQ,
have required changes in corporate governance practices of public companies.
These rules and regulations increase legal and financial compliance costs and
make some activities more time consuming and costly. In addition, Registrant
incurs additional costs associated with its public company reporting
requirements. These rules and regulations also may make it more difficult and
more expensive for Registrant to obtain director and officer liability
insurance, and Registrant may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage.

REGISTRANT RELIES ON LICENSES WITH THIRD PARTIES TO LICENSE SOFTWARE CODE THAT
IS AN INTEGRAL PART OF THE ACPG BUSINESS'S PINNACLE SOFTWARE SOLUTION AND IF
REGISTRANT WOULD NEED TO SEEK ALTERNATE LICENSES, ITS RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.

Registrant licenses certain software code that is an integral part of ACPG's
Pinnacle software solution from third parties. In particular, Registrant obtains
from third party licensors certain software code included in the Pinnacle
software solution, and the software for its badging products. Registrant would
need to seek alternative licensors for the software code if any of the third
party licensors terminate or decides not to renew a license. If any of these
third party licensors become unable to or refuses to license its code, it could
interrupt and delay the development, design and delivery of the Pinnacle
software solution and related products. Any such disruption could adversely
affect Registrant's results of operations.

CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT REGISTRANT'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Registrant's operating results may be affected adversely by the general cyclical
pattern of the industries in which it operates. For example, demand for ACPG
products and services is significantly affected by levels of commercial
construction and consumer and business discretionary spending. The demand
patterns of these markets could impact the revenues and margins in this
business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

NONE

ITEM 2.  PROPERTIES

         Our principal corporate offices are located at 888 Seventh Avenue, New
York, NY. ACPG currently occupies approximately 7,000 square feet in the
Checkpoint facility located at 101 Wolf Drive, Thorofare, New Jersey. On January
27, 2006, we signed a five year lease on 8,900 square feet located at 170 Ninth
Avenue, Runnemede, New Jersey. Occupancy at this facility is expected to begin
on April 1, 2006. Our SES unit, leases approximately 450 square feet in Jericho,
New York.

ITEM 3.  LEGAL PROCEEDINGS

We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
The lawsuits have been filed by

                                        7
<PAGE>

individual shareholders who purport to seek class action status on behalf of all
other similarly situated persons who purchased the common stock of the Company
between July 8, 1999 and December 6, 2000. The lawsuits allege that certain
underwriters of the initial public offering solicited and received excessive and
undisclosed fees and commissions in connection with that offering. The lawsuits
further allege that the defendants violated the federal securities laws by
issuing a registration statement and prospectus in connection with the Company's
initial public offering which failed to accurately disclose the amount and
nature of the commissions and fees paid to the underwriter defendants. On or
about October 8, 2002, the Court entered an Order dismissing the claims asserted
against certain individual defendants in the consolidated actions without any
payment from these individuals or the Company. On or about February 19, 2003,
the court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities Act of 1933, as amended. The Company
has entered into an agreement-in-principle to settle the remaining claims in the
litigation. The proposed settlement will result in a dismissal with prejudice of
all claims and will include a release of all claims that were brought or could
have been brought against the Company and its present and former directors and
officers. It is anticipated that any payment to the plaintiff class and their
counsel will be funded by the Company's directors' and officers' liability
insurance and that no direct payment will be made by the Company. The parties
have negotiated and executed a definitive settlement agreement. The proposed
settlement provides that the class members in the class action cases brought
against the participating issuer defendants will be guaranteed a recovery of $1
billion by insurers of the participating issuer defendants. If recoveries
totaling $1 billion or more are obtained by the class members from the
underwriter defendants, however, the monetary obligations to the class members
under the proposed settlement will be satisfied. In addition, LQ Corporation and
any other participating issuer defendants will be required to assign to the
class members certain claims that they may have against the underwriters of
their IPO's. The proposed settlement contemplates that any amounts necessary to
fund the settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. If ultimately approved by the Court,
the proposed settlement would result in the dismissal, with prejudice, of all
claims in the litigation against LQ Corporation and all of the other issuer
defendants who have elected to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation as against those defendants is continuing. Consummation of the
proposed settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court preliminarily approved the proposed settlement,
directed that notice of the terms of the proposed settlement be provided to
class members, and scheduled a fairness hearing for April 24, 2006, at which
objections to the proposed settlement will be heard. Thereafter, the Court will
determine whether to grant final approval to the proposed settlement.

                                        8
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        We held our 2005 Annual Meeting of Stockholders on December 6, 2005 in
New York, New York.

At this meeting, the stockholders elected the following individuals to serve as
directors for the succeeding year or until their successors are duly qualified
and elected.

NAME                                        VOTES FOR   VOTES WITHHELD
-----------------------------------------   ---------   -------------
Steven Berns                                2,450,151      83,299
William Fox                                 2,450,067      83,383
Stephen Liguori                             2,440,915      92,535
Michael A. McManus, Jr.                     2,429,412     104,038
James Mitarotonda                           2,438,732      94,718

Lastly, the stockholders approved the ratification of the appointment of
Rothstein, Kass & Company. P.C. as our independent auditors for the 2005 fiscal
year. There were 2,527,052 votes cast for the ratification and 6,398 votes cast
against the ratification.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
         AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET PRICE OF COMMON STOCK

Our common stock was quoted on the Nasdaq National Market under the symbol
"LQID" from July 8, 1999, until it was delisted on June 5, 2003. On June 5,
2003, our common stock began trading over the counter as a "pink sheet"
security. On June 20, 2003, our common stock began trading on the Nasdaq OTC
Bulletin Board under the symbol "LQID.OB," and currently trades under the symbol
"LQCI.OB." The following table presents, for the periods indicated, the high and
low closing prices per share of our common stock as reported on the Nasdaq
National Market and/or the Nasdaq OTC Bulletin Board, as applicable.

                                                       HIGH         LOW
                                                     ---------   ---------
YEAR ENDED DECEMBER 31, 2005
         First Quarter                               $    1.78   $    1.64
         Second Quarter                                   2.18        1.65
         Third Quarter                                    2.20        1.80
         Fourth Quarter                                   1.95        1.64
YEAR ENDED DECEMBER 31, 2004
         First Quarter                                    3.14        2.07
         Second Quarter                                   3.36        1.94
         Third Quarter                                    2.15        1.80
         Fourth Quarter                                   2.00        1.74

The high and low closing prices for the year ending December 31, 2004 reflect
the effect of the reverse/forward stock split, defined earlier.

                                        9
<PAGE>

        The closing price per share of our common stock at March 17, 2006 was
$1.67. As of March 17, 2006, there were approximately 48 shareholders of record
of our common stock. Because many shares of our common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders.

DIVIDEND POLICY

        We have not declared any distributions since our $2.50 return of capital
distribution was paid on January 29, 2003.

                                       10
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

        The following selected financial data should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes
thereto included in Item 8 of in this document to fully understand factors that
may affect the comparability of the information presented below. Per share data
reflects the Reverse/Forward Stock Split which took place on June 7, 2004.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                -------------------------------------------------------------
                                                  2005         2004         2003         2002         2001
                                                ---------    ---------    ---------    ---------    ---------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
       License                                  $      --    $      --    $       4    $     108    $     682
       Services                                        --           --           39          374        1,173
       Business development (related party)            --           --           --           --        2,873
                                                ---------    ---------    ---------    ---------    ---------
Total net revenues                                     --           --           43          482        4,728
                                                ---------    ---------    ---------    ---------    ---------
Cost of net revenues:
       License                                         --           --            5          388          491
       Services                                        --           --            2          654        1,503
       Business development(related party)             --           --           --           --           --
       Non-cash cost of revenues                       --           --           --           82          349
                                                ---------    ---------    ---------    ---------    ---------
Total cost of net revenues                             --           --            7        1,124        2,343
                                                ---------    ---------    ---------    ---------    ---------
Gross profit(loss)                                     --           --          (36)        (642)       2,385
                                                ---------    ---------    ---------    ---------    ---------
Operating expenses:
       Sales and marketing                             --           --          277        3,765       11,404
       Non-cash sales and marketing                    --           --           --          (28)         (43)
       Research and development                        --           --          165        9,111       16,957
       Non-cash research and development               --           --           --            6           --
       General and administrative                     993          968        6,658       10,712        9,077
       Non-cash general and administrative             --           --           --           (1)         (14)
       Impairment loss                                 --           --           --          689           --
       Strategic marketing-equity instruments          --           --           --           --          607
       Restructuring                                   --           --        4,411        1,163        4,497
                                                ---------    ---------    ---------    ---------    ---------
Total operating expenses                              993          968       11,511       25,419       42,485
                                                ---------    ---------    ---------    ---------    ---------
Loss from operations                                 (993)        (968)     (11,475)     (26,061)     (40,100)
Other income (expense), net                           236          121          313        1,886        4,170
Gain on sale of intellectual property                  --           --           --        7,000           --
Gain on sale of Digital Music fulfillment
 business.                                             --           --        2,868
Merger termination fee                                 --           --           --       (2,100)          --
Loss in equity investment                              --           --           --           --       (1,254)
                                                ---------    ---------    ---------    ---------    ---------
Net loss                                        $    (757)   $    (847)   $  (8,294)   $ (19,275)   $ (37,184)
                                                =========    =========    =========    =========    =========
Net loss per share:
       Basic and diluted                        $   (0.24)   $   (0.26)   $   (2.56)   $   (6.04)   $  (11.74)
       Weighted average shares                      3,214        3,232        3,243        3,189        3,166
Cash distribution declared per common share     $      --    $      --    $      --    $    2.50    $      --
</TABLE>

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                -------------------------------------------------------------
                                                  2005         2004         2003         2002         2001
                                                ---------    ---------    ---------    ---------    ---------
                                                                        (IN THOUSANDS)
<S>                                             <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents                       $   5,746    $   6,432    $   9,077    $  73,985    $  91,594

Short-term investments                                 --           --           --           --           --
Working capital                                     4,638        6,421        7,334       14,227       87,233
Total assets                                        8,807        6,535        9,269       76,797       97,415
Long-term debt, less current portion                   --           --           --           --           --
Mandatorily redeemable convertible
 preferred stock                                       --           --           --           --           --
Total stockholders' equity (deficit)                5,651        6,421        7,334       15,618       91,825
</TABLE>

                                       11
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis contains
forward-looking statements within the meaning of Federal securities laws. You
can identify these statements because they use forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate," "continue," "believe" and
"intend" or other similar words. These words, however, are not the exclusive
means by which you can identify these statements. You can also identify
forward-looking statements because they discuss future expectations, contain
projections of results of operations or of financial conditions, characterize
future events or circumstances or state other forward-looking information. We
have based all forward-looking statements included in this Management's
Discussion and Analysis on information currently available to us, and we assume
no obligation to update any of these forward-looking statements. Although we
believe that the expectations reflected in any of these forward-looking
statements are based on reasonable assumptions, actual results could differ
materially from those projected in the forward-looking statements. Potential
risks and uncertainty include, among others, those set forth in the "Risk
Factors" section. The following discussion should be read in conjunction with
the consolidated financial statements and notes thereto included in Item 8 of
this Form 10-K.

OVERVIEW

There were no material relationships between Registrant or its affiliates and
any of the parties to the Checkpoint Asset Purchase Agreement or the SES Asset
Purchase Agreement, other than in respect of such agreements.

Registrant was a "shell company" (as such term is defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
immediately before the completion of the Acquisitions.

A.       DESCRIPTION OF BUSINESS

Summary

L Q Corporation, Inc. was incorporated in California as "Liquid Audio, Inc." in
January 1996 and reincorporated in Delaware in April 1999. In July 1999, we
completed our initial public offering of common stock. Our name was formally
changed to "L Q Corporation, Inc." on January 7, 2004. Our principal executive
offices are located at 888 Seventh Avenue, 17th Floor, New York, NY 10019, and
our telephone number is (212) 974-5730.

Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.

From January 2003 until December 30, 2005, we have not operated any business and
have been settling our remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.

On January 6, 2006, a newly formed wholly owned subsidiary of the Registrant
completed the purchase of substantially all of the assets of the Access Control
Products Group or "ACPG" division of Checkpoint Systems, Inc. The assets were
acquired in accordance with an agreement that was entered into on November 4,
2005 between the Registrant and Checkpoint and was treated effective as of
December 31, 2005. Also on January 6, 2006, a newly formed subsidiary of LQ
Corporation, Inc., SES Resources International, Inc. ("SES") completed the
acquisition of substantially all of the assets of SES Resources Ltd's, a startup
security consulting entity, pursuant to the transaction contemplated by an asset
purchase agreement dated as of December 30, 2005 (the "SES Asset Purchase
Agreement") to initiate Registrant's launch into the professional security and
services sector. The ACPG business, which will operate as Sielox(TM) under
Registrant's management, develops, designs and distributes a complete line of
open architecture access control software, programmable controllers (electronic
circuit boards), and related accessories such as readers and ID cards, which can
be configured to monitor, manage and control physical access to building
perimeters and interior locations. SES expects to offer a wide range of
professional services including anti-money laundering and counterfeiting
investigatory services, forensic accounting and emergency preparedness and
contingency planning.

Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of the 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of March 17, 2006 was $1.67 per share. The market price of our common
stock as of December 31, 2005 was $1.75 per share.

Additional information with respect to the "Description of Business" of
Registrant is hereby incorporated by reference to Item I of Part I of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2004 and to the subsection entitled "The Company" in Note 1 to the "Notes to
Condensed Consolidated Financial Statements" of Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 2005.

                                       12
<PAGE>

History

On September 8, 2005, Registrant entered into a non-binding letter of intent
with Checkpoint dated September 7, 2005 to acquire substantially all of the
assets of Checkpoint's Access Control Products Group division. On October 26,
2005, Registrant's Board of Directors approved the transaction and on November
4, 2005 the parties entered into the Checkpoint Asset Purchase Agreement. On
December 30, 2005, Registrant and Checkpoint entered into a First Amendment to
the Checkpoint Asset Purchase Agreement to, among other things, extend the
closing of the acquisition to January 5, 2006. On January 6, 2006, Registrant's
subsidiary, Sielox, LLC, completed the acquisition from Checkpoint of
substantially all of the assets of the ACPG division, effective as of December
30, 2005. The cash consideration for the transaction was approximately $2.6
million, subject to post-closing adjustments, an escrow, and related expenses
estimated to be $0.4 million.

Also on January 6, 2006, Registrant's 80.5% owned subsidiary, SES, completed the
acquisition of substantially all of the assets of SES Resources, a start up
consulting venture. The newly formed business unit will specialize in delivering
critical strategic security and business protection solutions based on best
practices developed by accomplished retired law enforcement agents and in
association with an advisory panel comprised of senior executive service level
government risk assessment and law enforcement professionals ("Advisory Panel").
SES' primary areas of specialization are expected to include: corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection; corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services.

SES has established an Advisory Panel which will serve the business with advice
and will identify expert talent throughout the United States and
internationally, to manage and staff client assignments. The Advisory Panel is
in the process of formation and includes a senior executive service level agent
from the U.S. Internal Revenue Service, a former Chief of Police of Boca Raton,
Florida, and a medical doctor who is presently Assistant Clinical Professor at
Albert Einstein College of Medicine. The Advisory Panel is chaired by one of the
owners/founders of SES Resources and vice chaired by the former VP and Director
of Brinks Inc. SES is in the process of adding additional members to the
Advisory Panel from various law enforcement agencies. For additional
information, please see the section entitled "Certain Relationships and Related
Transactions" below.

Business

Access Control Products Group

The ACPG business was originally acquired by Checkpoint when Checkpoint acquired
Sielox Systems, Inc. of Sunnyvale, California in 1986. At that time, the ACPG
business distributed, developed and manufactured System Five and System Ten
access control systems for automated access to buildings and areas within
buildings. In the late eighties, ACPG introduced the Threshold series for use on
DOS and QNX operating systems and in the middle nineties developed a series of
applications for use on the Windows operating systems. In March 2003, the ACPG
business introduced Pinnacle, the next generation in access control software
solutions. Today ACPG develops, designs and distributes a complete line of open
architecture access control software, including both Pinnacle and the legacy
Enterprise Threshold, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. ACPG generally does not experience seasonality in its business and
there is no single customer which constitutes 10% or more of its revenue.

SES Resources International

The newly formed business unit will specialize in delivering critical strategic
security and business protection solutions based on best practices developed by
accomplished retired law enforcement agents and in association with its Advisory
Panel comprised of senior executive service level government risk assessment and
law enforcement professionals. SES' primary areas of specialization are expected
to include: corporate investigations (e.g. know your customer, know your
employee, know your vendor reviews); due diligence reviews; forensic accounting;
anti-money laundering investigatory services consistent with the requirements of
the Patriot Act; anti-counterfeiting and intellectual property protection;
corporate health and wellness consultancy; emergency preparedness and
contingency planning; executive staffing solutions; and education and government
security training services.

                                       13
<PAGE>

CORPORATE RESTRUCTURINGS

        In January 2003, we adopted a corporate restructuring program,
consisting of a worldwide workforce reduction, in connection with the sale of
our digital music fulfillment business and related assets to Geneva Media, LLC
("Geneva"), an affiliate of Anderson Merchandisers, LP. A restructuring charge
of $4,441,000 was recorded in operating expenses for the year. The restructuring
charge included involuntary separation costs of $796,000 for 29 employees
worldwide, lease termination fees of $3,569,000 and asset impairment costs of
$46,000 for prepaid expenses related to assets sold to Geneva. We terminated our
last remaining employee on September 4, 2004, as a result of which we paid
termination and accrued vacation payments of $10,592. We closed our office in
Foster City, California and as of September 30, 2004. From September 30, 2004 to
December 30, 2005, we had no employees and were focused on settling our claims
and liabilities and pursuing other uses for the remainder of our assets.

On March 18, 2003, our Board acknowledged that many of our outstanding options,
whether or not currently exercisable, have exercise prices significantly higher
than the current market price of our current stock, and therefore, in
recognition of the $2.50 per share cash distribution made to stockholders on
January 29, 2003, unilaterally approved a reduction in the exercise price for
all options by $2.50. The Board further resolved that such reduction will in no
event reduce the exercise price of any options to less than $0.10 per share.

As a result of this reduction in option exercise price, all outstanding options
will be treated for financial reporting purposes as variable awards. This means
that we will be required to record non-cash accounting charges or credits for
compensation expense reflecting any increases and decreases in the price of our
common stock. We will have to continue to reflect decreases and increases in the
price of our common stock in our statement of operations with respect to the
options until they are exercised, forfeited or terminated. In recording these
accounting charges or credits, the higher the market value of our common stock,
the greater the non-cash compensation expense.

                                       14
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, certain data derived
from our statement of operations as a percentage of total net revenues. During
2005 and 2004 had no operating business, so the operating results in any period
are not indicative of the results, if any, that may be expected for any future
period. As discussed elsewhere in this document, we completed two acquisitions
as of December 30, 2005.

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                     ---------------------------------
                                                        2005        2004        2003
                                                     ---------   ---------   ---------
<S>                                                         <C>         <C>    <C>
Net revenues:
       License                                              --          --           9%
       Services                                             --          --          91
       Business development (related party)                 --          --          --
                                                     ---------   ---------   ---------
         Total net revenues                                 --          --         100
                                                     =========   =========   =========
Cost of net revenues:
       License                                              --          --          12
       Services                                             --          --           5
       Business development (related party)                 --          --          --
       Non-cash cost of revenues                            --          --          --
                                                     ---------   ---------   ---------
         Total cost of net revenues                         --          --          16
                                                     =========   =========   =========
Gross profit (loss)                                         --          --          84
                                                     =========   =========   =========
       Operating expenses:
       Sales and marketing                                  --          --         644
       Non-cash sales and marketing                         --          --          --
       Research and development                             --          --         384
       Non-cash research and development                    --          --          --
       General and administrative                           --          --         155
       Non-cash general and administrative                  --          --          --
       Impairment loss                                      --          --          --
       Strategic marketing-equity instruments               --          --          --
       Restructuring                                        --          --      10,258
                                                     ---------   ---------   ---------
         Total operating expenses                           --          --      26,769
                                                     =========   =========   =========
Loss from operations                                        --          --     (26,686)
Other income (expense), net                                 --          --         728
Gain on sale of intellectual property                       --          --          --
Gain on sale of Digital Music fulfillment business          --          --       6,670
Merger termination fee                                      --          --          --
Loss in equity investment                                   --          --          --
                                                     ---------   ---------   ---------
Net loss                                                    --          --     (14,288)
                                                     =========   =========   =========
</TABLE>

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

Total Net Revenues.

Total net revenues were $0 in 2005 and 2004 compared to $42,860 in 2003.

License. License revenues primarily consisted of fees from licensing our
software products to third parties. License revenues were $0 in 2005 and 2004
compared to $4,000 in 2003. The decrease in 2005 and 2004 were due to the
cessation of our operating business activity.

Services. Services revenues consisted of maintenance fees related to our
licensed software products, hosting fees, encoding, music delivery and
transaction fees, promotion and advertising services and kiosk-related equipment
sales from third parties. Services revenues were $0 in 2005 and 2004 compared to
$39,000 in 2003. The decrease in 2005 and 2004 was primarily due to the
cessation of our business activity.

                                       15
<PAGE>

Total Cost of Net Revenues

Our gross profit (loss) decreased to approximately 0% of total net revenues in
2005 and 2004 from approximately 84% of total net revenues in 2003. Total cost
of net revenues decreased 100% to $0 in 2005 and 2004 from $7,000 in 2003.

License. Cost of license revenues primarily consisted of royalties paid to
third-party technology vendors and costs of documentation, duplication and
packaging. Cost of license revenues decreased 100% to $0 in 2005 and 2004
compared to 98% and $5,000 in 2003. Cost of license revenue decreased in 2005
and 2004 due to the cessation of our operating business activity.

Services. Cost of services revenues primarily consisted of compensation for
customer service, encoding and professional services personnel, kiosk-related
equipment and an allocation of our occupancy costs and other overhead
attributable to our services revenues. Cost of services revenues decreased 100%
to $0 in 2005 and 2004 from $2,000 in 2003. The decrease in 2005 and 2004 in
cost of services revenue was due to the cessation of our operating business
activity.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consisted primarily of
compensation for our sales, marketing and business development personnel,
compensation for customer service and professional services personnel
attributable to sales and marketing activities, advertising, trade show and
other promotional costs, design and creation expenses for marketing literature
and our website and an allocation of our occupancy costs and other overhead.
Sales and marketing expenses decreased 100% to $0 in 2005 and 2004 from $277,000
in 2003. The decrease in 2005, 2004 and 2003 was due to the cessation of
business activity and termination of all remaining sales and marketing
personnel.

Research and Development. Research and development expenses consisted primarily
of compensation for our research and development, network operations and product
management personnel, payments to outside contractors and, to a lesser extent,
depreciation on equipment used for research and development and an allocation of
our occupancy costs and other overhead. Research and development expenses
decreased 100% in 2005 and 2004 to $0 from $165,000 in 2003. The decrease in
2005, 2004 and 2003 was due to the cessation of business activity and the
termination of all remaining research and development personnel.

General and Administrative. General and Administrative expenses remained
relatively the same in 2005 and 2004 at $.9 million each of the two years.
General and Administrative expenses decreased 86% to $0.9 million in 2004 from
$6.6 million in 2003. The decrease in 2004 was due to the cessation of operating
business activity. General and Administrative expenses in 2005 include directors
and officers liability insurance premium payments of approximately $135,000,
legal expenses of approximately $26,000, professional services for audit and
accounting of approximately $98,000, administrative fees of approximately
$180,000, director and officer remuneration of approximately $197,000. General
and Administrative expenses in 2004 include, directors and offices liability
insurance premium payments of approximately $224,000, legal expenses of
approximately $229,000, professional services for audit and accounting of
approximately $77,000, administrative fee of approximately $141,000 and director
renumeration of approximately $116,000.

Impairment Loss. Impairment loss consists of a write-down of our property and
equipment to fair value. Our property and equipment were impaired when we
terminated our merger agreement with Alliance in November 2002. If the merger
had been approved, our property and equipment would have remained in use with
the continuation of our digital music fulfillment business under the combined
entity. When we terminated our merger agreement with Alliance, certain property
and equipment were no longer in use and we had to impair the economic life of
the property and equipment remaining in use. In January 2003, we announced the
sale of our digital music fulfillment business and related assets to Geneva.
These assets included certain property and equipment. We determined the fair
value of the assets remaining in use and those assets sold to Geneva based on
quoted market prices obtained from a business auction and valuation firm dealing
in similar assets.

Non-Cash Sales and Marketing, Research and Development and General and
Administrative. Non-cash sales and marketing, research and development and
general and administrative expenses relate to stock-based employee compensation
arrangements. The total unearned compensation recorded by us from inception to
December 31, 2005 was $3.5 million. We recognized $0, $0 and $ 0 of stock
compensation expense (income) for 2005, 2004 and 2003, respectively. The income
amounts in 2005, 2004 and 2003 relate to the adjustment of cumulative expense
attributable to employees terminated in those periods from accelerated
amortization to straight-line amortization during the terminated employees'
service periods. We have fully amortized stock

                                       16
<PAGE>

compensation expense related to these personnel in 2002, and accordingly no
future expense related to these stock options will be incurred.

Restructuring- Restructuring charge relates to costs associated with our
corporate restructuring program. We had no costs related to our restructuring in
2005 and 2004. A $4.4 million charge in 2003 consisted of involuntary employee
separation costs of $796,000 and costs of $3,569,000 pertaining to lease
termination payments for certain facilities that were vacated due to reductions
in our work force

Interest Income. Interest income consists of earnings on our cash, cash
equivalents and short-term investments. Interest income was $233,000 in 2005,
$148,000 in 2004 and $242,200 in 2003.

Other Income (Expense). Other income (expense) was $3,000 in 2005 $(27,000) in
2004 and $71,000 in 2003.

Gain on Sale of Intellectual Property and Digital Music Fulfillment Business.
Gain on sale of intellectual property relates to the sale of our Digital Music
fulfillment business to Geneva in January 2003.

CONTRACTUAL OBLIGATIONS

        We did not have any contractual commitments and obligations as of
December 31, 2005, including any long-term debt obligations, capital lease
obligations, operating lease obligations or purchase obligations, within the
meaning of the current rules of the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are as follows:

        o       revenue recognition;

        o       estimating valuation allowances, specifically the allowance for
                doubtful accounts and sales returns reserve;

        o       accounting for contingencies; and

        o       accounting for income taxes.

        o       business combinations

        o       long lived assets

Revenue recognition. To date, we have derived our revenues primarily from the
licensing of software products and service fees associated with business
development contracts. Business development revenues primarily consist of
license and maintenance fees from agreements under which we gave our strategic
related partners ("Partners") the right to license and use our digital recorded
music delivery technology. These U.S. dollar-denominated, non-refundable fees
are allocated among the various elements of the contract based on vendor
specific objective evidence ("VSOE") of fair value. VSOE of fair values for the
ongoing maintenance and support obligations are based upon the prices paid for
the separate renewal of these services by the customer or upon substantive
renewal rates stated in the contractual arrangements. VSOE of the fair value of
other services, primarily consulting services, is based upon separate sales of
these services. When VSOE of fair value exist for the undelivered elements,
primarily maintenance, we account for the license portion based on the "residual
method" as prescribed by SOP No. 98-9, "Modification of SOP 97-2 with Respect to
Certain Transactions." When VSOE of fair value does not exist for the
undelivered elements, we recognized the total fee from a business development
contract ratably over the term of the contract. The total fee from business
development arrangements was recognized when payments became due if extended
payment terms existed. Extended payment terms are defined as payment terms
outside our customary business practice, generally greater than 90 days. Revenue
is not recognized if the Partners stop making their contractual payments. We
also licensed our software products to original equipment manufacturers, record
companies, artists and websites. Software license revenues were recognized when
persuasive evidence of an arrangement exists, the fee is fixed and determinable,
collection is probable and delivery has occurred. Similarly with business
development contracts, the total fee from the arrangement is allocated among the
various elements based on VSOE of fair value. Maintenance revenue related to our
licensed software products and hosting revenue from record companies and artists
were recognized over the service period, typically one year. Revenue derived
from hosting services include subscription fees from artists for encoding and
storing music files, e-commerce services and transaction reporting. Music
delivery services revenues include transaction fees from sales of digital
recorded music through our LMN website affiliates and fees from music retailers
and websites related to the sample digital music clips delivery service.

                                       17
<PAGE>

Revenue from kiosk sales consisted of software licenses and services revenue
from equipment and kiosk-related services.

Allowance for doubtful accounts and sales returns reserve. The preparation of
financial statements requires our management to make estimates and assumptions
that affect the reported amount of assets and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Specifically, our
management must make estimates of the uncollectability of our accounts
receivables. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. Similarly, our
management must make estimates of the potential future product returns related
to current period product revenue. Management analyzes historical returns,
current economic trends, and changes in customer demand and acceptance of our
products when evaluating the adequacy of the sales returns reserve. Significant
management judgments and estimates must be made and used in connection with
establishing the allowance for doubtful accounts and sales returns reserve in
any accounting period. Material differences may result in the amount and timing
of our revenue and bad debt expense for any period if management made different
judgments or used different estimates. Our accounts receivable from third
parties balance was $1,097, net as of December 31, 2005. Per the Asset Purchase
Agreement, Checkpoint Systems, Inc has guaranteed collection of all acquired net
receivables.

Accounting for contingencies. We are subject to various legal proceedings and
claims, the outcomes of which are subject to significant uncertainty. SFAS 5,
Accounting for Contingencies, requires that an estimated loss from a loss
contingency should be accrued by a charge to income if it is probable that an
asset has been impaired or a liability has been incurred and the amount of the
loss can be reasonably estimated. Disclosure of a contingency is required if
there is at least a reasonable possibility that a loss has been incurred. We
evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss.
Changes in these factors could materially impact our financial position or
results of operations.

Accounting for income taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $8,826 as of December 31, 2005, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward, before they expire.
The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations.

Business combinations. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations ("SFAS
141"), the purchase price of an acquired company is allocated between intangible
assets and the net tangible assets of the acquired business with the residual of
the purchase price recorded as goodwill. The determination of the value of the
intangible assets acquired and their expected lives involves certain judgments
and estimates. These judgments can include, but are not limited to, the cash
flows that an asset is expected to generate in the future and the appropriate
weighted average cost of capital.

Long lived assets. In accordance with Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-lived Assets," the Company reviews property and equipment for impairment
whenever events or changes in circumstances indicated that the carrying amount
of the assets may not be recoverable. A loss is recognized on the statements of
operations if it is determined that an impairment exists based on expected
future undiscounted cash flows. The amount of the impairment is the excess of
the carrying amount of the impaired asset over its fair value.

                                       18
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS.

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs", an amendment of Accounting Research Bulletin (ARB)
No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. This pronouncement will be effective for
the first quarter 2006. The Company does not believe that this statement will
have a material effect on the financial statements.

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for Stock-Based Compensation (Revised)." SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification.

In March 2005, FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN No. 47 clarifies that the term
Conditional Asset Retirement Obligation refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company does not believe that this statement will
have a material effect on the financial statements.

In June 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which will require entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, Accounting Changes, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period's net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
"retrospective application" of an accounting principle and the "restatement" of
financial statements to reflect the correction of an error. Another significant
change in practice under SFAS No. 154 will be that if an entity changes its
method of depreciation, amortization, or depletion for long-lived, non-financial
assets, the change must be accounted for as a change in accounting estimate.
Under APB Opinion No. 20, such a change would have been reported as a change in
accounting principle. SFAS No. 154 applies to accounting changes and error
corrections that are made in fiscal years beginning after December 15, 2005. The
Company does not believe that this statement will have a material effect on the
financial statements.

The Company has not completed its evaluation of SFAS No. 123(R) but expects the
adoption of this new standard will not have a material impact on operating
results of the Company.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the initial
and follow-on public offerings of common stock, private placements of our
preferred stock, equipment financing, lines of credit and short-term loans. As
of December 31, 2005, we had raised $65.9 million and $93.7 million through our
initial and follow-on public offerings of common stock, respectively, and $29.8
million through the sale of our preferred stock. In January 2003, we distributed
$57.7 million to our common stockholders of record as of December 10, 2002. At
December 31, 2005, we had approximately $5.7 million of cash and cash
equivalents. On January 6, 2006, approximately $2.6 million of cash was paid to
Checkpoint Systems, Inc. for the acquisition of Checkpoint's Access Control
Products Group ("ACPG") division. The effective date of this acquisition was
December 30, 2005.

Net cash used in operating activities was $0.7 million, $2.5 million and $10.3
million in 2005, 2004 and 2003, respectively. Net cash used in operating
activities in 2005 was primarily the result of net losses from operations of
$757,000 offset by accruals for legal and other expenses of $375,000 and trade
and accrued payables of $199,000. Net cash used in operating activities in 2004
was primarily the result of net losses from operations of $847,000, legal
expenses of $360,000 and the settlement in the BeMusic litigation of $ 1.4
million. Net cash used in operating activities in 2003 was the result of net
losses from operations of $8.3 million, the gain on the sale of our digital
music fulfillments business and related assets of $2.8 million, a decrease in
accounts payable of $1.2 million, offset by a decrease in depreciation and
amortization of $226,000 and the recovery of restricted cash of $826,000
relating to the lease termination of our Redwood City facility.

Net cash provided by (used in) investing activities was $0, $0 and $3.2 million
in 2005, 2004, and 2003 respectively. The net cash provided in 2003 was from the
sale of our digital music fulfillment business and related assets.

Net cash provided by (used in) financing activities was $0, $(67,000) and
$(57.7) million, in 2005, 2004 and 2003, respectively. The net cash used in
financing activities in 2004 was due to the purchase of fractional interests in
connection with the implementation of the Reverse/Forward Stock Split. The net
cash used in financing activities in 2003 of $57.7 million was from the cash
distribution to our shareholders of $2.50 per share on January 29, 2003.

We also, as permitted under Delaware law and in accordance with our Bylaws,
indemnify our officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at our
request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe
the fair value of these indemnification agreements is minimal.

                                       19
<PAGE>

We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures in
the near future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Financial Statements which appears on page F-1
of this report. The Reports of Independent Registered Public Accounting Firms,
Financial Statements and Notes to Financial Statements which are listed in the
Index to Financial Statements and which appear beginning on page F-2 of this
report are incorporated into this Item 8.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of the end of the period covered by
this report, our chief executive office and our chief financial officer have
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.

No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table presents our directors and executive officers, their ages
and the positions held by them as of December 31, 2005:

  NAME                     AGE   POSITION
------------------------   ---   -----------------------------------------------
  William J. Fox           49    President, Chief Executive Officer and Director
  Melvyn Brunt             62    Chief Financial Officer and Secretary
  James A. Mitarotonda     51    Chairman and Director
  Steven Berns             41    Director
  Stephen Liguori          49    Director
  Michael A. McManus. Jr   62    Director

Mr. Fox has served as one of our directors since April 2003 and has served as
our President and Chief Executive Officer since October 7, 2004. Mr. Fox was
Chairman, President and Chief Executive Officer of AKI Inc. and President and
CEO of AKI Holdings, Inc., an international specialty marketing services
business, from February 1999 until October 2004. From September 1991 until
January 1999, Mr. Fox was an executive of Revlon Inc. (NYSE: REV) and of Revlon
Consumer Products Corporation ("RCPC"), holding various positions, including
Senior Executive Vice President of Revlon, Inc., President of Strategic and
Corporate Development, Revlon Worldwide, Chief Executive Officer of Revlon
Technologies, and, until December 1997, was Chief Financial Officer of Revlon,
Inc. Mr. Fox was concurrently Senior Vice President of MacAndrews & Forbes
Holdings Inc. ("MacAndrews"). Mr. Fox was a director of Revlon Inc. and RCPC
from 1994 until April 1999. At various times, beginning in April 1983, Mr. Fox
was also an executive officer of several affiliates of MacAndrews and Revlon,
including Technicolor Inc., The Coleman Company, New World Entertainment and
Revlon Group Incorporated. Mr. Fox served as a director and non-executive
Co-Chairman of Loehmann's Holdings Inc. from October 2000 until October 2004.
Mr. Fox currently serves as Vice Chairman of Barington Capital Group, L.P.

                                       20
<PAGE>

and certain of its affiliates and has been the President, Chief Executive
Officer and a director of Dynabazaar, Inc. (OTCBB:FAIM) since December 2004. Mr.
Fox is also a director of Nephros, Inc. (AMEX:NEP).

Mr. Brunt has served as our Chief Financial Officer and Secretary since April
2003. He has also served as Chief Financial Officer to Barington Capital Group,
L.P. since January 2002 and as Chief Financial Officer and Secretary to
Dynbazaar, Inc. (OTCBB:FAIM) since January 2004. In addition, from January 2002
to May 2004, he served as Chief Financial Officer and Secretary to MM Companies,
Inc. (OTCBB:MMCO). From 1985 to 2001, Mr. Brunt was a Director and Chief
Financial Officer of Davies Turner & Co., an international freight forwarding
company with offices throughout the United States. From 1996 to 2001, Mr. Brunt
was President of Air Mar, Inc. and a Director of TCX International Inc. Both of
those companies provided logistics support services to a wide variety of
importing and exporting companies.

Mr. Mitarotonda has served as one of our directors since September 2002, our
Co-Chairman from April 2003 until May 2004 and our sole Chairman since May 2004.
He served as our Co-Chief Executive Officer from April 2003 until May 2004 and
our sole Chief Executive Officer from May 2004 to October 7, 2004. Mr.
Mitarotonda is Chairman of the Board, President and Chief Executive Officer of
Barington Capital Group, L.P., an investment firm that he co-founded in November
1991. Mr. Mitarotonda is also the Managing Director of Barington Companies
Offshore Fund, Ltd. and President and Chief Executive Officer of Barington
Companies Investors, LLC, the general partner of Barington Companies Equity
Partners, L.P., a small capitalization value fund which seeks to be actively
involved with its portfolio companies in order to enhance shareholder value. Mr.
Mitarotonda is also a director of A. Schulman (NASDAQ: 5HLM) and Dynabazaar,
Inc. (OTCBB:FAIM) and served as the President and Chief Executive Officer of
Dynabazaar, Inc. from January 2004 until December 2004. In May 1988, Mr.
Mitarotonda co-founded Commonwealth Associates, an investment banking, brokerage
and securities trading firm. Mr. Mitarotonda served as Chairman of the Board and
Co-Chief Executive Officer of JMJ Management Company Inc., the general partner
of Commonwealth Associates.

Mr. Berns has been President, Chief Financial Officer and Director of MDC
Partners Inc. (NASDAQ:MDCA) (the "Company") since November 2005. From September
2004 to November 2005, Mr. Berns served as Vice Chairman and Executive Vice
President of the Company. Prior to that, Mr. Berns was the Senior Vice President
and Treasurer of The Interpublic Group of Companies, Inc., an organization of
advertising agencies and marketing services companies from August 1999 until
September 2004. Before that, Mr. Berns held a variety of positions in finance at
Revlon, Inc. from April 1992 until August 1999, becoming Vice President and
Treasurer in 1996. Prior to joining Revlon, Mr. Berns worked at Paramount
Communications Inc. and at a predecessor public accounting firm of Deloitte &
Touche. Mr. Berns is a Certified Public Accountant. He has served as a Director
and member of the Audit and Compensation Committees for LivePerson, Inc. since
April 2002 and a Director and member of the Audit and Nominating and Corporate
Governance Committee of LQ Corporation, Inc. since October 2004.

Mr. Liguori has served as one of our directors since October 2004. From January
2001 until January 2005, Mr. Liguori was a Managing Director and the Chief
Retail Marketing Officer of Morgan Stanley's Individual Investor Group, a group
that provides investment products and services for individuals. From June 2000
to October 2000, Mr. Liguori was the head of Citibanking North America's
E-Consumer Division and from June 1998 to June 2000, was a Business Manager at
Citibanking, N.A. Before joining Citibank, Mr. Liguori worked in general
management and strategic marketing with the Kraft/Phillip Morris organization
(NYSE:KFT) and Pepsico (NYSE:PEP).

Mr. McManus has served as one of our directors since April 2003. Mr. McManus has
been President and Chief Executive Officer of Misonix, Inc. (NASDAQ:MSON), a
medical device company since November 1998. He was President and Chief Executive
Officer of New York Bancorp Inc. ("NYBI") from 1991 to 1998, a director of NYBI
from 1990 to 1998 and a director and Vice Chairman of Home Federal Savings Bank,
NYBI's subsidiary, from 1991 to 1998. He is also a director of NWH, Inc.
(NASDAQ:NWIR), American Home Mortgage Holdings, Inc. (NYSE:AMH) and Novavax,
Inc. (NASDAQ:NVAX). He has served in numerous government capacities, including
Assistant to the President of the United States from 1982 to 1985 and as Special
Assistant to the Secretary of Commerce during the Ford Administration.

        There is no family relationship between any of the foregoing directors
or between any of such directors and any of our executive officers.

                                       21
<PAGE>

AUDIT COMMITTEE

The Audit Committee currently consists of Steven Berns (Chairman), Steve Liguori
and Michael McManus. The Board has determined that each member is "independent"
under the NASD's listing standards and the applicable rules of the Securities
Exchange Commission (the "SEC"), that each member is "financially literate"
under the NASD's listing standards and that Mr. Berns qualifies as an Audit
Committee Financial Expert under the applicable rules of the SEC.

The Audit Committee hires our independent accountants and is charged with the
responsibility of overseeing our financial reporting process. In the course of
performing its functions, the Audit Committee reviews, with management and the
independent accountants, our internal accounting controls, the annual financial
statements, the report and recommendations of the independent accountants, the
scope of the audit and the qualifications and independence of the auditors. A
copy of the Audit Committee charter as adopted by the Board on October 7, 2004
is available upon request to the following address: L Q Corporation, Inc., 888
Seventh Avenue, 17th Floor, New York, NY, 10019, Attn: Secretary.

CODE OF BUSINESS CONDUCT AND ETHICS

We have adopted a Code of Business Conduct and Ethics that applies to our
directors, officers, senior management and certain other employees, including
our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions. We
will provide a copy of our Code of Business Conduct and Ethics to any person
without charge, upon request. Requests for a copy of the Code of Business
Conduct and Ethics can be made in writing to the following address: L Q
Corporation, Inc., 888 Seventh Avenue, 17th Floor, New York, NY, 10019, Attn:
Secretary.

                                       22
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than 10% of a registered class of the our
equity securities, to file certain reports regarding ownership of, and
transactions in, our securities with the SEC and with Nasdaq. Such officers,
directors and 10% shareholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms that they file.

Based solely on our review of copies of Forms 3, 4, 5 and amendments thereto
furnished to us and representations made to us, we believe that during the
fiscal year ended December 31, 2005 all reports required by Section 16(a) to be
filed by our officers and directors and 10% beneficial owners were filed on a
timely basis, except as follows: (i) Joseph R. Wright, Jr. filed late his
Initial Statement of Beneficial Ownership of Securities on Form 3; and (ii)
James A. Mitarotonda filed late one Statement of Changes in Beneficial Ownership
on Form 4 relating to certain acquisitions of shares of common stock of the
Company.

BOARD COMPOSITION

At our December 22, 2004 meeting of our stockholders, our stockholders voted in
favor of an amendment to our certificate of incorporation to eliminate the
classification of our board of directors into three classes with staggered
three-year terms, and all directors hereafter will be elected for one-year terms
at each annual meeting of stockholders.

Our board of directors is currently comprised of five (5) members, namely, James
A. Mitarotonda, Steven Berns, William J. Fox, Michael A. McManus, Jr. and
Stephen Liguori.

Each officer is elected by, and serves at the discretion of, the Board. Each of
our officers and directors, devote the amount of time necessary to discharge
their duties to the Company.

ITEM 11. EXECUTIVE COMPENSATION

                             EXECUTIVE COMPENSATION

The following table sets forth the total compensation received for services
rendered to us for the years ended December 31, 2005, 2004 and 2003 by the Named
Executive Officers. Numbers of securities in this table reflect the
reverse-forward stock split which took place on June 7, 2004.

<TABLE>
<CAPTION>
                                                                                                  LONG-TERM
                                                              ANNUAL COMPENSATION                COMPENSATION
                                                ----------------------------------------------   ------------
                                                                                                 # SECURITIES
                                                                                  OTHER ANNUAL    UNDERLYING
NAME AND PRINCIPAL POSITION                     YEAR    SALARY        BONUS       COMPENSATION   OPTIONS/SARs
---------------------------------------------   ----   --------    -----------    ------------   ------------
<S>                                             <C>    <C>         <C>                      <C>  <C>
William J. Fox, Chief Executive                 2005   $ 78,000    $    60,000 (3)          --             --
Officer (1)                                     2004   $ 15,000             --              --   $     67,347
                                                2003         --             --              --             --

James A. Mitarotonda, Chairman and              2005         --             --              --             --
Chief Executive Officer (resigned               2004   $ 37,000             --              --             --
as Chief Executive Officer in                   2003   $ 46,487             --              --         63,000
October 2004)

Seymour Holtzman, Co-Chairman and               2005         --             --              --             --
Co-Chief Executive Officer                      2004   $ 20,000             --              --             --
(resigned as Co-Chairman and                    2003   $ 10,000             --              --         63,000
Co-Chief Executive Officer in May 2004)

Melvyn Brunt, Chief Financial                   2005         (2)            --              --             --
Officer                                         2004         (2)            --              --             --
                                                2003         (2)            --              --         14,000
</TABLE>

----------
(1)     Mr. Fox has served as our Chief Executive Officer since October 7, 2004.
(2)     From April 2003 through May 16, 2004, the Company paid Barington Capital
Group, L.P. ("Barington") a monthly fee of $7,290 for certain administrative and
accounting services provided by Barington on its behalf, which includes services
performed by Mr. Brunt, the Chief Financial Officer of Barington, on behalf of
the Company. The Company entered into a new services agreement with Barington
dated as of November 18, 2004. Under this agreement, the Company paid Barington
$8,000 per month for providing certain administrative, accounting and other
services on its behalf in 2004. The services

                                       23
<PAGE>

agreement with Barington was amended as of January 1, 2005 to, among other
things, increase the monthly fee payable by the Company to Barington from $8,000
to $15,000. For more information, see "Certain Relationships and Related
Transactions."
(3)     The bonus to Mr. Fox was paid in January 2006 after the closing of the
acquisition of the ACPG business.

OPTION GRANTS IN LAST FISCAL YEAR

There were no stock options awarded to Executive Officers during the year ended
December 31, 2005.

               AGGREGATED OPTION SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION SAR VALUES

The following table provides summary information concerning stock options held
as of December 31, 2005 by each of the Named Executive Officers. Number of
securities and exercise prices reflect the reverse-forward stock split which
took place on June 7, 2004. The value of unexercised in-the-money options at
fiscal year-end is based on a price per share of $1.79 on December 31, 2005 less
the exercise price.

<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES
                                                     UNDERLYING UNEXERCISED                    VALUE OF UNEXERCISED
                                                   OPTIONS/SAR's AT FISCAL YEAR-           IN-THE-MONEY OPTIONS/SAR's AT
                          SHARES      VALUE                   END                                 FISCAL YEAR-END
                       ACQUIRED ON   REALIZED   ------------------------------------   -----------------------------------
NAME                     EXERCISE      ($)       EXERCISABLE          UNEXERCISABLE        EXERCISABLE     UNEXERCISABLE
--------------------   -----------   --------   ---------------      ---------------   ----------------   ----------------
<S>                             <C>        <C>          <C>                   <C>                    <C>                <C>
William Fox                     --         --            47,261               41,086                 --                 --
James Mitarotonda               --         --           160,200(1)                --                 --                 --
Melvyn Brunt                    --         --            14,000                   --                 --                 --
Total                           --         --           221,461               41,086                 --                 --
</TABLE>

----------
(1)     In May 2004, 63,000 options were transferred to Mr. Mitarotonda from Mr.
        Holtzman pursuant to the terms of a securities purchase agreement by and
        among Jewelcor Management, Inc., Seymour Holtzman, Barington Capital
        Group, L.P., James A. Mitarotonda and Ramius Securities, LLC, dated as
        of May 13, 2004.

DIRECTOR COMPENSATION

In February 2003, our Board approved a plan that provides our non-employee
directors with cash compensation of $10,000 upon initial election and on each
anniversary of becoming a director during their term of service, and $1,000 per
meeting of the Board attended during their term of service. Attendance at
Committee meetings will be compensated at the rate of $1,000 per meeting for
members and $2,000 per meeting for the chairperson. In 2005, we paid $49,000 for
Board and Committee attendance.

Non-employee directors are granted a fully vested option to purchase 21,000
shares of common stock upon initial election and a fully vested option to
purchase 1,400 shares of common stock on each anniversary of becoming a director
during their term of service at an exercise price equal to the fair market value
of a share of common stock as of the date of grant.

EMPLOYMENT CONTRACTS TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

As approved by the Board on October 22, 2005, Mr. Fox's compensation is $11,000
per month. Mr. Fox is to be paid one year of severance if terminated without
cause.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee of the Board reviews and recommends to the Board the
compensation and benefits of all of our executive officers, administers our
stock and option plans and establishes and reviews general policies relating to
compensation and benefits. The compensation committee currently consists of
Stephen Liguori and Michael A. McManus, Jr. The compensation committee is
currently composed of independent, non-employee directors. No interlocking
relationships exist among our Board, compensation committee or executive

                                       24
<PAGE>

officers and the Board, compensation committee or executive officers of any
other company, nor has an interlocking relationship existed in the past.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The compensation committee generally believes that the compensation of the
executive officers, including that of the Chief Executive Officer (each, an
"Executive Officer" and collectively, the "Executive Officers"), should be
influenced by our performance. The compensation committee establishes the
salaries and bonuses of all of the Executive Officers by considering: (i) our
financial performance for the past year; (ii) the achievement of certain
objectives related to the particular Executive Officer's area of responsibility;
(iii) the salaries and bonuses of Executive Officers in similar positions of
comparably-sized companies; and (iv) the relationship between revenue and
Executive Officer compensation. No specific weight is given to any of these
factors in the evaluation of an executive officer's base salary.

To contain expenses in 2004, the compensation committee established a salary
freeze on all of our employees. In approving the salary of the Company's Chief
Executive Officer, the compensation committee generally follows the policies set
forth above. However, as the Company did not have an operating business in 2004,
the Chief Executive Officer was compensated at a level deemed reasonable and
appropriate for the services being provided to the Company by the Chief
Executive Officer.

In 2005, the compensation committee did not establish bonus targets for the
Executive Officers. In prior years, bonus targets have been equal to either 30%
or 50% of base salary. Actual bonus amounts were based on both corporate and
individual performance measurements. The corporate performance measurements were
based on revenue and operating loss targets. No bonus payouts were made in 2005.
As approved by the Board of Directors in October 2005, Mr. Fox's monthly
retainers were increased to $11,000 and he was provided a severance provision of
one year's compensation in the event of termination without cause. He also
received a bonus in January 2006, in the amount of $60,000 after the closing of
the ACPG business acquisition.

In addition to salary and bonus, the compensation committee, from time to time,
grants options to Executive Officers. The compensation committee views option
grants as an important component of its long-term, performance-based
compensation philosophy. Since the value of an option bears a direct
relationship to our stock price, the compensation committee believes that
options motivate Executive Officers to manage us in a manner that will also
benefit stockholders. As such, the specific number of stock options granted to
an Executive Officer is determined by the committee's perception of relative
contributions or anticipated contributions to overall corporate performance. The
committee also reviews the total number of options already held by individual
executive officers at the time of grant.

In 2004, we granted options to purchase 67,347 shares of common stock to William
J. Fox.

In approving the Chief Executive Officers' salary, the compensation committee
generally follows the policies set forth above

                                                     COMPENSATION COMMITTEE
                                                     OF L Q CORPORATION, INC

                                                        /s/ Stephen Liguori
                                                     ---------------------------
                                                            STEPHEN LIGUORI

                                                     /s/ Michael A. McManus, Jr.
                                                     ---------------------------
                                                         MICHAEL A. McMANUS, JR.

                                       25
<PAGE>

PERFORMANCE GRAPH

        The following graph compares the cumulative total return to stockholders
on our common stock with the cumulative total return of the Nasdaq Stock Market
Index-U.S. and a group of former peer issuers selected in good faith and
comprised of Intertrust Technologies Corporation (ITRU) and RealNetworks, Inc.
(RNWK). The graph assumes that $100 was invested on December 31, 2000, the date
of our initial public offering, in our common stock, the Nasdaq Stock Market
Index-U.S. and the peer group, including reinvestment of dividends. No dividends
have been declared or paid on our common stock. Historic stock price performance
is not necessarily indicative of future stock price performance.

                 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
         AMONG LQ CORPORATION INC. THE NASDAQ STOCK MARKET (U.S.) INDEX
                                AND A PEER GROUP

                                [CHART OMITTED]

                                       26
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

The following table presents information with respect to beneficial ownership of
our common stock as of March 8, 2006 by:

        o       each person known by us who beneficially owns more than 5% of
                the common stock;

        o       each of our named executive officers;

        o       each of our directors; and

        o       all executive officers and directors as a group.

Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o L Q Corporation, Inc., 888 Seventh Avenue, 17th Floor, New York, NY
10019. The table includes all shares of common stock issuable within 60 days of
March 22, 2005 upon the exercise of options and other rights beneficially owned
by the indicated stockholders on that date. Beneficial ownership is determined
in accordance with the rules of the SEC and includes voting and investment power
with respect to all shares of common stock. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares of common stock beneficially owned. The applicable percentage of
ownership for each stockholder is based on 3,214,408 shares of common stock
outstanding as of March 17, 2006, together with applicable options for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the person holding those options and other rights,
but are not deemed outstanding for computing the percentage ownership of any
other person. Numbers of shares in the following table and footnotes thereto
have been adjusted to account for the Company's Reverse-Forward Stock Split
which took effect on June 7, 2004.

<TABLE>
<CAPTION>
                                                                     SHARES BENEFICIALLY OWNED
                                                                    ---------------------------
                                                                        NUMBER        PERCENT
                                                                    ------------   ------------
<S>                                                                      <C>              <C>
NAME OF BENEFICIAL OWNER
Lloyd I. Miller III(1)                                                   408,446          12.71
    4550 Gordon Drive,
    Naples, Florida 34102
Phillip Goldstein(2)                                                     377,791          11.75
    60 Heritage Drive
    Plesantville, NY 10570
PNC Financial Services Group, Inc. and related entities(3)               339,694          10.57
    One PNC Plaza
    249 Fifth Avenue
    Pittsburgh, PA 15265
Coghill Capital Management, L.L.C. and related entities(4)               196,584           6.11
    One North Wacker Drive - Suite 4350
    Chicago, IL 60606
SC Fundamental Value Fund, L.P. and related entities(5)                  195,660           6.09
    420 Lexington Avenue, Suite 2601
    New York, NY 10170
Jay Gottlieb(6)                                                          219,700           6.84
    27 Misty Brook Lane
    New Fairfield, CT 06812
Barington Companies Equity Partners, L.P. and related entities(7)        354,214          11.02
    c/o Barington Capital Group, L.P.
    888 Seventh Avenue, 17th Floor
    New York NY 10019
James A. Mitarotonda(8)                                                  324,336          10.09
Steve Berns(9)                                                            22,400           *
Melvyn Brunt(10)                                                          14,000           *
William J. Fox(11)                                                        47,261           *
Steven Liquori(12)                                                        22,400           *
Michael McManus(13)                                                       23,800           *
All executive officers and directors as a group (6 persons)              454,197          14.13
</TABLE>

                                       27
<PAGE>

----------
(1)     On February 18, 2004, Lloyd I. Miller III filed an amendment to Schedule
        13G pursuant to Rule 13d-1 of the Securities Exchange Act of 1934 with
        the Securities and Exchange Commission, reporting combined ownership of
        408,446 shares of Common Stock. According to this Schedule 13G/A, Mr.
        Miller holds sole dispositive and voting power with respect to 68,748
        shares of the reported securities as (i) the manager of a limited
        liability company that is the general partner of a certain limited
        partnership and (ii) an individual and shared dispositive and voting
        power with respect to 2,426,398 shares of the reported securities as an
        advisor to the trustee of certain family trusts.

(2)     On March 16, 2004, Phillip Goldstein filed an amendment to Schedule 13D
        pursuant to Rule 13d-1 of the Securities Exchange Act of 1934 with the
        Securities and Exchange Commission, reporting combined ownership of
        377,791 shares of Common Stock.

(3)     On February 10, 2004, PNC Financial Services Group, Inc. filed an
        amendment to Schedule 13G pursuant to Rule 13d-1 of the Securities
        Exchange Act of 1934 with the Securities and Exchange Commission,
        reporting combined ownership of 339,694 shares of Common Stock as the
        total owned by three entities, PNC Financial Services Group, Inc., PNC
        Bancorp, Inc. and PNC Bank, National Association. The total shares of
        Common Stock reported are held in Trust Accounts created by an Amended
        and Restated Trust Agreement dated September 20, 1983, in which Lloyd I.
        Miller, Jr. was Grantor and for which PNC Bank, National Association
        serves as Trustee.

(4)     On February 16, 2005, Coghill Capital Management, L.L.C. filed a
        Schedule 13G, pursuant to Rule 13d-1 of the Securities Exchange Act of
        1934 with the Securities and Exchange Commission, reporting combined
        ownership of 196,384 shares of Common Stock as the total owned.

(5)     On December 6, 2002, SC Fundamental Value Fund and related entities
        filed a Schedule 13G pursuant to Rule 13d-1 of the Securities Exchange
        Act of 1934 with the Securities and Exchange Commission, reporting
        combined ownership of 195,660 shares of Common Stock as the total owned.

(6)     On December 13, 2005, Jay Gottlieb filed a Schedule 13D reporting
        ownership of 219,700 shares of Common Stock as the total owned.

(7)     On May 25, 2004, the Barington group jointly filed and amendment to
        Schedule 13D pursuant to Rule 13d-1 of the Securities Exchange Act of
        1934 with the Securities and Echange Commission, reporting combined
        ownership of 298,214 shares of Common Stock as the total owned by the
        four entities. According to that Schedule 13D/A, Barington Company
        Equity Partners L.P. owns 67,438 shares of Common Stock, Ramius
        Securities, LLC owns 34,512 shares of Common Stock. Barington Capital
        Group, L.P. owns 80,598 shares of Common Stock and Starboard Value &
        Opportunity Fund, LLC owns 103,766 shares of Common Stock. Subsequent to
        this filing, Barington Capital Group, L.P. purchased an additional
        11,900 shares of Common Stock and was granted an option to purchase
        56,000 shares of Common Stock. Barington Companies Investors, LLC is the
        general partner of Barington Companies Equity Partners, L.P. James
        Mitarotonda is the managing member of Barington Companies Investors, LLC
        and Chairman of the Board, President and Chief Executive Officer of
        Barington Capital Group, L.P.

(8)     Includes 67,438 shares of Common Stock owned by Barington Companies
        Equity Partners, L.P., 148,498 shares of Common Stock owned by Barington
        Capital Group, L.P. and 160,200 shares of Common Stock issuable upon the
        exercise of stock options excercisable within 60 days of March 22, 2005.
        James A. Mitarotonda is President and Chief Executive Officer of
        Barington Companies Investors, LLC, the general partner of Barington
        Companies Equity Partner L.P., and Chairman of the Board, President and
        Chief Executive Officer of Barington Capital Group, L.P. Consequently,
        Mr. Mitarotonda may be deemed to beneficially own all of the shares held
        by Barington Companies Equity Partners, L.P. and Barington Capital
        Group, L.P. Mr. Mitarotonda disclaims beneficial ownership of such
        shares, except to the extent of his respective pecuniary interest
        therein.

(9)     Includes 22,400 shares of Common Stock issuable upon the exercise of
        stock options excercisable within 60 days of March 22,2006

(10)    Includes 14,000 shares of Common Stock issuable upon the exercise of
        stock options exercisable within 60 days of March 22, 2006.

(11)    Includes 47,261 shares of Common Stock issuable upon the exercise of
        stock options exercisable within 60 days of March 22, 2006.

(12)    Includes 22,400 shares of Common Stock issuable upon the exercise of
        stock options exercisable within 60 days of March 22, 2006.

(13)    Includes 23,800 shares of Common Stock issuable upon the exercise of
        stock options exercisable within 60 days of March 22, 2006.

* Does not exceed 1%.

                                       28
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information, as of December 31, 2005,
concerning shares of our common stock authorized for issuance under all of our
equity compensation plans (shares in thousands)

<TABLE>
<CAPTION>
                                                                                        NUMBER OF SECURITIES
                                                                                      REMAINING AVAILABLE FOR
                            NUMBER OF SECURITIES TO BE   WEIGHTED-AVERAGE EXERCISE     FUTURE ISSUANCE UNDER
                             ISSUED UPON EXERCISE OF        PRICE OF OUTSTANDING     EQUITY COMPENSATION PLANS
                               OUTSTANDING OPTIONS,        OPTIONS, WARRANTS AND       (EXCLUDING SECURITIES
PLAN CATEGORY                  WARRANTS AND RIGHTS               RIGHTS               REFLECTED IN COLUMN (A)
-------------------------   --------------------------   -------------------------   -------------------------
<S>                                    <C>                          <C>                        <C>
                                       (a)                          (b)                         (c)
Equity compensation plans
approved by security
Holders                                350                          1.93                       5,205

Equity compensation plans
not approved by
security holders                        --                            --                          --

           Total                       350                          1.93                       5,205
</TABLE>

On March 18, 2003, our Board elected to reduce the exercise price of all stock
options by $2.50, but not lower than $0.10, to account for the $2.50 per share
return of capital distribution made on January 29, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        In July 2003, we relocated our principal executive offices to 888
Seventh Avenue, 17th Floor, New York, 10019, an office maintained by Barington
Capital Group, LP ("Barington"), a limited partnership whose general partner is
a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is our Chairman and former Chief Executive
Officer. William Fox, the President, Chief Executive Officer and a director of
the Company, is the Vice Chairman of Barington. From April 2003 through May 16,
2004, we paid Barington a monthly fee of $7,290 for certain administrative and
accounting services provided by Barington on our behalf. During the same period,
we also paid Jewelcor Management, Inc. ("Jewelcor"), a corporation whose
Chairman and Chief Executive Officer is Seymour Holtzman, a fee of $5,000 for
certain administrative services provided by Jewelcor on our behalf. Mr. Holtzman
is a former Co-Chairman and Co-Chief Executive Officer of the Company. In May
2004, Mr. Holtzman resigned from the Board and Jewelcor ceased to provide
administrative services to us. The Board then decided to enter into a new
services arrangement with Barington, and it was agreed that all payments for
services would be suspended until a new services arrangement was negotiated,
although Barington continued to provide services on our behalf. We entered into
a new services agreement with Barington dated as of November 18, 2004. Under
this agreement, we agreed to pay Barington $8,000 per month for providing
certain administrative, accounting and other services on our behalf and a fee of
$125 per hour for any legal services provided by Barington at our request. We
also agreed that in the event Barington identifies for us at our request a
business transaction such as a merger, acquisition or joint venture, and
provides us with financial consulting services in connection with such business
transaction, we will pay Barington a fee of two percent of the amount of the
consideration paid in the transaction. In connection with the agreement, we
granted to Barington or its designees stock options to purchase 56,000 shares of
our Common Stock. The options are fully exercisable and were granted with an
exercise price per share equal to $1.82, the fair market value of our Common
Stock on the grant date. The option grant was reported in a Form 4 filed by Mr.
Mitarotonda with the SEC on November 18, 2004, pending designation of the stock
option recipients among Mr. Mitarotonda and other designees of Barington. On
April 14, 2005, Barington designated Mr. Mitarotonda as a recipient of stock
options to purchase 37,000 shares of the Common Stock.

The services agreement with Barington was amended as of January 1, 2005 to,
among other things, increase the monthly fee payable by the Company to Barington
from $8,000 to $15,000 and increase the hourly fee payable for legal services
from $125 per hour to $175 per hour. We believe that the fees payable to
Barington are less than those that would be charged in arm's length transactions
between unaffiliated third parties.

We have entered into indemnification agreements with our officers and directors
containing provisions which may require us, among other things, to indemnify our
officers and directors against certain liabilities that may arise by reason of
their status or service as officers or directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. We also intend to execute such agreements with our future directors
and executive officers.

                                       29
<PAGE>

SES Resources is a minority shareholder of SES with 19.5% of the SES equity. Mr.
Bradley Schnur, one of the shareholders of the SES Resources, is serving as
President of SES. Two of the other SES Resources shareholders may become members
of the SES Advisory Panel in the future. Mr. Dennis Schnur, the remaining
shareholder of SES Resources, is Mr. B. Schnur's father and also serves as
Chairman of the SES Advisory Panel. Sebastian Cassetta serves as Vice Chairman
of the SES Advisory Panel. Mr. Cassetta served as special assistant to Governor
and Vice President Nelson Rockefeller and was Vice President and Director of
Brinks Inc. Mr. Cassetta was also the founder and CEO of Burns and Roe
Securecom, a high level security systems consulting design and integration firm.
Mr. Cassetta is presently the Senior Managing Director and Chief Operating
Officer of the Barington Capital Group, an affiliate of Registrant. As
remuneration for their duties, Mr. D. Schnur and Mr. Cassetta, as well as other
SES Advisory Panel members, may receive remuneration fees in connection with the
gross profit earned by SES. In connection with the Acquisitions, Barington
served as a transaction advisor and shall receive a fee of approximately $60,000
in January 2006. Such amount was approved by the independent directors of
Registrant at a meeting of its Board of Directors meeting on October 26, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The public accounting firm of Rothstein Kass & Company, PC has served as our
independent accountant to perform the audit of our financial statements for the
fiscal year ended December 31, 2005 and December 31, 2004. The table below sets
forth the aggregate audit fees, audit-related fees, tax fees and all other fees
billed for services rendered by our principal accountants in our fiscal years
ended December 31, 2005 and 2004.

                                                      FISCAL      FISCAL
     FEE CATEGORY                                      2005        2004
     ---------------------------------------------   ---------   --------
     Audit Fees (1)                                  $  72,500   $ 65,700
     Audit-Related Fees (2)                                 --         --
     Tax Fees (3)                                    $  14,500   $ 19,630
     All Other Fees (4)                              $  80,953         --

     Total All Fees                                  $ 167,953   $ 85,330

(1)     Audit Fees. These consist of fees billed for professional services
        rendered for the audit of our annual financial statements and review of
        the interim financial statements included in quarterly 10-Q reports and
        for services normally provided in connection with statutory and
        regulatory filings.

(2)     Audit-Related Fees. These consist of fees billed for assurance and
        related services that are reasonably related to the performance of the
        audit or review of our financial statements that are not reported under
        "Audit Fees." These services include accounting consultations in
        connection with acquisitions and consultations concerning financial
        accounting and reporting standards.

(3)     Tax Fees. These consist of fees billed for professional services for tax
        compliance, tax advice and tax planning. These services include

(4)     All Other Fees. These consist of other fees not reported in the above
        categories.

PRE-APPROVAL POLICIES AND PROCEDURES OF AUDIT COMMITTEE

The Audit Committee has responsibility for the appointment, compensation and
oversight of the work of the independent accountant. As part of this
responsibility, the Audit Committee must pre-approve all permissible services to
be performed by the independent accountant.

The Audit Committee has adopted an auditor pre-approval policy which sets forth
the procedures and conditions pursuant to which pre-approval may be given for
services performed by the independent auditor. Under the policy, the Committee
must give prior approval for all auditing services and the terms thereof (which
may include providing comfort letters in connection with securities
underwritings) and non-audit services (other than non-audit services prohibits
under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or
the Public Company Accounting Oversight Board) to be provided. Prior approval
need not be given with respect to the provision of non-audit services if certain
"de minimus" provisions of Section 10A(i)(1)(B) of the Exchange Act are
satisfied. The Audit Committee may delegate to one or more of its members
authority to approve a request for pre-approval provided the member reports any
approval so given to the Audit Committee at its next scheduled meeting.

                                       30
<PAGE>

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) INDEX TO FINANCIAL STATEMENTS

Please see the accompanying Index to Financial Statements which appears on page
F-1 of this report. The Report of Independent Registered Public Accounting Firm,
Financial Statements and Notes to Financial Statements which are listed in the
Index to Financial Statements and which appear beginning on page F-2 of this
report are included in Item 8 above.

(a)(2) The financial statement schedule of L Q Corporation, Inc. for the years
ended December 31, 2005, 2004 and 2003 included in subsection (c) below is filed
as part of this Annual Report and should be read in conjunction with the
Financial Statement of L Q Corporation, Inc. - Schedule II - Valuation and
Qualifying Accounts. Schedules not listed have been omitted because the
information required to be set forth therein is not applicable or is included in
the Financial Statements or notes thereto.

(a)(3) EXHIBITS

     Please see subsection (b) below.

(b) EXHIBITS

     The following exhibits are incorporated herein by reference or are filed
with this report as indicated below:

3.1     Certificate of Incorporation as currently in effect (6)

3.2     Bylaws as currently in effect (2)

4.2     Form of Specimen Stock Certificate (1)

4.3     Second Amended and Restated Investor Rights Agreement dated July 31,
        1998 (1)

10.1    Form of Indemnification Agreement entered into between the registrant
        and each of its directors and executive officers (1)

10.2    1996 Equity Incentive Plan (1)

10.3    1999 Employee Stock Purchase Plan (1)

10.21   Summary Plan Description of 401(K) Plan (1)

10.50   2000 Nonstatutory Stock Option Plan (2)

10.71   Settlement Agreement with BeMusic, Inc. dated as of January 17, 2003 (3)

10.74   Settlement Agreement and Mutual Release with BeMusic, Inc. dated
        February 13, 2004 (5)

10.80   Administrative Services Agreement with Barington Capital Group, L.P.
        dated as of November 18, 2004

10.85   Amendment to Administrative Services Agreement with Barington Capital
        Group, L.P. dated as of January 1, 2005

11.1    Statement regarding computation of per share earnings (4)

23.1    Consent of PricewaterhouseCoopers LLP

23.2    Consent of Rothstein Kass & Company, PC

24.1    Power of Attorney (contained in the signature page to this report)

31.1    Certification of Chief Executive Officer pursuant to Section 302 of
        Sarbanes-Oxley Act of 2002

31.2    Certification of Chief Financial Officer pursuant to Section 302 of
        Sarbanes-Oxley Act of 2002

32.1    Certification of Chief Executive Officer pursuant to Section 906 of
        Sarbanes-Oxley Act of 2002

32.2    Certification of Chief Financial Officer pursuant to Section 906 of
        Sarbanes-Oxley Act of 2002

----------
+    confidential treatment received as to certain portions

(1)  Incorporated by reference to the Registration Statement on Form S-1 and all
     amendments thereto, Registration No. 333-77707, filed with the Securities
     and Exchange Commission on May 4, 1999 and declared effective July 8, 1999

(2)  Incorporated by reference to the Form 10-Q filed with the Securities and
     Exchange Commission on August 14, 2000

(3)  Incorporated by reference to Exhibits on Form 8-K filed with the Securities
     and Exchange Commission on January 28, 2003

(4)  This exhibit has been omitted because the information is shown in the
     financial statements or notes thereto

(5)  Incorporated by reference to the Form 10-K filed with the Securities and
     Exchange Commission on March 30, 2004

(6)  Incorporated by reference to the Form 8-K filed with the Securities and
     Exchange Commission on July 16, 2004

                                       31
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                       By:         /s/ WILLIAM J. FOX
                                           -------------------------------------
                                                      WILLIAM J. FOX
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER
                                                   DATE: MARCH 31, 2006


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 dates indicated.

<TABLE>
<CAPTION>
              SIGNATURE                              TITLE                         DATE
----------------------------------   ---------------------------------------   --------------
     <S>                             <C>                                       <C>
     /s/ WILLIAM J. FOX              President, Chief Executive Officer and    March 31, 2006
----------------------------------   Director (Principal Executive Officer)
        WILLIAM J. FOX

        /s/ MELVYN BRUNT             Chief Financial Officer (Principal        March 31, 2006
----------------------------------   Financial and Accounting Officer)
           MELVYN BRUNT

      /s/ JAMES A. MITAROTONDA       Chairman and Director                     March 31, 2006
----------------------------------
        JAMES A. MITAROTONDA

         /s/ STEPHEN LIGUORI         Director                                  March 31, 2006
----------------------------------
            STEPHEN LIGUORI

     /s/ MICHAEL A. MCMANUS, JR.     Director                                  March 31, 2006
----------------------------------
       MICHAEL A. MCMANUS, JR.

          /s/ STEVEN BERNS           Director                                  March 31, 2006
----------------------------------
            STEVEN BERNS
</TABLE>

                                       32
<PAGE>

                             L Q CORPORATION, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                     PAGE
                                                                     ----
Report of Independent Registered Public Accounting Firm               F-2
Consolidated Balance Sheets                                           F-3
Consolidated Statements of Operations                                 F-4
Consolidated Statements of Stockholders' Equity                       F-5
Consolidated Statements of Cash Flows                                 F-6
Notes to Consolidated Financial Statements                            F-7
Financial Statement Schedule II - Valuation and Qualifying Account   F-27

                                       F-1
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of L Q Corporation, Inc.

        We have audited the accompanying consolidated balance sheets of LQ
Corporation, Inc. and subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
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, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of L Q
Corporation, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

        In connection with our audits of the consolidated financial statements
referred to above, we audited the consolidated financial schedules listed under
Item 15. In our opinion, these consolidated financial schedules, when considered
in relation to the financial statements taken as a whole, present fairly, in all
material respects, the information stated therein.

                                             /s/ Rothstein, Kass & Company, P.C.

Roseland, New Jersey
March 21, 2006

                                       F-2
<PAGE>

                             L Q CORPORATION, INC.
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                                           DECEMBER 31,
                                                     ----------------------
                                                       2005         2004
                                                     ---------    ---------
                     ASSETS

Current assets:
  Cash and cash equivalents                          $   5,746    $   6,432
  Accounts receivable                                    1,097
  Inventories                                              855
  Other current assets                                      96          103
                                                     ---------    ---------
    Total current assets                                 7,794        6,535

Fixed assets                                                14

Goodwill                                                   999
                                                     ---------    ---------
      Total assets                                   $   8,807    $   6,535
                                                     =========    =========
       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accrued expenses and other current liabilities       $     575    $     114
Due to Checkpoint                                        2,581
                                                     ---------    ---------
    Total current liabilities                            3,156          114

Commitments and contingencies

  Common stock, $0.001 par value; 30,000,000
   shares authorized; 3,214,408 in 2005 and 2004
   shares issued and outstanding                             3            3
  Additional paid-in capital                           146,006      146,006
  Accumulated deficit                                 (140,267)    (139,510)
  Accumulated other comprehensive loss                     (91)         (78)
                                                     ---------    ---------
    Total stockholders' equity                           5,651        6,421
                                                     ---------    ---------
      Total liabilities and stockholders' equity     $   8,807    $   6,535
                                                     =========    =========

   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                       F-3
<PAGE>

                             L Q CORPORATION, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2005        2004        2003
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Net revenues:
  License                                            $     --    $     --    $      4
  Services                                                 --          --          39
                                                     --------    --------    --------
    Total net revenues                                     --          --          43
                                                     --------    --------    --------
Cost of net revenues:
  License                                                  --          --           5
  Services                                                 --          --           2
                                                     --------    --------    --------
    Total cost of net revenues                             --          --           7
                                                     --------    --------    --------
  Gross profit                                             --          --          36
                                                     --------    --------    --------
Operating expenses:
  Sales and marketing                                      --          --         277
  Research and development                                 --          --         165
  General and administrative                              993         968       6,628
  Restructuring                                            --          --       4,441
                                                     --------    --------    --------
    Total operating expenses                              993         968      11,511
                                                     --------    --------    --------
Loss from operations                                     (993)       (968)    (11,475)
Interest income                                           233         148         242
Other income (expense), net                                 3         (27)         71
Gain on sale of digital music fulfillment business         --          --       2,868
                                                     --------    --------    --------
Net loss                                             $   (757)   $   (847)   $ (8,294)
                                                     ========    ========    ========
Net loss per share:
  Basic and diluted                                  $  (0.24)   $  (0.26)   $  (2.56)
                                                     --------    --------    --------
  Weighted average shares                               3,214       3,232       3,243
                                                     ========    ========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       F-4
<PAGE>

                             L Q CORPORATION, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                     COMMON STOCK           ADDITIONAL                       OTHER
                               ------------------------      PAID-IN      ACCUMULATED    COMPREHENSIVE               COMPREHENSIVE
                                  SHARES        AMOUNT       CAPITAL        DEFICIT      INCOME (LOSS)      TOTAL        (LOSS)
                               ------------    --------    -----------    -----------    -------------    --------   -------------
<S>                             <C>            <C>         <C>            <C>            <C>              <C>        <C>
BALANCE AT DECEMBER 31, 2002     23,144,828    $     23    $   146,039    $  (130,369)   $         (75)   $ 15,618
                               ------------    --------    -----------    -----------    -------------    --------
Issuance of common stock in
 connection with exercise of
 stock options                       32,030                         14                                          14
 Cumulative translation
  adjustment                                                                                        (4)         (4)             (4)
Net loss                                                                       (8,294)                      (8,294)         (8,294)
                                                                                                                     -------------
Comprehensive loss                                                                                                   $      (8,298)
                               ------------    --------    -----------    -----------    -------------    --------   =============
BALANCE AT DECEMBER 31, 2003     23,176,858          23        146,053       (138,663)             (79)      7,334
                               ------------    --------    -----------    -----------    -------------    --------
Effect of reverse
 forward split                  (19,932,879)        (20)            20
Cancellation of common stock        (29,571)                       (67)                                        (67)
Cumulative translation
 Adjustments                                                                                         1           1               1
Net loss                                                                         (847)                        (847)           (847)
                                                                                                                     -------------
Comprehensive loss                                                                                                   $        (846)
                               ------------    --------    -----------    -----------    -------------    --------   =============
BALANCE AT DECEMBER 31, 2004      3,214,408           3        146,006       (139,510)             (78)      6,421
                               ------------    --------    -----------    -----------    -------------    --------
Cumulative translation
 Adjustments                                                                                       (13)        (13)            (13)
Net loss                                                                         (757)                        (757)           (757)
                                                                                                                     -------------
Comprehensive loss                                                                                                   $        (770)
                               ------------    --------    -----------    -----------    -------------    --------   =============
BALANCE AT DECEMBER 31, 2005      3,214,408    $      3    $   146,006    $  (140,267)   $         (91)   $  5,651
                               ============    ========    ===========    ===========    =============    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       F-5
<PAGE>

                             L Q CORPORATION, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2005        2004        2003
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                             $   (757)   $   (847)   $ (8,294)
Adjustments to reconcile net loss to net cash used
 in operating activities:
Depreciation and amortization                              --          --         226
 and related assets                                        --          --      (2,868)
Increase (decrease) in cash attributable to changes
 in operating assets and liabilities:
Accounts receivable from third parties                     --          28          32
Restricted cash                                            --          --         826
Other current assets                                       44          61       1,204
Accounts payable                                                       --      (1,218)
Accrued expenses and other current liabilities             64      (1,821)       (216)
Deferred revenue from third parties                        --          --         (39)
                                                     --------    --------    --------
Net cash used in operating activities                    (649)     (2,579)    (10,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of digital music fulfillment
 business and related assets                               --          --       3,200
Costs of acquisition                                      (24)
                                                     --------    --------    --------
Net cash provided by (used in)
 investing activities                                     (24)         --       3,200

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to stockholders                          --          --     (57,771)
Purchase of fractional shares                              --         (67)         14
                                                     --------    --------    --------
Net cash used in financing activities                      --         (67)    (57,757)
Effect of exchange rates on cash
 and cash equivalents                                     (13)          1          (4)
                                                     --------    --------    --------
Net decrease in cash and cash equivalents                (686)     (2,645)    (64,908)
Cash and cash equivalents at beginning of period        6,432       9,077      73,985
                                                     --------    --------    --------
Cash and cash equivalents at end of period           $  5,746    $  6,432    $  9,077
                                                     ========    ========    ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest                               $     --    $     --    $     24

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
 ACTIVITIES IN CONNECTION TO SIELOX, LLC
 ACQUISITION:
  Accounts receivable                             $    (1,097)
  Inventories                                            (855)
  Other current assets                                    (37)
  Property and equipment                                  (14)
  Goodwill                                               (667)
  Accrued expenses                                         89
  Due to Checkpoint                                     2,581
  Acquisition costs                                      (308)
  Acquisition related accrued expenses            $       308
</TABLE>

         On January 6, 2006, Sielox, LLC a newly formed wholly owned subsidiary
of LQ Corporation completed the acquisition of Checkpoint Inc's, Access Control
Products Group division. The effective date of the acquisition was the close of
business on December 30, 2005. (See note 1).

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       F-6
<PAGE>

                             L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

Overview

L Q Corporation, Inc. (the "Company") was incorporated in California as "Liquid
Audio, Inc." in January 1996 and reincorporated in Delaware in April 1999. In
July 1999, we completed our initial public offering of common stock. Our name
was formally changed to "L Q Corporation, Inc." on January 7, 2004. Our
principal executive offices are located at 888 Seventh Avenue, 17th Floor, New
York, NY 10019, and our telephone number is (212) 974-5730.

Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.

From January 2003 until December 30, 2005, we have not operated any business and
have been settling our remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.

Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of the 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of December 31, 2005 was $1.75 per share.

CHECKPOINT ACQUISITION

On September 8, 2005, the Company entered into a non-binding letter of intent
with Checkpoint Systems, Inc. ("Checkpoint") dated September 7, 2005 to acquire
substantially all of the net assets of Checkpoint's Access Control Products
Group ("ACPG") division. On October 26, 2005, the Company's Board of Directors
approved the transaction and on November 4, 2005 the parties entered into the
Checkpoint Asset Purchase Agreement. On December 30, 2005, the Company and
Checkpoint entered into a First Amendment to the Checkpoint Asset Purchase
Agreement to, among other things, extend the closing of the acquisition to
January 5, 2006. On January 6, 2006, the newly formed wholly owned subsidiary of
the Company, Sielox, LLC, completed the acquisition from Checkpoint of
substantially all of the assets of the ACPG division, effective as of the close
of business on December 30, 2005. The cash consideration for the transaction was
approximately $2.6 million, subject to post-closing adjustments, an escrow, and
related expenses estimated to be $0.3 million. The acquisition of the net assets
of ACPG are not included in the consolidated statement of operations, since the
acquisition was effective as of the close of business on December 30, 2005.

The ACPG business, which will operate as Sielox(TM) under the Company's
management, develops, designs and distributes a complete line of open
architecture access control software, programmable controllers (electronic
circuit boards), and related accessories such as readers and ID cards, which can
be configured to monitor, manage and control physical access to building
perimeters and interior locations.

SES RESOURCES, LTD.

On January 6, 2006, the Company's newly formed wholly owned subsidiary, SES
Resources International, Inc. ("SES"), completed the acquisition of
substantially all of the assets of SES Resources, Ltd., a start up consulting
venture, effective as of December 30, 2005. SES Resources, Ltd. assets consist
primarily of various trademarks. It has been determined that these trademarks
have a fair value of zero. Consideration given in exchange for these assets was
a 19.5% share in SES. The newly formed business unit will specialize in
delivering critical strategic security and business protection solutions based
on best practices developed by accomplished retired law enforcement agents and
in association with an advisory panel comprised of senior executive service
level government risk assessment and law enforcement professionals ("Advisory
Panel"). SES' primary areas of specialization are expected to include: corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection; corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services.

                                       F-7
<PAGE>

                             L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

The SES Advisory Panel will serve the business with advice and will identify
expert talent throughout the United States and internationally, to manage and
staff client assignments. The Advisory Panel is in the process of formation and
includes a senior executive service level agent from the U.S. Internal Revenue
Service, and a medical doctor who is presently Assistant Clinical Professor at
Albert Einstein College of Medicine. The Advisory Panel is chaired by one of the
owners/founders of SES Resources and vice chaired by the former VP and Director
of Brinks Inc. SES is in the process of adding additional members to the
Advisory Panel from various law enforcement agencies. For additional
information, please see the section entitled "Related Parties" below.

LIQUIDITY

The Company has incurred losses and negative cash flows from operations for
every year since inception. For the year ended December 31, 2005, the Company
incurred a net loss of approximately $757,000 and negative cash flows from
operations of approximately $649,000. As of December 31, 2005, the Company had
an accumulated deficit of approximately $140.3 million. The Company feels its
existing cash and cash equivalents are sufficient to fund the Company's current
operations and satisfy its obligations. The Company believes these obligations
will primarily relate to costs associated with the operation as a public company
(legal, accounting, insurance, etc.), the satisfaction of any potential legal
judgments or settlements and the expenses associated with the operations of
Sielox, LLC and SES. Such activities may have an impact on the Company's
liquidity.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to current period presentation.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries, Sielox, LLC and SES.
Significant intercompany transactions and balances have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company's
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

                                       F-8
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents. At December 31, 2005,
and at various times during the year, balances of cash at financial institutions
exceeded the federally insured limit. The Company has not experienced any losses
in such accounts and believes it is not subject to any significant credit risk
on cash and cash equivalents. The following schedule summarizes the estimated
fair value of the Company's cash and cash equivalents (in thousands):

                                                         DECEMBER 31,
                                                     -------------------
                                                       2005       2004
                                                     --------   --------
CASH AND CASH EQUIVALENTS:

Cash                                                 $  2,644   $     53
Money market funds                                      3,102       6379
                                                     --------   --------
                                                     $  5,746   $  6,432
                                                     ========   ========

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short term investments and accounts receivable. Substantially all of the
Company's cash and cash equivalents are invested in a highly liquid money market
fund.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accrued expenses payable are carried at cost. The
Company's financial instruments approximate fair value due to their relatively
short maturities. The Company does not hold or issue financial instruments for
trading purposes.

ACCOUNTS RECEIVABLE, NET

Accounts receivables are recorded at net realizable values. The Company
maintains an allowance for estimated losses resulting from the inability of
customers to make required payments and for anticipated returns. The allowance
is based on specific facts and circumstances surrounding individual customers as
well as historical experience. Provisions for the losses on receivables and
returns are charged to income to maintain the allowance at a level considered
adequate to cover losses and future returns. Receivables are charged off against
the reserve when they are deemed uncollectible and returns are charged off
against the reserve when the actual returns are incurred. The Company's accounts
receivable, net from third parties was $1,097 as of December 31, 2005. Per the
Asset Purchase Agreement, Checkpoint Systems, Inc has guaranteed collection of
all acquired net receivables.

INVENTORIES

Inventories are stated on the first-in, first-out method, at the lower of cost
or market. A provision is made to reduce excess or obsolete inventories to their
net realizable value.

PROPERTY AND EQUIPMENT, NET

Property and equipment are carried at cost less accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred. Additions,
improvements, and major renewals are capitalized. Depreciation generally is
provided on a straight-line basis over the estimated useful lives of the assets.
Machinery and equipment estimated useful lives range from three to ten years.
The cost and accumulated depreciation applicable to assets retired are removed
from the accounts and the gain or loss on disposition is included on the
statements of operations.

                                       F-9
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

Pursuant to Statement of Financial Accounting Standards No. 144 (SFAS 144)
"Accounting for the Impairment or Disposal of Long-lived Assets," the Company
reviews property and equipment for impairment whenever events or changes in
circumstances indicated that the carrying amount of the assets may not be
recoverable. A loss is recognized on the statements of operations if it is
determined that an impairment exists based on expected future undiscounted cash
flows. The amount of the impairment is the excess of the carrying amount of the
impaired asset over its fair value.

INTANGIBLE ASSETS

Pursuant to Statement of Financial Accounting Standards No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets," effective December 31, 2001, intangible
assets with indefinite lives are no longer amortized, but instead tested for
impairment. Intangible assets are reviewed for impairment annually or whenever
events or changes in business circumstances indicate the carrying value of the
assets may not be recoverable. Impairment losses are recognized if future cash
flows of the related assets are less than their carrying values.

GOODWILL

Pursuant to Statement of Financial Accounting Standards No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets," effective December 31, 2001, goodwill is
no longer being amortized. The Company tests goodwill for impairment on an
annual basis, relying on a number of factors including operating results,
business plans and future cash flows. Recoverability of goodwill is evaluated
using a two-step process. The first step involves a comparison of fair value of
the Company with its carrying value. If the carrying amount exceeds its fair
value, the second step of the process involves a comparison of the fair value
and carrying value of the goodwill. If the carrying value exceeds its fair
value, an impairment loss is recognized in an amount equal to the excess.

ACCRUED WARRANTY COSTS

The Company provides product warranties for various products. The warranties
vary in length depending on the product. The Company accrues warranty costs
based on historical data of warranty transactions. Accrued warranties are
reported under accrued expenses and other current liabilities at December 31,
2005.

REVENUE RECOGNITION

Revenue and related costs are recognized upon transfer of ownership, which
generally coincides with the shipment of products to customers. Service revenue
is recognized as services are performed. The Company records revenues net of an
allowance for estimated return activities.

ROYALTY EXPENSES

The Company pays royalties at amounts defined in each agreement based upon units
sold of certain components of its software solution products to various third
parties, which expire at various dates through May 2008.

RESEARCH AND DEVELOPMENT COSTS

Expenditures for research, development and engineering of software and hardware
products are expensed as incurred.

                                      F-10
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising costs are charged to operations when incurred.

SHIPPING AND HANDLING COSTS

Shipping and handling costs are accounted for in revenues, and shipping and
handling costs in cost of revenues.

STOCK-BASED COMPENSATION

The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure,".
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements.

The Company accounts for the stock issued to non-employees in accordance with
the provisions of SFAS No. 123, "Accounting for Stock Based Compensation," which
encourages but does not require companies to record compensation costs for
stock-based employee compensation at fair value. The Company has chosen to
account for stock-based compensation granted to employees using the intrinsic
value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options granted to employees is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the amount that must be paid by the employee to acquire
the stock under the terms of the stock option. Subsequent changes to option
terms can also give rise to compensation. Stock-based compensation issued to
non-employees is measured and recorded using the fair value method prescribed in
SFAS No. 123.

The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."

Consistent with the disclosure provisions of SFAS No. 123, the Company's net
loss and basic and diluted net loss per share would have been adjusted to the
pro forma amounts indicated below (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                          ------------------------------------
(In thousands, except per share data)                        2005         2004         2003
-------------------------------------------------------   ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Net loss - as reported                                    $     (757)  $     (847)  $   (8,294)
Add back stock-based employee compensation expense
 included in net loss
Less stock based compensation expense determined under
 fair value based method, net of tax effects                      18           54          853
                                                          ----------   ----------   ----------
Net loss - pro forma                                      $     (775)  $     (901)  $   (9,147)

Basic and diluted net loss per share  - as reported            (0.24)       (0.26)       (2.56)
Basic and diluted net loss per share  - pro forma         $    (0.24)  $    (0.28)  $    (2.82)
</TABLE>

                                      F-11
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company calculated the fair value of each option grant on the date of grant
using the Black-Scholes option pricing method as prescribed by the sfas no. 123
Using the following assumptions:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          -------------------------------------
                                                              2005        2004         2003
                                                          ----------   ----------   ----------
<S>                                                            <C>          <C>         <C>
Risk-free interest rate                                         3.53%        4.00%        1.28%
Weighted-average expected life (in years)                       10.0         5-10          1.0
Dividend yield                                                   0.0%         0.0%         0.0%
Expected volatility                                            36.39%       36.39%      140.00%
</TABLE>

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          -------------------------------------
                                                             2005         2004         2003
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Weighted-average fair value of options
 granted during the period                                $     1.85   $     1.82   $     0.14
                                                          ==========   ==========   ==========
Weighted-average fair value of purchase
 rights granted during the period                         $        -   $        -   $        -
                                                          ==========   ==========   ==========
</TABLE>

NET LOSS PER SHARE

Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings per share on the face
of the statements of operations, which the Company has adopted.

Basic and diluted net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. The calculation of diluted net
loss per share excludes potential common shares if the effect is anti-dilutive.
Potential common shares consist of unvested restricted common stock, incremental
common shares issuable upon the exercise of stock options and common shares
issuable upon the exercise of stock warrants.

                                      F-12
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          ------------------------------------
                                                             2005         2004         2003
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Numerator:
  Net loss                                                $     (757)  $     (847)  $   (8,294)
                                                          ==========   ==========   ==========
Denominator:
  Weighted average shares                                      3,214        3,232        3,243
                                                          ----------   ----------   ----------
  Denominator for basic and diluted calculation                3,214        3,232        3,243
                                                          ==========   ==========   ==========
Net loss per share:
  Basic and diluted                                       $    (0.24)  $    (0.26)  $    (2.56)
                                                          ==========   ==========   ==========
</TABLE>

The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                          ------------------------------------
                                                             2005         2004         2003
                                                          ----------   ----------   ----------
<S>                                                              <C>          <C>        <C>
Common stock options                                             350          361        1,368
Common stock warrants                                            --           --           264
</TABLE>

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's inactive foreign subsidiary was its
local currency. Foreign currency assets and liabilities are translated at the
current exchange rate at each balance sheet date. Revenues and expenses are
translated at weighted average exchange rates in effect during the year. The
related gains and losses from foreign currency translation are recorded in
accumulated other comprehensive income. Realized gains and losses on foreign
currency transactions are included in other income (expense), net. The
subsidiary was liquidated during the year ended December 31, 2005.

INCOME TAXES

The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized.

                                      F-13
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE LOSS

The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income".SFAS No. 130 establishes standards for disclosure and
financial statement presentation for reporting total comprehensive income (loss)
and its individual components. Comprehensive income (loss), as defined, includes
all changes in equity during a period from non-owner sources. The Company's
comprehensive income (loss) includes net income (loss), unrealized gains and
losses on investments and foreign currency translation adjustments and is
displayed in the statement of stockholders' equity.

SEGMENT INFORMATION

The Company complies with the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the method companies report information about operating segments
in financial statements. SFAS No. 131 focuses on the internal organization that
is used by management for making operating decisions and assessing performance
as the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The Company has determined that it operated in only one operating segment.

International revenues are based on the country in which the customer is
located. The following is a summary of total net revenues by geographic area (in
thousands):

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          ------------------------------------
                                                             2005         2004         2003
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Domestic                                                  $       --   $       --   $       43
International                                             $       --   $       --   $       --
                                                          ----------   ----------   ----------
                                                          $       --   $       --   $       43
                                                          ==========   ==========   ==========
</TABLE>

It is impractical for the Company to compute revenues by type of product and
service for the years ended December 31, 2005, 2004 and 2003.

Substantially all of the Company's assets as of December 31, 2005, 2004 and 2003
were located in the United States.

                                      F-14
<PAGE>

                             L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for Stock-Based Compensation (Revised)." SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification.

The Company has not completed its evaluation of SFAS No. 123(R) but expects the
adoption of this new standard will not have a material impact on operating
results of the Company.

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs", an amendment of Accounting Research Bulletin (ARB)
No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. This pronouncement will be effective for
the first quarter 2006. The Company does not believe that this statement will
have a material effect on the financial statements.

In March 2005, FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN No. 47 clarifies that the term
Conditional Asset Retirement Obligation refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company does not believe that this statement will
have a material effect on the financial statements.

In June 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which will require entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, Accounting Changes, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period's net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
"retrospective application" of an accounting principle and the "restatement" of
financial statements to reflect the correction of an error. Another significant
change in practice under SFAS No. 154 will be that if an entity changes its
method of depreciation, amortization, or depletion for long-lived, non-financial
assets, the change must be accounted for as a change in accounting estimate.
Under APB Opinion No. 20, such a change would have been reported as a change in
accounting principle. SFAS No. 154 applies to accounting changes and error
corrections that are made in fiscal years beginning after December 15, 2005. The
Company does not believe that this statement will have a material effect on the
financial statements.

                                      F-15
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2-BUSINESS ACQUISITIONS:

ACPG ACQUISITION

On January 6, 2006 the Company acquired certain assets and assumed certain
liabilities of the Access Control Products Group ("ACPG") division of Checkpoint
Systems Inc. with an effective date as of the close of business on December 30,
2005. The Company is a former public shell which had no operations. ACPG was
acquired in order for the Company to have an operating business. The aggregate
purchase price including acquisition costs of approximately $0.3 was
approximately $2.9 million dollars.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the date of acquisition. The Company is in the
process of having an independent appraisal done on all intangible assets
received as a result of the acquisition of ACPG. Intangible assets will be
reclassified upon results of an independent appraisal.

DECEMBER 31, 2005
-----------------
($ IN THOUSANDS)
Accounts Receivable                    $  1,097
Inventories                                 855
Property, plant and equipment                14
Goodwill                                    999
Other assets                                 37
                                       --------
Total assets acquired                  $  3,002
Current liabilities                         (89)
                                       --------
Net assets acquired                    $  2,913
                                       ========

Goodwill arose from the ACPG acquisition. This is due to a purchase price plus
acquisition costs of approximately $2.9 million which exceeded the fair market
value of all identifiable assets. The Company is in the process of having an
independent appraisal done on all intangible assets received as a result of the
acquisition of ACPG. The results of this appraisal may give rise to, among other
things, goodwill. Goodwill of approximately $999,000 will be adjusted for
amounts provided for in the Asset Purchase Agreement and will be reclassified
upon results of an independent appraisal. As the goodwill arose on December 30,
2005, no amortization was charged to operations for the year then ended.

                                      F-16
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS)(CONTINUED):

The following unaudited pro forma information presents results of operations of
L Q Corporation, Inc. as if the acquisition of ACPG occurred as of January 1,
2004. As the Company is in the process of receiving an appraisal on the goodwill
acquired as a result of the acquisition, amortization expense can not be
estimated at this time. Although prepared on a basis consistent with L Q
Corporation, Inc. consolidated financial statements, these unaudited pro forma
results do not purport to be indicative of the actual results of operations of
the combined companies which would have been achieved had these events occurred
at the beginning of the periods presented nor are they indicative of future
results.

<TABLE>
<CAPTION>
For the years ended December 31,                      2005                  2004
---------------------------------------------   ----------------      ----------------
                                                ($ in thousands)      ($ in thousands)
<S>                                             <C>                   <C>
Net Sales                                       $          6,390      $          6,560
Cost of Goods Sold                                        (3,681)               (3,549)
                                                ----------------      ----------------
Gross Profit                                               2,709                 3,011
General and Administrative Expenses                        4,734                 5,370
                                                ----------------      ----------------
Net Loss from Operations                                  (2,025)               (2,359)
Interest Income                                              236                   148
Pro forma Adjustment in Interest Income                     (161)(A)               (34)(A)
Other Income (Expense), Net                                  (12)                  (27)
                                                ----------------      ----------------
Net Loss                                        $         (1,962)     $         (2,272)
                                                ================      ================
Net loss per share - as reported                $          (0.24)     $          (0.26)
Net loss per share - proforma                   $          (0.61)     $          (0.70)
Weighted average shares                                    3,214                 3,232
</TABLE>

(A) Interest income has been reduced based on cash balances that would have
existed had the acquisition occurred at the beginning of the period.

NOTE 3-RELATED PARTIES:

In July 2003, we relocated our principal executive offices to 888 Seventh
Avenue, 17th Floor, New York, 10019, an office maintained by Barington Capital
Group, LP ("Barington"), a limited partnership whose general partner is a
corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is our Chairman and former Chief Executive
Officer. William Fox, the President, Chief Executive Officer and a director of
the Company, is the Vice Chairman of Barington. From April 2003 through May 16,
2004, we paid Barington a monthly fee of $7,920 for certain administrative and
accounting services provided by Barington on our behalf. During the same period,
we also paid Jewelcor Management, Inc. ("Jewelcor"), a corporation whose
Chairman and Chief Executive Officer is Seymour Holtzman, a fee of $5,000 for
certain administrative services provided by Jewelcor on our behalf. Mr. Holtzman
is a former Co-Chairman and Co-Chief Executive Officer of the Company. In May
2004, Mr. Holtzman resigned from the Board and Jewelcor ceased to provide
administrative services to us. The Board then decided to enter into a new
services arrangement with Barington, and it was agreed that all payments for
services would be suspended until a new services arrangement was negotiated,
although Barington continued to provide services on our behalf. We entered into
a new services agreement with Barington dated as of November 18, 2004. Under
this agreement, we agreed to pay Barington $8,000 per month for providing
certain administrative, accounting and other services on our behalf and a fee of
$125 per hour for any legal services provided by Barington at our request. We
also agreed that in the event Barington identifies for us at our request a
business transaction such as a merger, acquisition or joint venture, and
provides us with financial consulting services in connection with such business
transaction, we will pay Barington a fee of two percent of the amount of the
consideration paid in the transaction. In connection with the agreement, we
granted to Barington or its designees stock options to purchase 56,000 shares of
our Common Stock. The options are fully exercisable and were granted with an
exercise price per share equal to $1.82, the fair market value of our Common
Stock on the grant date. The option grant was reported in a Form 4 filed by Mr.
Mitarotonda with the SEC on November 18, 2004, pending designation of the stock
option recipients among Mr. Mitarotonda and other designees of Barington. On
April 14, 2005, Barington designated Mr. Mitarotonda as a recipient of stock
options to purchase 37,000 shares of the Common Stock.

                                      F-17
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3-RELATED PARTIES (CONTINUED):

The services agreement with Barington was amended as of January 1, 2005 to,
among other things, increase the monthly fee payable by the Company to Barington
from $8,000 to $15,000 and increase the hourly fee payable for legal services
from $125 per hour to $175 per hour. We believe that the fees payable to
Barington are less than those that would be charged in arm's length transactions
between unaffiliated third parties.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to the Company's CEO, William Fox.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to Barington for serving as a transaction
advisor.

We have entered into indemnification agreements with our officers and directors
containing provisions which may require us, among other things, to indemnify our
officers and directors against certain liabilities that may arise by reason of
their status or service as officers or directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. We also intend to execute such agreements with our future directors
and executive officers.

SES Resources is a minority shareholder of SES with an interest of 19.5% in the
equity of SES. Mr. Bradley Schnur, one of the shareholders of the SES Resources,
is serving as President of SES. Two of the other SES Resources shareholders may
become members of the SES Advisory Panel in the future. Mr. Dennis Schnur, the
remaining shareholder of SES Resources, is Mr. B. Schnur's father and also
serves as Chairman of the SES Advisory Panel. Sebastian Cassetta serves as Vice
Chairman of the SES Advisory Panel. Mr. Cassetta served as special assistant to
Governor and Vice President Nelson Rockefeller and was Vice President and
Director of Brinks Inc. Mr. Cassetta was also the founder and CEO of Burns and
Roe Securecom, a high level security systems consulting design and integration
firm. Mr. Cassetta is presently the Senior Managing Director and Chief Operating
Officer of the Barington Capital Group, an affiliate of the Company. As
remuneration for their duties, Mr. D. Schnur and Mr. Cassetta, as well as other
SES Advisory Panel members, may receive remuneration fees in connection with the
gross profit earned by SES.

NOTE 4-BALANCE SHEET COMPONENTS ($ IN THOUSANDS):

DUE TO CHECKPOINT

Amounts due to Checkpoint are the result of consideration due from the
acquisition of ACPG by Sielox, LLC. These amounts were paid on January 6, 2006.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

                                                         DECEMBER 31,
                                                     -------------------
                                                       2005       2004
                                                     --------   --------
Accrued expenses and other current liabilities:
  Consulting and professional services               $    486   $    104
  Warranty reserve                                         25
  Other                                                    64         10
                                                     --------   --------
                                                     $    575   $    114
                                                     ========   ========

                                      F-18
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5-COMMON STOCK:

On December 6, 2002, the Company announced a return of capital cash distribution
to the Company's common stockholders of $2.50 per share, payable on December 20,
2002 to stockholders of record as of December 10, 2002. After a delay due to a
lawsuit filed against the Company by BeMusic, Inc. (see Note 9--Commitments and
Contingencies: Litigation), the Company paid this return of capital cash
distribution on January 29, 2003, for a total of $57.8 million.

At a September 29, 2003 meeting, the Company's stockholders approved amendments
to the Company's certificate of incorporation to effect a 1-for-250 reverse
stock split, to be followed immediately by a 35-for-1 forward stock split
(collectively, the "Reverse/Forward Stock Split"), as well as a reduction in the
number of common shares authorized for issuance from 50,000,000 shares to
30,000,000 shares (the "Share Reduction"). On June 7, 2004, the Company filed
amendments to its Certificate of Incorporation to implement the Reverse/Forward
Stock Split and the Share Reduction, which took place on July 26, 2004. All
weighted average and earnings per share amounts have been restated to reflect
the retroactive effect of the Reverse/Forward Stock Split except for the
capitalization of the Company.

On August 4, 2004, the Company retired approximately 30,000 shares of common
stock.

NOTE 6-PREFERRED STOCK RIGHTS AGREEMENTS:

On April 15, 2003, the Company's Board of Directors approved the repeal of the
Preferred Stock Rights Agreement. The Preferred Stock Rights Agreement gave
rights to stockholders, exercisable after a person or group announced
acquisition of 10% or more of the Company's common stock or announced
commencement of a tender or exchange offer the consummation of which would have
resulted in ownership by the person or group of 10% or more of the Company's
common stock to acquire shares of the Company's common stock or shares of any
company in which the Company was merged.

NOTE 7-WARRANTS:

In June 1999, the Company signed an Advertising Agreement with Amazon.com, Inc.
("Amazon.com") to collaborate on event-based advertising using the Company's
digital delivery services. In connection with this agreement, the Company issued
a fully vested warrant to purchase approximately 254,000 shares of the Company's
common stock to Amazon.com. The warrant was valued at $2,022,000 and was
recognized as strategic marketing-equity instruments expense ratably over the
one-year term of the agreement, which ended in June 2000. The remaining warrants
to purchase 264,000 shares of common stock expired in June 2004.

                                      F-19
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8-INCOME TAXES:

        Deferred taxes are comprised of the following (in thousands):

                                                         DECEMBER 31,
                                                     --------   --------
                                                       2005       2004
                                                     --------   --------
Deferred tax assets
Net operating loss and tax credit carryforwards      $  8,785   $  8,617
  Depreciation and amortization                            41         45
  Accrual and other                                         -         39
                                                     --------   --------
  Total deferred tax assets                             8,826      8,701
  Less: Valuation allowance                            (8,826)    (8,701)
                                                     --------   --------
Net deferred tax assets                              $     --   $     --
                                                     ========   ========

At December 31, 2005, the Company had approximately $18.9 million of federal and
state net operating loss carryforwards available to offset future taxable
income. The federal and state net operating loss carryforwards expire beginning
in 2013. At December 31, 2005, the Company had approximately $2.0 million of
federal and state research and development tax credit carryforwards available to
offset future taxes. The federal tax credit carryforward expire in varying
amounts beginning in 2011. The California tax credit carryforward can be carried
forward indefinitely.

The total net operating loss carry-forwards ("NOL") of $18.9 million has been
reduced, for financial reporting purposes by $117.2 million for federal and
$48.9 million for state, which is unlikely ever to be utilized due to the
application of the Section 382 provisions. The remainder of the NOL also likely
might effectively be obviated if certain future events were to occur that would
invoke additional Section 382 provisions. Future use of the NOL's therefore is
extremely speculative and should not be presumed absent extensive analysis of
the complex Section 382 provisions.

The Company has incurred a loss in each period since its inception. Based on the
available objective evidence, including the Company's history of losses,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company has provided for a full
valuation allowance against its total deferred tax assets at December 31, 2005
and 2004. The valuation allowance increased by approximately $125,000 in the
year ended December 31, 2005.

NOTE 9-COMMITMENTS AND CONTINGENCIES:

Rent expense consists of the following:

                                                    YEAR ENDED DECEMBER 31,
                                                -------------------------------
                                                  2005       2004       2003
                                                --------   --------   --------
Rent expense (in thousands) .................          -   $     10   $    532

                                      F-20
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9-COMMITMENTS AND CONTINGENCIES (CONTINUED):

LITIGATION

        From time to time, the Company has been subject to litigation including
the pending litigation described below. Because of the uncertainties related to
both the amount and range of loss on the pending litigation, management is
generally unable to make a reasonable estimate of the liability that could
result from an unfavorable outcome and has therefore not recorded a liability,
except as described below. As additional information becomes available, the
Company will assess its potential liability and revise its estimates. Pending or
future litigation could be costly, could cause the diversion of management's
attention and could upon resolution, have a material adverse effect on the
Company's business, results of operations, financial condition and cash flow.

In addition, the Company is engaged in certain legal and administrative
proceedings incidental to its normal business activities and believes that these
matters will not have a material adverse effect on its financial position,
results of operations or cash flow.

On or about April 7, 2000, SightSound filed an Amended Complaint in a lawsuit in
the United States District Court for the Western District of Pennsylvania (the
"Pennsylvania Court") alleging that certain former customers of ours, N2K, Inc.,
CDNow, Inc. and CDNow Online, Inc., which have since merged into BeMusic,
infringed one or more of three patents of SightSound (Nos. 5,191,573; 5,675,734;
and 5,996,440). In January 2002, we agreed to share evenly with CDNow Online,
Inc. all legal fees incurred by CDNow Online, Inc. in defending the patent
infringement action, but required BeMusic to consult in good faith with us
regarding its defense and/or settlement of the patent infringement action. On
February 20, 2004, an Order was entered in the Pennsylvania Court ending the
lawsuit by SightSound against BeMusic. As a result of the entry of the Order and
pursuant to a separate agreement between SightSound and BeMusic executed on
February 12, 2004, SightSound dismissed the SightSound litigation and released
all claims against us. Entry of the Order also made effective a Settlement
Agreement and Mutual Release executed on February 13, 2004 by us and BeMusic
(the "Settlement Agreement"). The Settlement Agreement finally resolves all
matters between BeMusic and us relating to the SightSound litigation. Under the
terms of the Settlement Agreement, we paid $1,452,000 to BeMusic and
approximately $314,000 in legal fees relating to the SightSound litigation.
These payments were in addition to $335,827 previously paid by us for our share
of attorney fees incurred in connection with this matter. As a result of the
Settlement Agreement, we have no further obligation to maintain available cash
on hand in connection with the SightSound litigation. Neither party to the
Settlement Agreement admitted any wrongdoing or any indemnification obligations
in connection with this litigation.

We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
The lawsuits have been filed by individual shareholders who purport to seek
class action status on behalf of all other similarly situated persons who
purchased the common stock of the Company between July 8, 1999 and December 6,
2000. The lawsuits allege that certain underwriters of the initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The lawsuits further allege that the
defendants violated the federal securities laws by issuing a registration
statement and prospectus in connection with the Company's initial public
offering which failed to accurately disclose the amount and nature of the
commissions and fees paid to the underwriter defendants. On or about October 8,
2002, the Court entered an Order dismissing the claims asserted against certain
individual defendants in the consolidated actions without any payment from these
individuals or the Company. On or about February 19, 2003, the Court entered an
Order dismissing with prejudice the claims asserted against the Company under
Section 10(b) of the Securities Exchange Act of 1934, as amended. As a result,
the only claims that remain against the Company are those arising under Section
11 of the Securities Act of 1933, as amended. The Company has entered into an
agreement-in-principle to settle the remaining claims in the litigation. The
proposed settlement will result in a dismissal with prejudice of all claims and
will include a release of all claims that were brought or could have been
brought against the Company and its present and former directors and officers.
It is anticipated that any payment to the plaintiff class and their counsel will
be funded by the Company's directors' and officers' liability insurance and that
no direct payment will be made by the Company. The parties have negotiated and
executed a definitive settlement agreement. The proposed settlement provides
that the class members in the class action cases brought against the
participating

                                      F-21
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9-COMMITMENTS AND CONTINGENCIES (CONTINUED):

issuer defendants will be guaranteed a recovery of $1 billion by insurers of the
participating issuer defendants. If recoveries totaling $1 billion or more are
obtained by the class members from the underwriter defendants, however, the
monetary obligations to the class members under the proposed settlement will be
satisfied. In addition, LQ Corporation and any other participating issuer
defendants will be required to assign to the class members certain claims that
they may have against the underwriters of their IPO's. The proposed settlement
contemplates that any amounts necessary to fund the settlement or
settlement-related expenses would come from participating issuers' directors and
officers liability insurance policy proceeds as opposed to funds of the
participating issuer defendants themselves. A participating issuer defendant
could be required to contribute to the costs of the settlement if that issuer's
insurance coverage were insufficient to pay that issuer's allocable share of the
settlement costs. If ultimately approved by the Court, the proposed settlement
would result in the dismissal, with prejudice, of all claims in the litigation
against LQ Corporation and all of the other issuer defendants who have elected
to participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. The proposed settlement does not provide for the resolution of any
claims against the underwriter defendants, and the litigation as against those
defendants is continuing. Consummation of the proposed settlement remains
conditioned upon obtaining approval by the Court. On September 1, 2005, the
Court preliminarily approved the proposed settlement, directed that notice of
the terms of the proposed settlement be provided to class members, and scheduled
a fairness hearing for April 24, 2006, at which objections to the proposed
settlement will be heard. Thereafter, the Court will determine whether to grant
final approval to the proposed settlement.

GUARANTEES, WARRANTIES AND INDEMNIFICATION

The Company, as permitted under Delaware law and in accordance with its Bylaws,
indemnifies its officers and directors for certain events or occurrences,
subject to certain limits, while the officer is or was serving at the Company's
request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, the Company has a Director and Officer
Insurance Policy that limits its exposure and enables it to recover a portion of
any future amounts paid. As a result of the Company's insurance policy coverage
it believes the fair value of these indemnification agreements is minimal.

In the Company's sales agreements, the Company typically agrees to indemnify its
customers for any expenses or liability resulting from claimed infringements of
patents, trademarks or copyrights of third parties. The terms of these
indemnification agreements are generally perpetual any time after execution of
the agreement. The maximum amount of potential future indemnification is
unlimited. Except for the Sightsound legal matter (see LITIGATION above), to
date the Company has not paid any amounts to settle claims or defend lawsuits
related to indemnification under its sales agreements.

The Company provides product warranties for various products. These warranties
vary in length depending on the product. The Company accrues warranty costs
based on historical data of warranty transactions.

NOTE 10--RESTRUCTURING:

In January 2003, the Company adopted a corporate restructuring program,
consisting of a worldwide workforce reduction, in connection with the sale of
the Company's digital music fulfillment business and related assets to Geneva
Media, LLC ("Geneva"), an affiliate of Anderson Merchandisers, LP. A
restructuring charge of $4,411,000 was recorded in operating expense for the
year ended December 31, 2003. The restructuring charge included involuntary
separation costs of $796,000 for 29 employees worldwide, 5 in sales and
marketing, 11 in research and development, 9 in general and administrative and 4
in operations functions in the U.S., lease termination fees of $3,599,000 and
asset impairment costs of $46,000 for prepaid expenses related to assets sold to
Geneva.

In July 2003, the Company incurred a one-time payout of $3,569,000 to terminate
the remaining term of its property lease on its former headquarters located in
Redwood City, CA. As of December 31, 2003, the Company paid this liability and
expensed it as a restructuring charge.

                                      F-22
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10--RESTRUCTURING (CONTINUED):

In October 2003, the Company incurred a one-time payout of $30,000 to terminate
the remaining term of its property lease on an office located in Los Angeles,
California.

The Company did not incur any restructuring charges during the years ended
December 31, 2004 and 2005.

A summary of the restructuring cost is outlined as follows (in thousands):

<TABLE>
<CAPTION>
                                                       SEVERANCE                       ASSET
                                                     AND BENEFITS    FACILITIES     IMPAIRMENTS       TOTAL
                                                     ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>
Restructuring reserve balance at January 1, 2002     $         --   $        523   $         --   $        523
Severance and benefits                                        852                            --            852
Accrued lease costs                                            --            155             --            155
Property and equipment impairment                              --             --            156            156
                                                     ------------   ------------   ------------   ------------
Total                                                         852            678            156          1,686
Cash paid                                                    (852)          (678)            --         (1,530)
Non-cash                                                       --             --           (156)          (156)
                                                     ------------   ------------   ------------   ------------
Restructuring reserve balance at December 31, 2002             --   $         --   $         --   $         --
Severance and benefits                                        796             --             --            796
Lease termination fee                                          --          3,599             --          3,599
Asset impairment                                               --             --             46             46
                                                     ------------   ------------   ------------   ------------
Total                                                         796          3,599             46          4,441
Cash paid                                                    (796)        (3,599)                       (4,395)
                                                     ------------   ------------   ------------   ------------
Non-cash                                                       --             --            (46)           (46)
                                                     ------------   ------------   ------------   ------------
Restructuring reserve balance at December 31, 2003   $         --   $         --   $         --   $         --
                                                     ============   ============   ============   ============
</TABLE>

NOTE 11--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following is a summary of the unaudited quarterly results of operations for
the periods shown (in thousands except per share data):

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                         -------------------------------------------------------------------------------------
                                           MARCH      JUNE       SEPT.      DEC.       MARCH      JUNE       SEPT.      DEC.
                                         31, 2005   30, 2005   30, 2005   31, 2005   31, 2004   30, 2004   30, 2004   31, 2004
                                         --------   --------   --------   --------   --------   --------   --------   --------
<S>                                      <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net revenue                              $     --   $     --   $     --   $     --   $     --   $     --   $     --   $     --
Gross profit (loss)                            --         --         --         --         --         --         --         --
Net loss                                     (112)      (192)      (166)      (287)      (134)      (353)      (185)      (175)
Net loss per share, basic and diluted        (.03)      (.06)      (.05)      (.09)      (.04)      (.11)      (.06)      (.05)
Weighted average shares used in per
 share calculation                          3,214      3,214      3,214      3,214      3,245      3,243      3,238      3,213
</TABLE>

NOTE 12--SALE OF DIGITAL MUSIC FULFILLMENT BUSINESS

        In January 2003, the Company entered into an agreement to sell its
digital music fulfillment business and related assets (approximately $332,000)
to Geneva Media, LLC ("Geneva"), an affiliate of Anderson Merchandisers, LP for
$3,200,000. As part of the sale, the Company also transferred ownership of
certain "Liquid Audio" related trademarks to Geneva and the Microsoft License.
The Company recorded a gain on sale of Digital Music Fulfillment Business of
$2,868,000 in 2003.

                                      F-23
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13--DECREASE IN STOCK OPTION EXERCISE PRICE

        On March 18, 2003, the Company's Board of Directors elected to reduce
the exercise price of all outstanding stock options by $2.50, but not lower than
$0.10.

NOTE 14--REVERSE/FORWARD STOCK SPLIT

        At the September 29, 2003 meeting of the Company's stockholders, the
stockholders approved amendments to the Company's certificate of incorporation
to effect a 1-for-250 followed immediately by a 35-for-1 Reverse/Forward Stock
Split as well as the Share Reduction. On June 7, 2004, the Company filed
amendments to its Certificate of Incorporation to implement the Reverse/Forward
Stock Split and the Share Reduction, which took place on July 26, 2004. All
weighted average and earnings per amounts have been restated to reflect the
retroactive effect of the Reverse/Forward Stock Split except for the
capitalization of the Company.

NOTE 15-EMPLOYEE BENEFITS

STOCK OPTION PLANS

In September 1996, the Board of Directors adopted the 1996 Equity Incentive Plan
(the "1996 Plan"), which initially provided for the granting of up to 1,144,000
incentive stock options and nonqualified stock options. In August 1997, October
1998 and April 1999, an additional 441,000, 88,000 and 1,600,000 shares,
respectively, were authorized for grants under the 1996 Plan. Under the 1996
Plan, incentive stock options may be granted to employees of the Company and
nonqualified stock options and stock purchase rights may be granted to
consultants, employees, directors and officers of the Company. Options granted
under the 1996 Plan are for periods not to exceed ten years, and must be issued
at prices not less than 100% and 85%, for incentive and nonqualified stock
options, respectively, of the fair market value of the stock on the date of
grant as determined by the Board of Directors. Options granted under the 1996
Plan generally vest 25% after the first year and then 2.083% each month
thereafter until 100% vested. Options granted to stockholders who own greater
than 10% of the outstanding stock must be for periods not to exceed five years
and must be issued at prices not less that 110% of the estimated fair market
value of the stock on the date of grant as determined by the Board of Directors.
In April 1999, the 1996 Plan was also amended to provide for annual increases on
January 1 equal to the lesser of 1,500,000 shares, 5% of the outstanding shares
on such date or a lesser amount determined by the Board of Directors. For the
year ended December 31, 2005, approximately 6,000 options were granted under the
1996 plan.

In April 2000, the Board of Directors adopted the 2000 Nonstatutory Stock Option
Plan (the "2000 Plan"), which provided for the granting of up to 500,000
nonqualified stock options. Under the 2000 Plan, stock options may be granted to
employees of the Company. Options granted under the 2000 Plan are for periods
not to exceed ten years, and are issued at prices determined by the Board of
Directors or any of its committees. Options granted under the 2000 Plan vest at
terms and conditions determined by the Board of Directors or any of its
committees. Options granted for the year ended December 31, 2000 vest 25% after
the first year and then 2.083% each month thereafter until 100% vested. Options
granted for the year ended December 31, 2001 vest 2.083% each month until 100%
vested. No options were granted under the 2000 Plan for the year ended December
31, 2005 and 2004, respectively.

                                      F-24
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15-EMPLOYEE BENEFITS (CONTINUED):

The following table summarizes stock option activity under the plans (shares in
thousands):

<TABLE>
<CAPTION>
                                                                         Weighted
                                                                         Average
                                            Options                      Exercise
                                           Available                       Price
                                           for Grant       Shares        Per Share
                                         ------------   ------------   ------------
<S>                                            <C>            <C>      <C>
Balance at December 31, 2002                    4,485          1,102   $       7.31
Additional options authorized                       -              -              -
Options granted                                (1,690)         1,690           1.24
Options exercised                                   -            (32)          0.22
Options canceled                                1,392         (1,392)          7.41
                                         ------------   ------------   ------------
Balance at December 31, 2003                    4,187          1,368           0.29
Options granted                                  (188)           188           1.82
Options exercised                                   -              -
Options canceled                                1,195         (1,195)          0.29
                                         ------------   ------------   ------------
Balance at December 31, 2004                    5,194            361           1.93
Options granted                                    (6)             6           1.85
Options canceled                                   17            (17)          1.93
                                         ------------   ------------   ------------
Balance at December 31, 2005                    5,205            350   $       1.93
                                         ------------   ------------   ------------
</TABLE>

The following table summarizes information concerning outstanding and
exercisable options for all the stock option plans as of December 31, 2005
(shares in thousands):

<TABLE>
<CAPTION>
                                                                             Options vested and
                                       Options Outstanding                      Exercisable
                           ------------------------------------------   ---------------------------
                                            Weighted       Weighted                      Weighted
                                             Average        Average                       Average
                                            Remaining      Exercise                      Exercise
                              Number       Contractual     Price per       Number        Price per
Range of Exercise Price     Outstanding   Life (Years)       Share       Outstanding       Share
------------------------   ------------   ------------   ------------   ------------   ------------
<S>                                 <C>            <C>   <C>                     <C>   <C>
$       0.79                          4            6.8   $       0.79              4   $       0.79
$       2.07                        169            7.3           2.07            169           2.07
$       1.82                        171            3.8           1.82            128           1.82
$       1.85                          6            9.8           1.85                          1.85
                           ------------                                 ------------
                                    350            7.3   $       1.93            301   $       1.95
                           ============                                 ============
</TABLE>

                                      F-25
<PAGE>

                              L Q CORPORATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15-EMPLOYEE BENEFITS (CONTINUED):

EMPLOYEE STOCK PURCHASE PLAN

        In April 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan") and reserved 500,000 shares of common stock
for issuance thereunder. The Purchase Plan was approved by the stockholders in
June 1999. On January 1, each year, the aggregate number of shares reserved for
issuance under the Purchase Plan is increased by the lesser of 750,000 shares,
3% of the outstanding shares on such date or a lesser amount determined by the
Board of Directors. The Purchase Plan became effective on the first business day
on which price quotations for the Company's common stock were available on the
Nasdaq National Market, which was July 8, 1999. Employees are eligible to
participate if they are customarily employed by the Company or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year and do not (i) immediately after grant own stock possessing 5% or
more of the total combined voting capital stock, or (ii) possess rights to
purchase stock under all of the employee stock purchase plans at an accrual rate
which exceeds $25,000 worth of stock for each calendar year. The Purchase Plan
permits participants to purchase common stock through payroll deductions up to
15% of the participant's compensation, as defined in the Purchase Plan, but
limited to 2,500 shares per participant per purchase period. Each offering
period includes four six-month purchase periods, and the Purchase Plan was
amended in June 2000 so that purchase periods begin on April 1 and October 1 of
each year, except for the offering period which started on the first trading day
on or after the effective date of the public offering. The price at which the
common stock is purchased under the Purchase Plan is 85% of the lesser of the
fair market value at the beginning of the offering period or at the end of the
purchase period. The Purchase Plan will terminate after a period of ten years
unless terminated earlier as permitted by the Purchase Plan. Common stock issued
under the plan was 34,940. No shares of Common Stock were issued under the
Purchase Plan in 2005 and 2004 respectively.

NOTE 16-SUBSEQUENT EVENT

LEASE AGREEMENTS

The Company entered into a lease agreement on January 27, 2006, for the period
April 1, 2006 through February 28, 2011. Future minimum annual rental payments
under this lease are approximately as follows:

                 YEAR ENDING DECEMBER 31,

               2006             $  65,000

               2007             $  87,000

               2008             $  91,000

               2009             $  91,000

               2010             $  91,000

               2011             $  23,000

                                      F-26
<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

The following is a summary of valuation and qualifying accounts for the periods
shown:

<TABLE>
<CAPTION>
                                                            ADDITIONS
                                                             CHARGED
                                                           (CREDITED)
                                            BALANCE AT      TO COSTS                       BALANCE
                                             BEGINNING        AND                         AT END OF
                                              OF YEAR       EXPENSES      DEDUCTIONS        YEAR
                                           ------------   ------------   ------------   ------------
<S>                                        <C>            <C>            <C>            <C>
DECEMBER 31, 2003
Allowance for Doubtful Accounts            $        146   $          0   $       (146)  $          0
Deferred Tax Valuation Allowance                 47,513                       (38,970)         8,543
DECEMBER 31, 2004
Allowance for Doubtful Accounts                       0              0              0              0
Deferred Tax Valuation Allowance                  8,543            158                         8,701
December 31, 2005
Allowance for Doubtful Accounts            $          0   $          0   $          0   $          0
Deferred Tax Valuation Allowance                  8,701            125                         8,826
</TABLE>

                                      F-27
<PAGE>

EXHIBIT INDEX

3.1     Certificate of Incorporation as currently in effect (6)

3.2     Bylaws as currently in effect (2)

4.2     Form of Specimen Stock Certificate (1)

4.3     Second Amended and Restated Investor Rights Agreement dated July 31,
        1998 (1)

10.1    Form of Indemnification Agreement entered into between the registrant
        and each of its directors and executive officers (1)

10.2    1996 Equity Incentive Plan (1)

10.3    1999 Employee Stock Purchase Plan (1)

10.22   Summary Plan Description of 401(K) Plan (1)

10.50   2000 Nonstatutory Stock Option Plan (2)

10.71   Settlement Agreement with BeMusic, Inc. dated as of January 17, 2003 (3)

10.74   Settlement Agreement and Mutual Release with BeMusic, Inc. dated
        February 13, 2004 (5)

10.80   Administrative Services Agreement with Barington Capital Group, L.P.
        dated as of November 18, 2004

10.85   Amendment to Administrative Services Agreement with Barington Capital
        Group, L.P. dated as of January 1, 2005

11.1    Statement regarding computation of per share earnings (4)

23.2    Consent of Rothstein Kass & Company, PC

24.1    Power of Attorney (contained in the signature page to this report)

31.1    Certification of Chief Executive Officer pursuant to Section 302 of
        Sarbanes-Oxley Act of 2002

31.2    Certification of Chief Financial Officer pursuant to Section 302 of
        Sarbanes-Oxley Act of 2002

32.1    Certification of Chief Executive Officer pursuant to Section 906 of
        Sarbanes-Oxley Act of 2002

32.2    Certification of Chief Executive Officer pursuant to Section 906 of
        Sarbanes-Oxley Act of 2002

32.2    Certification of Chief Financial Officer pursuant to Section 906 of
        Sarbanes-Oxley Act of 2002

----------
+    confidential treatment received as to certain portions

(1)  Incorporated by reference to the Registration Statement on Form S-1 and all
     amendments thereto, Registration No. 333-77707, filed with the Securities
     and Exchange Commission on May 4, 1999 and declared effective July 8, 1999

(2)  Incorporated by reference to the Form 10-Q filed with the Securities and
     Exchange Commission on August 14, 2000

(3)  Incorporated by reference to Exhibits on Form 8-K filed with the Securities
     and Exchange Commission on January 28, 2003

(4)  this exhibit has been omitted because the information is shown in the
     financial statements or notes thereto

(5)  Incorporated by reference to the Form 10-K filed with the Securities and
     Exchange Commission on March 30, 2004

(6)  Incorporated by reference to the Form 8-K filed with the Securities and
     Exchange Commission on July 16, 2004