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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549





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FORM 10-Q





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Commission File Number 000-25977





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L Q CORPORATION, INC.


(Exact name of registrant as  specified in its charter)





|Delaware                                                             |  | 77-0421089                                
|-------------------------------------------------------------------- |  | ------------------------------------------
|                                                                     |  |                                           
|(State or    other jurisdiction of    incorporation or organization) |  | (I.R.S.    Employer    Identification No.)
|                                                                     |  |                                           
|888 Seventh Ave., 17th    Floor, New York, NY                        |  | 10019                                     
|                                                                     |  |                                           
|(Address    of principal executive offices)                          |  | (Zip Code)                                
|                                                                     |  |                                           
|(212) 974-5730                                                      
|                                                                    
|(Registrants    telephone number, including area code)             




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) had been subject to such  filing requirements for the past 90 days.    Yes      No





Indicate by check mark whether the registrant is an accelerated filer  (as defined in Rule 12b-2 of the Exchange Act).


Yes      No





As of November 9, 2004, there were 3,027,273 shares of registrants  Common Stock outstanding.





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L Q CORPORATION, INC.





INDEX


|PART    I. FINANCIAL INFORMATION | 1                                                                                                                           
|-------------------------------- | ----------------------------------------------------------------------------------------------------------------------------
|                                 |                                                                                                                             
|ITEM 1.                          | FINANCIAL STATEMENTS (unaudited)                                                                                            
|                                 | Condensed    Consolidated Balance Sheets as of September 30, 2004 and December 31,    2003                                  
|                                 | Condensed    Consolidated Statements of Operations for the three months and nine months    ended September 30, 2004 and 2003
|                                 | Condensed    Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003                    
|                                 | Notes to    Condensed Consolidated Financial Statements                                                                     
|ITEM 2.                          | MANAGEMENTS DISCUSSION AND ANALYSIS    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                    
|ITEM 3.                          | QUANTITATIVE AND QUALITATIVE    DISCLOSURES ABOUT MARKET RISK                                                               
|ITEM 4.                          | CONTROLS AND PROCEDURES                                                                                                     
|                                 |                                                                                                                             
|PART II. OTHER INFORMATION       | 17                                                                                                                          
|                                 |                                                                                                                             
|ITEM 1.                          | LEGAL PROCEEDINGS                                                                                                           
|ITEM 2.                          | CHANGES IN SECURITIES, USE OF    PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES                                          
|ITEM 3.                          | DEFAULT UPON SENIOR SECURITIES                                                                                              
|ITEM 4.                          | SUBMISSION OF MATTERS TO A VOTE OF    SECURITY HOLDERS                                                                      
|ITEM 5.                          | OTHER INFORMATION                                                                                                           
|ITEM 6.                          | EXHIBITS AND REPORTS ON FORM 8-K                                                                                            
|                                 |                                                                                                                             
|SIGNATURES                       | 20                                                                                                                          




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ITEM 1.    FINANCIAL STATEMENTS





L Q CORPORATION, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands; unaudited)





|                                                                                                                                                                                       |  | September    30    2004 |          | December    31,     2003 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | ------------------------ | -
|                                                                                                                                                                                       |  |                         |          |                          |  
|Assets                                                                                                                                                                                 |  |                         |          |                          |  
|Current assets:                                                                                                                                                                        |  |                         |          |                          |  
|Cash and cash    equivalents                                                                                                                                                           |  | $                       | 6,525    |                          | $
|Accounts receivable,    net                                                                                                                                                            |  |                         |          |                          |  
|Other current assets                                                                                                                                                                   |  |                         | 160      |                          |  
|                                                                                                                                                                                       |  |                         |          |                          |  
|Total current assets                                                                                                                                                                   |  | $                       | 6,685    |                          | $
|                                                                                                                                                                                       |  |                         |          |                          |  
|Liabilities    and stockholders equity                                                                                                                                                |  |                         |          |                          |  
|Current liabilities:                                                                                                                                                                   |  |                         |          |                          |  
|Accrued liabilities                                                                                                                                                                    |  | $                       | 90       |                          | $
|                                                                                                                                                                                       |  |                         |          |                          |  
|Total current    liabilities                                                                                                                                                           |  |                         | 90       |                          |  
|                                                                                                                                                                                       |  |                         |          |                          |  
|Stockholders equity:                                                                                                                                                                  |  |                         |          |                          |  
|Common stock, $0.001    par value; 30,000,000 shares authorized; 3,027,273 and 3,243,979 shares    issued and outstanding at September 30, 2004 and December 31, 2003,    respectively |  |                         | 23       |                          |  
|Additional paid-in    capital                                                                                                                                                          |  |                         | 146,053  |                          |  
|Accumulated other    comprehensive loss (net)                                                                                                                                          |  |                         | (79      | )                        |  
|Accumulated deficit                                                                                                                                                                    |  |                         | (139,335 | )                        |  
|Treasury Stock 216,706    shares at cost                                                                                                                                               |  |                         | (67      | )                        |  
|                                                                                                                                                                                       |  |                         |          |                          |  
|Total stockholders    equity                                                                                                                                                          |  |                         | 6,595    |                          |  
|                                                                                                                                                                                       |  |                         |          |                          |  
|Total liabilities and    stockholders equity                                                                                                                                          |  | $                       | 6,685    |                          | $
|                                                                                                                                                                                       |  |                         |          |                          |  




See accompanying notes to  condensed consolidated financial statements.





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L Q CORPORATION, INC.


CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS


(in  thousands, except per share amounts; unaudited)





|                                                      |  | Three    Months Ended     September 30, |       | Nine    Months Ended     September 30, |  
|----------------------------------------------------- |  | --------------------------------------- | ----- | -------------------------------------- | -
|                                                      |  |                                         |       |                                        |  
|                                                      |  | 2004                                    |       | 2003                                   |  
|                                                      |  |                                         |       |                                        |  
|Net revenues:                                         |  |                                         |       |                                        |  
|License                                               |  | $                                       |      |                                        | $
|Services                                              |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Total net revenues                                    |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Cost of net revenues:                                 |  |                                         |       |                                        |  
|License                                               |  |                                         |      |                                        |  
|Services                                              |  |                                         |      |                                        |  
|Non-cash cost of    revenue                           |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Total cost of net    revenues                         |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Gross profit (loss)                                   |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Operating expenses:                                   |  |                                         |       |                                        |  
|Sales and marketing                                   |  |                                         |      |                                        |  
|Research and    development                           |  |                                         |      |                                        |  
|General and    administrative                         |  |                                         | 225   |                                        |  
|Restructuring                                         |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Total operating    expenses                           |  |                                         | 225   |                                        |  
|                                                      |  |                                         |       |                                        |  
|Loss from operations                                  |  |                                         | (225  | )                                      |  
|Other income (expense), net                           |  |                                         | 40    |                                        |  
|Gain on sale of digital music    fulfillment business |  |                                         |      |                                        |  
|                                                      |  |                                         |       |                                        |  
|Net loss                                              |  | $                                       | (185  | )                                      | $
|                                                      |  |                                         |       |                                        |  
|Net loss per share:                                   |  |                                         |       |                                        |  
|Basic and diluted                                     |  | $                                       | (0.06 | )                                      | $
|                                                      |  |                                         |       |                                        |  
|Weighted average shares                               |  |                                         | 3,027 |                                        |  
|                                                      |  |                                         |       |                                        |  




See accompanying notes to  condensed consolidated financial statements.





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L Q CORPORATION, INC.


NOTES  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(in  thousands; unaudited)





|                                                                               |  | Nine    Months Ended     September 30, |       
|------------------------------------------------------------------------------ |  | -------------------------------------- | ------
|                                                                               |  |                                        |       
|                                                                               |  | 2004                                   |       
|                                                                               |  |                                        |       
|Cash    flows from operating activities:                                       |  |                                        |       
|Net loss                                                                       |  | $                                      | (672  
|Adjustments to    reconcile net loss to net cash used in operating activities: |  |                                        |       
|Depreciation and    amortization                                               |  |                                        |       
|Gain on sale of digital    music fulfillment business                          |  |                                        |       
|Changes in assets and    liabilities:                                          |  |                                        |       
|Accounts receivable                                                            |  |                                        | 28    
|Other current assets                                                           |  |                                        | 4     
|Accounts payable                                                               |  |                                        |       
|Accrued liabilities                                                            |  |                                        | (1,845
|Deferred revenue                                                               |  |                                        |       
|                                                                               |  |                                        |       
|Net cash used in    operating activities                                       |  |                                        | (2,485
|Cash    flows from investing activities:                                       |  |                                        |       
|Purchase of available    for sale securities                                   |  |                                        |       
|Decrease in restricted    cash                                                 |  |                                        |       
|Proceeds from sale of    digital music fulfillment business and related assets |  |                                        |       
|                                                                               |  |                                        |       
|Net cash provided by    investing activities                                   |  |                                        |       
|                                                                               |  |                                        |       
|Cash    flows from financing activities:                                       |  |                                        |       
|Cash distribution to    stockholders                                           |  |                                        |       
|Proceeds from issuance    of common stock, net of repurchases                  |  |                                        |       
|Purchase of treasury    stock                                                  |  |                                        | (67   
|                                                                               |  |                                        |       
|Net cash used in    financing activities                                       |  |                                        | (67   
|                                                                               |  |                                        |       
|Net decrease in cash and cash equivalents                                      |  |                                        | (2,552
|Cash and cash equivalents, beginning of period                                 |  |                                        | 9,077 
|                                                                               |  |                                        |       
|Cash and cash equivalents, end of period                                       |  | $                                      | 6,525 
|                                                                               |  |                                        |       




See accompanying notes to  condensed consolidated financial statements.





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L Q CORPORATION, INC.


NOTES  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





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





The Company





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 Board of Directors (the Board) received stockholder  approval on July 30, 2003 to change our name to L Q Corporation, Inc. Our  name was formally changed 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.





Since January 2003, we have not operated  any business and have been reviewing alternatives for the use or disposition of  our remaining assets while settling our remaining claims and liabilities. We  intend to pursue other business opportunities and investments unrelated to the  downloading of digital music. Neither our Board nor our stockholders have yet  approved any such opportunities. If we are unable to find any suitable business  opportunities and/or investments, we may pursue a plan of complete liquidation  and dissolution. If a complete liquidation and dissolution is approved,  pursuant to Delaware General Corporation Law, we will continue to exist for  three years after the dissolution becomes effective or for such longer period  as the Delaware Court of Chancery shall direct, for the purpose of prosecuting  and defending suits against us and enabling us gradually to close our business,  to dispose of our property, to
discharge our liabilities and to distribute to  our stockholders any remaining assets.





We entered into a Settlement Agreement  and Mutual Release on February 12, 2004 with BeMusic, Inc. which finally  resolved all matters between BeMusic and us with respect to a lawsuit brought  by SightSound, Inc. (SightSound) alleging that certain former customers of  ours (which have since merged into BeMusic) infringed certain patents of  SightSound. Under the terms of this Agreement, we paid approximately $1,452,000  to BeMusic as settlement expenses 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.





At the September 29, 2003 stockholders  meeting, 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 the 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.  Per share amounts for all periods presented have been restated to  give effect to this Reverse/Forward Stock Split.  Our common stock currently trades over the counter 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 of our common stock  increased significantly following the implementation of the Reverse/Forward  Stock Split. The market price of our common stock as of November 9th, 2004  was $1.75 per share. An investment in an OTC security is speculative and  involves a significant degree of risk. Many OTC securities are relatively  illiquid, or thinly traded, which can enhance volatility in the share price  and make it difficult for investors to buy or sell without dramatically  effecting the quoted price or may inhibit the ability of investors to sell a





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L Q CORPORATION, INC.


NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





position at a later date. Moreover, if we pursue a plan of complete  liquidation and dissolution, we will close our stock transfer books,  discontinue recording transfers of our common stock, and our common stock will  no longer be traded on any exchange, and certificates representing our common  stock will no longer be assignable or transferable on our books. Accordingly,  the proportionate interests of all of our stockholders will be fixed on the  basis of their respective stock holdings at the close of business on the date  of dissolution, and any distributions made by us after such date will be made  solely to the stockholders of record at the close of business on the date of  dissolution.





Basis of presentation





The accompanying unaudited condensed  consolidated financial statements have been prepared by us and reflect all  adjustments which are, in the opinion of management, necessary for a fair  presentation of the interim periods presented. The results of operations for  the periods ended September 30, 2004 are not necessarily indicative of the  results to be expected for any subsequent quarter or for the year ending  December 31, 2004. Certain information and footnote disclosures normally  included in financial statements prepared in accordance with accounting  principles generally accepted in the United States of America have been condensed  or omitted pursuant to the Securities and Exchange Commissions (SEC) rules  and regulations.





These unaudited condensed consolidated  interim financial statements and notes included herein should be read in  conjunction with our audited consolidated financial statements and notes as  included in our Annual Report on Form 10-K for the year ended December 31, 2003  as filed with the SEC on March 30, 2004.





The accompanying condensed consolidated  financial statements have been prepared assuming that we will continue as a  going concern, which contemplates the realization of assets and the settlement  of liabilities and commitments in the normal course of business.  We incurred losses and negative cash flows  from operations for every year since inception.  For the nine months ended September 30, 2004, we incurred a net  loss of approximately $672,000 and negative cash flows from operations of  approximately $2,485,000. As of September 30, 2004, we had an accumulated  deficit of approximately $139 million.   We have not yet settled on an operating plan and accordingly, can give  no assurance that our existing cash and cash equivalents will be sufficient to  fund any obligations relative to a future operating plan.  These factors, among others, indicate that  we may be unable to continue as a going concern. 
No adjustment has been made in the accompanying condensed  consolidated financial statements to the amounts and classifications of assets  and liabilities which could result should we be unable to continue as a going  concern.  We continue to consider future  alternatives, including the possible acquisition of other businesses or the  possibility of adopting a plan of liquidation.   However, we have not consummated any significant transactions to date  and any business prospects remain uncertain.   To the extent that our management moves forward on any alternative  strategy, such strategy may have an impact on our liquidity. It remains managements prime focus to acquire an operating business.





Principles of consolidation





The financial statements include our  accounts and our wholly-owned (inactive) subsidiary. Significant intercompany  transactions and balances have been eliminated.





Income Taxes





At December 31, 2003, we had  approximately $11.3 million of federal and state net operating loss carry  forwards which have been lost due to the application of the Internal Revenue  Code Section 382 provisions.





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L Q CORPORATION, INC.


NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Stock-based compensation





The Company complies with SFAS No. 148,  Accounting for Stock-Based Compensation, Transition and Disclosure.  SFAS 148 provides alternative methods of  transition for a voluntary change to the fair value based method of accounting  for stock-based employee compensation. SFAS 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 148 requires disclosure of the pro forma  effect in interim financial statements.





We account 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 123 and SFAS 148, our 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).





|                                                                                                               |  | Three    Months Ended     September 30, |      | Nine    Months Ended     September 30, |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ---- | -------------------------------------- | -
|                                                                                                               |  |                                         |      |                                        |  
|                                                                                                               |  | 2004                                    |      | 2003                                   |  
|                                                                                                               |  |                                         |      |                                        |  
|Net lossas reported                                                                                           |  | $                                       | 185  |                                        | $
|Less stock-based compensation (income) expense    determined under fair value based method, net of tax effects |  |                                         | 2    |                                        |  
|                                                                                                               |  |                                         |      |                                        |  
|Net losspro forma                                                                                             |  | $                                       | 187  |                                        | $
|                                                                                                               |  |                                         |      |                                        |  
|Basic and diluted net loss per shareas reported                                                               |  | $                                       | 0.06 |                                        | $
|Basic and diluted net loss per sharepro forma                                                                 |  | $                                       | 0.06 |                                        | $




NOTE 2  ACCRUED LIABILITIES:





The components of accrued liabilities are  as follows (in thousands):


|                                        |  | September    30,    2004 |    | December    31,    2003 |  
|--------------------------------------- |  | ------------------------ | -- | ----------------------- | -
|                                        |  |                          |    |                         |  
|Accrued liabilities:                    |  |                          |    |                         |  
|Consulting and    professional services |  | $                        | 30 |                         | $
|Litigation settlement                   |  |                          |   |                         |  
|Other                                   |  |                          | 60 |                         |  
|                                        |  |                          |    |                         |  
|                                        |  | $                        | 90 |                         | $
|                                        |  |                          |    |                         |  




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L Q CORPORATION, INC.


NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE 3  COMPREHENSIVE LOSS:





Comprehensive loss includes net loss and  other comprehensive income (loss). Other comprehensive income (loss) includes  accumulated translation adjustments. The components of comprehensive loss are  as follows (in thousands):





|                                                           |  | Three    Months Ended    September 30, |      | Nine    Months Ended    September 30, |  
|---------------------------------------------------------- |  | -------------------------------------- | ---- | ------------------------------------- | -
|                                                           |  |                                        |      |                                       |  
|                                                           |  | 2004                                   |      | 2003                                  |  
|                                                           |  |                                        |      |                                       |  
|Comprehensive loss:                                        |  |                                        |      |                                       |  
|Net loss                                                   |  | $                                      | (185 | )                                     | $
|Foreign currency translation adjustments                   |  |                                        |      |                                       |  
|Unrealized gain (loss) on available-for-sale    securities |  |                                        |      |                                       |  
|                                                           |  |                                        |      |                                       |  
|                                                           |  | $                                      | (185 | )                                     | $
|                                                           |  |                                        |      |                                       |  




NOTE 4  NET LOSS PER SHARE:





Basic and diluted net loss per share is  computed by dividing the net loss 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 common stock warrants.





|                      |  |                                         |     |                                        |  |      |  |      |     |  |  |     | 
|--------------------- |  | --------------------------------------- | --- | -------------------------------------- |  | ---- |  | ---- | --- |  |  | --- | 
|                      |  | Three    Months Ended     September 30, |     | Nine    Months Ended     September 30, | 
|                      |  |                                         |     |                                        | 
|                      |  | 2004                                    |     | 2003                                   |  | 2004 |  | 2003 |    
|                      |  |                                         |     |                                        |  |      |  |      |     |  |  |     | 
|Common stock options  |  |                                         | 111 |                                        |  | 73   |  |      | 111 |  |  | 73  | 
|Common stock warrants |  |                                         |     |                                        |  | 431  |  |      |     |  |  | 431 | 
|                      |  |                                         |     |                                        |  |      |  |      |     |  |  |     | 
|                      |  |                                         | 111 |                                        |  | 504  |  |      | 111 |  |  | 504 | 
|                      |  |                                         |     |                                        |  |      |  |      |     |  |  |     | 




NOTE 5  CONTINGENCIES AND LEGAL  PROCEEDINGS:





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





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L Q CORPORATION, INC.


NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





the Settlement Agreement admitted any wrongdoing or any  indemnification obligations in connection with this litigation.





We, certain of our former officers and  directors, and various of the underwriters in our initial public offering (IPO)  and secondary offering, were named as defendants in a consolidated action filed  in the United States District Court for the Southern District of New York on  July 20, 2001, In re Liquid Audio, Inc. Initial Public Offering Securities Litigation,  CV-6611. The consolidated amended complaint generally alleges that various  investment bank underwriters engaged in improper and undisclosed activities  related to the allocation of shares in our IPO and secondary offering of  securities. The plaintiffs brought claims for violation of several provisions  of the federal securities laws against those underwriters, and also against us  and certain of our former directors and officers, seeking unspecified damages  on behalf of a purported class of purchasers of our common stock between July  8, 1999 and
December 6, 2000. Various plaintiffs filed similar actions  asserting virtually identical allegations against more than 40 investment banks  and 250 other companies. All of these IPO allocation securities class actions  currently pending in the Southern District of New York have been assigned to  Judge Shira A. Scheindlin for coordinated pretrial proceedings as In re Liquid  Audio, Inc. Initial Public Offering Securities Litigation, 21 MC  92.   Defendants have filed omnibus motions  to dismiss the actions on common pleading issues.  In October 2002, our former directors and officers, named as  defendants, were dismissed from the litigation without prejudice.  In February 2003, the court granted in part  and denied in part the omnibus motions to dismiss.  The court did not dismiss any claims against us.  A stipulation of settlement for the claims  against the issuer-defendants, including us, has been submitted to the  court.  There is no guarantee
that the  settlement will become effective, as it is subject to a number of conditions,  including approval of the court.  If the  settlement does not occur, and litigation against us continues, we believe that  we have meritorious defenses and intend to defend the case vigorously.





NOTE 6  CASH DISTRIBUTION TO  STOCKHOLDERS:





On January 29, 2003, we distributed $2.50  per share, for a total of $57,771,000, to our common stockholders of record as  of December 10, 2002.





NOTE 7  DECREASE IN STOCK OPTION  EXERCISE PRICE:





On March 18, 2003, our Board of Directors  elected to reduce the exercise price of all outstanding stock options by $2.50,  but not lower than $0.10, to reflect the $2.50 cash distribution to our  stockholders.  Consequently, we will  account for approximately 8,540 of these stock options as variable.





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ITEM  2.   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 Managements Discussion and Analysis on information currently  available to us, and we assume no obligation
to update any such forward-looking  statements. Although we believe that the expectations reflected in such  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, but are not limited to, those set  forth under the caption Additional Factors Affecting Future Results included  in this Managements Discussion and Analysis of Financial Condition and  Results of Operations.





While we believe that the discussion and  analysis in this report is adequate for a fair presentation of the information,  we recommend that you read this discussion and analysis in conjunction with  Managements Discussion and Analysis included in our Annual Report on Form  10-K for the year ended December 31, 2003 filed with the Securities Exchange  Commission (SEC).





Overview





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





Since January 2003, we have not operated  any business and have been reviewing alternatives for the use or disposition of  our remaining assets while settling our remaining claims and liabilities. We  intend to pursue other business opportunities and investments unrelated to the  downloading of digital music. Neither our Board nor our stockholders have yet  approved any such opportunities. If we are unable to find any suitable business  opportunities and/or investments, we may pursue a plan of complete liquidation  and dissolution. If a complete liquidation and dissolution is approved,  pursuant to Delaware General Corporation Law, we will continue to exist for  three years after the dissolution becomes effective or for such longer period  as the Delaware Court of Chancery shall direct, for the purpose of prosecuting  and defending suits against us and enabling us gradually to close our business,  to dispose of our property, to
discharge our liabilities and to distribute to  our stockholders any remaining 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 on January 29, 2003, unanimously 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, a portion of our 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.





We traded shares of an available-for-sale  security in August and September of 2003.   Although we liquidated our entire remaining position in this security as  of November 12, 2003 and do not intend to make any additional purchases of  available-for-sale securities, we may inadvertently have become, or may become  in the future, an investment company under the Investment Company Act of 1940  as a result of our lack of an operating business, our





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significant cash balance as a percentage of out total assets and our  recent trading activities.  Registration  as an investment company would be very expensive, further depleting our cash  reserves and would also subject us to restrictions that may be inconsistent  with any future business strategy we may decide upon.





We entered into a Settlement Agreement  and Mutual Release on February 12, 2004 with BeMusic which finally resolved all  matters between BeMusic and us with respect to the litigation matter with  SightSound, Inc.  Under the terms of  this Agreement we paid approximately $1,452,000 to BeMusic as settlement  expenses and approximately $314,000 in legal fees relating to the SightSound  litigation.  These payments were in  addition to the $335,827 previously paid by us for our share of attorney fees  incurred in connection with this matter.





On August 5, 2004, the Company filed a Form 8K announcing the appointment of Joseph R. Wright, Jr. to the Companys Board of Directors.





On October 7, 2004, Mr. Mitarotonda resigned as President and Chief Executive Officer of the Company. Mr. Mitarotonda will continue to serve as a director and as Chairman of the Board.





On October 7, 2004, Mr. William Fox was appointed as the Companys New President and Chief Executive Officer.





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 $4,411,000 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 $3,569,000 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 an accrued termination and vacation payment of  $10,542.  We closed our
office in Foster  City, California, and transferred all our administrative and accounting  functions to our corporate headquarters in New York, New York. As of September  30, 2004, we have no employees and are focused on settling our claims and  liabilities and pursuing other uses for the remainder of our assets.





Future Operations and Financial Results





Since January 2003, we have been reviewing alternatives for the use of our remaining assets while settling our remaining claims and liabilities. We may ultimately pursue a plan of complete liquidation and dissolution. We also may pursue other business opportunties and investments unrelated to the downloading of digital music.
 Neither our Board nor our stockholders have yet approved any such plan or use. If a complete liquidation and dissolution is approved, pursuant to Delaware General Corporation Law, we will continue to exist for three years after the dissolution becomes effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and
 enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets.





At the September 29, 2003 stockholders  meeting, 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 the 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.  Per share amounts for all periods  presented have been restated to give effect to this Reverse/Forward Stock Split.  Our common stock currently trades over the  counter 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 of  our common stock increased significantly following the implementation of the  Reverse/Forward Stock Split. The market price of our common stock as of  November 9th, 2004 was $1.75 per share. An investment in an OTC security is  speculative and involves a significant degree of risk. Many OTC securities are  relatively illiquid, or thinly traded, which can enhance volatility in the  share price and make it difficult for investors to buy or sell without  dramatically effecting the quoted price or may inhibit the ability of investors  to sell a position at a later date. Moreover, if we pursue a plan of complete  liquidation and dissolution, we will close our stock transfer books,  discontinue recording transfers of our common stock, and our common stock will  no longer be traded on any exchange, and certificates representing our common  stock will no longer be assignable or transferable on our books. Accordingly,  the proportionate interests
of all of our stockholders will be fixed on the  basis of their respective stock holdings at the close of business on the date  of dissolution, and any distributions made by us after such date will be made  solely to the stockholders of record at the close of business on the date of  dissolution.





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Three  Months Ended September 30, 2004 and 2003





Total Net Revenues





We did not derive any revenues in each of  the three months ended September 30, 2004 and September 30, 2003 due to the  discontinuation of our software license and our music hosting businesses and  the sale of our digital music fulfillment business to Geneva in January 2003.  We do not expect any revenue in the remainder of 2004.





Total Cost of Net Revenues





We had no sales or costs relating to  sales for each of the three months ended September 30, 2004 and September 30,  2003.  We do not expect any cost of net  revenues in the remainder of 2004 since we are not currently operating any  businesses.





Operating Expenses





Sales  and Marketing.  Sales  and marketing expenses consist 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 for the three months ended September 30, 2004 from $6,000 in the  comparable period of 2003. We do not expect to incur significant sales and  marketing expenses in the remainder of 2004 since we are not currently  operating any businesses.





Research  and Development.   Research and development expenses consist 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. We did not incur any research and  development expenses in each of the three months ended September 30, 2004  and September 30, 2003. We do not expect to incur significant research and  development expenses in the remainder of 2004 since we are not currently  operating any businesses.





General  and Administrative.   General and administrative expenses consist primarily of compensation  for personnel and payments to outside contractors for general corporate  functions, including finance, information systems, human resources, facilities,  legal and general management, fees for professional services, bad debt expense  and an allocation of our occupancy costs and other overhead. General and  administrative expenses decreased 53% to $ 225,700 for the three months ended  September 30, 2004 from $ 472,000 million in the comparable period of  2003.  This decrease was primarily due  to the cessation of business activity.





Other  Income (Expense), Net.Other income decreased to $40,000 for  the three months ended September 30, 2004 from $52,000 in the comparable period  of 2003. This decrease was due to lower interest income from lower average cash  and cash equivalent balances.





Nine  Months Ended September 30, 2004 and 2003





Total Net Revenues





Total net revenues decreased 100% to $0  for the nine months ended September 30, 2004 from $43,000 in the comparable  period of 2003. We do not expect significant revenue in the remainder of 2004.





License.  License revenues decreased 100% to $0 for  the nine months ended September 30, 2004 from $4,000 in the comparable period  of 2003. This decrease was due to discontinuation of our software licensing  business and the sale of our digital music fulfillment business to Geneva in  January 2003.





Services.  Services revenues decreased 100% to $0 for  the nine months ended September 30, 2004 from $39,000 in the comparable period  of 2003. This decrease was due to the discontinuation of our software license  business, our





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music hosting business for independent artists and labels and the sale  of our digital music fulfillment business to Geneva.





Total Cost of Net Revenues





Total cost of net revenues decreased 100%  to $0 for the nine months ended September 30, 2004 from $7,000 in the  comparable period of 2003.





License.  Cost of license revenues decreased 100% to  $0 for the nine months ended September 30, 2004 from $5,000 in the comparable  period of 2003. Cost of license revenues decreased due to the discontinuation  of our licensing business.





Services.  Cost of services revenues decreased 100% to  $0 for the nine months ended September 30, 2004 from $2,000 in the comparable  period of 2003. The decrease in cost of services revenues was due to the  termination all of our encoding, customer service and professional services  personnel, the elimination of all of our kiosk-related equipment due to our  corporate restructuring and the sale of our digital music fulfillment business  to Geneva.





Operating Expenses





Sales  and Marketing.  Sales  and marketing expenses decreased 100% to $0 for the nine months ended September  30, 2004 from $277,000 in the comparable period of 2003. This decrease was  primarily due to decrease in the number of personnel and outside contractors  due to our corporate restructuring and expense management initiatives.





Research  and Development.   Research and development expenses decreased 100% to $0 for the nine  months ended September 30, 2004 from $165,000 in the comparable period of 2003.  This decrease was primarily due to the termination of all of our personnel and  outside contractors, expense management initiatives and the sale of our digital  music fulfillment business to Geneva.





General  and Administrative.   General and administrative expenses decreased 83% to $792,000 for the  nine months ended September 30, 2004 from $4.7 million in the comparable  period of 2003. This decrease was primarily due to the cessation of business  activity.





Restructuring.  Restructuring charge was $0 and $4.4 million  for the nine months ended September 30, 2004 and 2003, respectively.  $3.6 million of the charge in the nine  months ended September 30, 2003 consisted of expense related to a one-time  payment to terminate the remaining term of our real estate lease of our  previous corporate offices, $796,000 of involuntary employee separation costs  and $46,000 of prepaid expenses related to assets sold to Geneva.





Other  Income (Expense), Net.   Other income (expense) decreased to $120,000 for the nine months ended  September 30, 2004 from $180,000 in the comparable period of 2003. The  decrease was due to lower average cash and cash equivalent balances resulting  from cash used in operating activities, and lower interest rates.





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 September 30, 2004, 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. As of September 30, 2004, we had approximately $6.5  million of cash and cash equivalents.





Net cash used in operating activities was  $2.5 million and $10.9 million for the nine months ended September 30,  2004 and 2003, respectively. Net cash used for operating activities in the 2004  period was primarily the result of the payment of $1,452,000 to BeMusic and  approximately $314,000 in legal fees relating to the Sightsound litigation,  combined with our $672,000 operating loss. Net cash used for operating  activities in the 2003





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period was the result of net losses from operations of $6.5 million,  depreciation and amortization of $228,000, gain on sale of digital music  fulfillment business and related assets of $2.9 million and a net increase in  working capital items of $1.7 million. The net increase in working capital items  include a decrease in accounts receivable of $35,000, a decrease in other  current assets of $1.1 million, and an increase in accounts payable, accrued  liabilities and deferred revenue of $2.9.    Net cash provided by (used) in investing activities was $0 and $3.6  million for the nine months ended September 30, 2004 and 2003,  respectively. Net cash provided by investing activities in the 2003 period was  due to the sale of our digital music fulfillment business and related assets to  Geneva.





Net cash used in financing activities was  $67,000 and $57.8 million for the nine months ended September 30, 2004 and  2003, respectively. The net cash used in financing activities in the 2004  period is due to the purchase of   fractional shares in connection with the implementation of the  Reverse/Forward Stock Split. The net cash used in financing activities in the  2003 period is due to the payments made to our stockholders in connection with  the return of capital cash distribution declared on December 6, 2002 to stockholders  of record on December 10, 2002.





We have no material commitments for  capital expenditures or strategic investments and anticipate no capital  expenditures during the remainder of 2004. We anticipate that we will  experience a decline in our operating expenses for the foreseeable future and  that our operating expenses will be a material use of our cash resources.





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.





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. However,  uncertainties exist as to the precise value of claims and liabilities, which  may exceed our current existing cash and cash equivalents. Additionally, we do  not currently have an operating business and, consequently, we are currently  exploring various options for the use of our remaining assets, including  pursuit of a business strategy unrelated to digital music distribution.  Acquisition and/or operation of any future business strategy may require  additional cash resources. See ADDITIONAL FACTORS AFFECTING FUTURE RESULTS  below.





Market Risk





No material changes exist to the market  risk our investment portfolio of cash and money market funds faced during the  three months ended September 30, 2004. As detailed in Overview in  Managements Discussion and Analysis of Financial Condition and Results of  Operations in this Form 10-Q, we began trading in available-for-sale  securities on August 8, 2003, and as of November 12, 2003, completely  liquidated our position.  Our trading  activities resulted in a gain of $48,777.   We do not intend to invest in such securities in the future, and will  maintain only cash and cash equivalents.   For additional information, refer to Item 7A Quantitative and  Qualitative Disclosures About Market Risk in Managements Discussion and  Analysis of Financial Condition and Results of Operations included in our Form  10-K for the year ended December 31, 2003 filed
with the SEC.





ADDITIONAL FACTORS AFFECTING FUTURE  RESULTS





Before deciding to invest in us or to  maintain or increase your investment, you should carefully consider the risks  described below, in addition to the other information contained in this report  and in our other filings with the SEC, including our Annual Report on Form 10-K  filed March 30, 2004. The risks and uncertainties described below are not the  only ones facing us. Additional risks and uncertainties not presently known to  us or that we currently deem immaterial may also affect our business  operations. If any of these risks actually occur, our business, financial  condition or results of operations could be seriously harmed. In that event,  the market price of our common stock could decline and you may lose all or part  of your investment.





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We Currently Do Not Have an Operating  Business, But Also Do Not Intend to Pursue a Course of Complete Liquidation and  Dissolution, and Accordingly, the Value of Your Shares May Decrease





We have not had an operating business  since January 2003; we are considering various options for the use of our  remaining assets, but have yet to approve any definitive plans. In the  meantime, we will continue to incur operating expenses while we consider  alternative operating plans. These plans may include business combinations with  or investments in other operating companies, or entering into a completely new  line of business. We have not yet identified any such opportunities, and thus,  you will not be able to evaluate the impact of such a business strategy on the  value of your stock.  In addition, we  cannot assure you that we will be able to identify any appropriate business  opportunities. Even if we are able to identify business opportunities that our  Board deems appropriate, we cannot assure you that such a strategy will provide  you with a positive return on your investment, and it may in fact result in a
substantial decrease in the value of your stock. These factors will  substantially increase the uncertainty, and thus the risk, of investing in our  shares. You should also not expect any further cash distributions.





We May Not Be Able to Identify or  Fully Capitalize on Any Appropriate Business Opportunities





We are considering various options for  the use of our remaining assets, which may include business combinations with  or investments in other operating companies, or entering into a completely new  line of business. Nevertheless, we have not yet identified any appropriate  business opportunities, and, due to a variety of factors outside of our  control, we may not be able to identify or fully capitalize on any such opportunities.  These factors include:  (1) competition  from other potential acquirors and partners of and investors in potential  acquisitions, many of whom may have greater financial resources than we do; (2)  in specific cases, failure to agree on the terms of a potential acquisition,  such as the amount or price of our acquired interest, or incompatibility  between us and management of the company we wish to acquire; and (3) the  possibility that we may lack sufficient capital and/or expertise to develop
promising opportunities. Even if we are able to identify business opportunities  that our Board deems appropriate, we cannot assure you that such a strategy  will provide you with a positive return on your investment, and may in fact  result in a substantial decrease in the value of your stock. In addition, if we  enter into a combination with a business that has operating income, we cannot  assure you that we will be able to utilize all or even a portion of our  existing net operating loss carryover for federal or state tax purposes  following such a business combination. If we are unable to make use of our  existing net operating loss carryover, the tax advantages of such a combination  may be limited, which could negatively impact the price of our stock and the  value of your investment. These factors will substantially increase the  uncertainty, and thus the risk, of investing in our shares.





We May Inadvertently Have Become, or May Become in the Future, an Investment Company Under the Investment  Company Act of 1940





We traded  shares of an available-for-sale security in August and September of 2003.  Although we liquidated our entire remaining position in this security as of  November 12, 2003 and do not intend to make any additional purchases of  available-for-sale securities, we may inadvertently have become, or may become  in the future, an investment company under the Investment Company Act of 1940.  The Investment Company Act of 1940 provides a set of regulations for companies  that are or that hold themselves out as being engaged primarily in the business  of investing, reinvesting, owning, holding or trading in securities. A company  may also become subject to regulation under the Investment Company Act if it  owns investment securities with a value exceeding 40% of the value of its  total assets (exclusive of government securities and cash items) as a result of  our lack of an operating business, our significant cash
balance as a percentage  of our total assets and our recent trading activities. Although we continue to  consider future operating alternatives, including the possible acquisition of  one or more operating businesses, we could become subject to regulation under  the Investment Company Act. Registration as an investment company would be very  expensive and further deplete our cash balances, which would leave us with  fewer resources to pursue further operating alternatives. Registration would  also subject us to restrictions that may be inconsistent with any future  business strategy we may decide upon. In order to avoid these regulations, we  may have to take actions that we would not otherwise choose to take to avoid  registration under the Investment Company Act.





Stockholders May Be Liable to Our  Creditors for Up to Amounts Received From Us if Our Reserves Are Inadequate





If we pursue a plan of complete  liquidation and dissolution, a Certificate of Dissolution will be filed with  the State of Delaware after such plan is approved by our stockholders. Pursuant  to the Delaware General Corporation Law, we will continue to exist for three  years after the dissolution becomes effective or for such longer period as the





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Delaware Court of Chancery shall direct, for the purpose of prosecuting  and defending suits against us and enabling us gradually to close our business,  to dispose of our property, to discharge our liabilities and to distribute to  our stockholders any remaining assets. Under the Delaware General Corporation  Law, in the event we fail to create an adequate contingency reserve for payment  of our expenses and liabilities during this three-year period, each stockholder  could be held liable for payment to our creditors for such stockholders pro  rata share of amounts owed to creditors in excess of the contingency reserve.  The liability of any stockholder would be limited, however, to the amounts  previously received by such stockholder from us (and from any liquidating trust  or trusts), including the return of capital cash distribution of $2.50 per  share paid to stockholders on January 29, 2003. Accordingly, in such event a  stockholder could be
required to return all distributions previously made to  such stockholder. In such event, a stockholder could receive nothing from us  under a plan of complete liquidation and dissolution. Moreover, in the event a  stockholder has paid taxes on amounts previously received, a repayment of all  or a portion of such amount could result in a stockholder incurring a net tax  cost if the stockholders repayment of an amount previously distributed does  not cause a commensurate reduction in taxes payable. There can be no assurance  that the contingency reserve maintained by us will be adequate to cover any  expenses and liabilities.





Success of a Plan of Complete  Liquidation and Dissolution Depends on Qualified Personnel to Execute It





If we pursue a plan of complete  liquidation and dissolution, the success of any such plan depends in large part  upon our ability to retain the services of qualified personnel to handle the  sale of our remaining assets and settlement of remaining liabilities. We may  retain the services of a consulting firm specializing in such purpose, however  the retention of qualified personnel is particularly difficult under our  current circumstances.





Our  Stock Has Been Delisted from The Nasdaq National Market, And Is Therefore  Significantly Less Liquid than Before





Our 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 our common stock.  As a  result, our common stock currently trades over the counter on the Nasdaq OTC  Bulletin Board and the ability of our stockholders to obtain liquidity and fair  market prices for our shares has been significantly impaired.





After  Our Wind-Up There May Be No Additional Cash to Distribute to Our Stockholders  and If There Is Additional Cash to Distribute, the Timing of Any Such Future  Distribution is Uncertain





If we pursue a plan of complete  liquidation and dissolution, there will be no firm timetable for the  distribution of proceeds to our stockholders, because of contingencies inherent  in winding up a business. If we pursue a plan of complete liquidation and  dissolution, the liquidation should be concluded prior to the third anniversary  of the filing of the Certificate of Dissolution in Delaware. If we pursue a  plan of complete liquidation and dissolution, the actual nature, amount and  timing of all distributions will be determined by our Board, in its sole  discretion, and will depend in part upon our ability to resolve our remaining  contingencies.





If we pursue this strategy, uncertainties  as to the ultimate amount of our liabilities make it impracticable to predict  the aggregate net value ultimately distributable to our stockholders. Claims,  liabilities and expenses from operations (including costs associated with any  retained firms efforts to sell our remaining assets and settle our remaining  liabilities, taxes, legal and accounting fees and miscellaneous office  expenses) will continue to be incurred. These expenses will reduce the amount  of cash available for ultimate distribution to stockholders. However, no  assurances can be given that available cash and amounts received on the sale of  assets will be adequate to provide for our obligations, liabilities, expenses  and claims and to make cash distributions to stockholders. If such available  cash and amounts received from the sale of assets are not adequate to provide  for our obligations, liabilities,
expenses and claims, we may not be able to  distribute meaningful cash, or any cash, to our stockholders.





The Proceeds from a Sale of Our  Assets May Be Less than Anticipated





If we pursue a plan of complete  liquidation and dissolution, sales of our remaining assets will be made on such  terms as are approved by the Board and may be conducted by competitive bidding,  public sales or privately negotiated sales. The prices at which we will be able  to sell these assets will depend largely on factors beyond our





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control, including, without limitation, the condition of financial  markets, the availability of financing to prospective purchasers of the assets,  United States and foreign regulatory approvals, public market perceptions and  limitations on transferability of certain assets. Because some of our remaining  assets may decline in value over time, we may not be able to consummate the  sale of these assets in time to generate meaningful value. In addition, we may  not obtain as high a price for a particular asset as we might secure if we were  not in liquidation.





We Will  Continue to Incur the Expense of Complying with Public Company Reporting  Requirements





We have an obligation to continue to  comply with the applicable reporting requirements of the Securities Exchange  Act of 1934, as amended, even though compliance with such reporting  requirements is economically burdensome. In order to curtail expenses, if we  elect to pursue a liquidation and dissolution strategy, after we file our  Certificate of Dissolution, we will seek relief from the Securities and  Exchange Commission from the reporting requirements under the Exchange Act,  which may or may not be granted. Until such relief is granted we will continue  to make obligatory Exchange Act filings. We anticipate that even if such relief  is granted in the future, we will continue to file current reports on Form 8-K  to disclose material events relating to our liquidation and dissolution along  with any other reports that the Securities and Exchange Commission may require.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





See Market Risk in Part I, Item 2,  Managements Discussion and Analysis of Financial Condition and Results of  Operations.





ITEM  4.  CONTROLS AND PROCEDURES





The Securities and Exchange Commission  defines the term disclosure controls and procedures to mean a companys  controls and other procedures that are designed to ensure that information required  to be disclosed in the reports that it files or submits under the Securities  Exchange Act of 1934 is recorded, processed, summarized and reported, within  the time periods specified in the Commissions rules and regulations. 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 officer 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 the Company files  or submits 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.





During the three month period ended  September 30, 2004, there were no changes in our internal controls over  financial reporting that have materially affected, or are reasonably likely to  affect, our internal controls over financial reporting.





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PART  II.  OTHER INFORMATION





ITEM  1.  LEGAL PROCEEDINGS





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, certain of our former officers and  directors, and various of the underwriters in our initial public offering  (IPO) and secondary offering, were named as defendants in a consolidated  action filed in the United States District Court for the Southern District of  New York on July 20, 2001, In re Liquid Audio, Inc. Initial Public Offering  Securities Litigation, CV-6611. The consolidated amended complaint  generally alleges that various investment bank underwriters engaged in improper  and undisclosed activities related to the allocation of shares in our IPO and  secondary offering of securities. The plaintiffs brought claims for violation  of several provisions of the federal securities laws against those  underwriters, and also against us and certain of our former directors and  officers, seeking unspecified damages on behalf of a purported class of  purchasers of our common stock between July 8, 1999 and
December 6, 2000.  Various plaintiffs filed similar actions asserting virtually identical  allegations against more than 40 investment banks and 250 other companies. All  of these IPO allocation securities class actions currently pending in the  Southern District of New York have been assigned to Judge Shira A. Scheindlin  for coordinated pretrial proceedings as In re Liquid Audio, Inc. Initial Public Offering  Securities Litigation, 21 MC 92.    Defendants have filed omnibus motions to dismiss the actions on common  pleading issues.  In October 2002, our  former directors and officers, named as defendants, were dismissed from the  litigation without prejudice.  In  February 2003, the court granted in part and denied in part the omnibus motions  to dismiss.  The court did not dismiss  any claims against us.  A stipulation of  settlement for the claims against the issuer-defendants, including us, has been  submitted to the court.  There is no
guarantee that the settlement will become effective, as it is subject to a  number of conditions, including approval of the court.  If the settlement does not occur, and  litigation against us continues, we believe that we have meritorious defenses  and intend to defend the case vigorously.





ITEM  2.  UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS





(a) The effective date of our first  registration statement, filed on Form S-1 under the Securities Act of 1933  (No. 333-82521) relating to our initial public offering of common stock,  was July 8, 1999. A total of 4,800,000 shares of common stock were sold at a  price of $15.00 per share to an underwriting syndicate led by Lehman Brothers  Inc., BancBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc.  Offering proceeds, net of aggregate expenses of approximately $6.1 million,  were approximately $65.9 million.





The effective date of our second  registration statement, filed on Form S-1 under the Securities Act of 1933  (No. 333-91541) relating to our follow-on public offering of common stock,  was December 14, 1999. A total of 2,946,076 shares of Common Stock were sold at  a price of $33.63 per share to an underwriting syndicate led by Lehman Brothers  Inc., BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc., Dain  Rauscher Wessells and Fidelity Capital Markets. An additional 503,924 shares of  common stock were sold on behalf of selling





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stockholders as part of the same offering. Offering proceeds to us, net  of aggregate expenses of approximately $5.4 million, were approximately $93.7  million.  Offering proceeds to selling  stockholders, net of expenses of approximately $847,000, were approximately  $16.1 million.





(b) From the time of receipt through  September 30, 2004, our proceeds from the offerings, except for the return of  capital cash distribution paid to our stockholders on January 29, 2003 of $57.8  million, were applied toward general corporate purposes, including the purchase  of temporary investments consisting of cash, cash equivalents and short-term  investments, working capital and capital expenditures, enhancing research and  development and attracting key personnel.





(c) Purchases of common stock made by or  on behalf of us during the three months ended September 30, 2004 are set forth  below:





|PERIOD                           |  | (A) TOTAL     NUMBER OF     SHARES     PURCHASED     (1) |         | (B)    AVERAGE     PRICE PAID     PER SHARE |  | (C) TOTAL     NUMBER OF     SHARES     REPURCHASE     AS PART OF     PUBLICLY     ANNOUNCED     PLANS OR     PROGRAMS |  | (D)    MAXIMUM     NUMBER OF     SHARES THAT     MAY YET BE     PURCHASED     UNDER THE     PLANS OR     PROGRAMS |  
|-------------------------------- |  | -------------------------------------------------------- | ------- | ------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | -
|                                 |  |                                                          |         |                                             |  |                                                                                                                       |  |                                                                                                                   |  
|July 1 - July 31, 2004           |  |                                                          |        |                                             |  |                                                                                                                      |  |                                                                                                                   | 
|August 1 August 31, 2004        |  |                                                          | 216,706 |                                             |  | $0.31                                                                                                                 |  |                                                                                                                   | 
|September 1  September 30, 2004 |  |                                                          |        |                                             |  |                                                                                                                      |  |                                                                                                                   | 




|                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Represents fractional shares that were    repurchased in connection with the implementation of the Reverse/Forward    Stock Split on July 26, 2004. These repurchases were completed on August 4, 2004. Per share amounts and prices in the above table    have not been adjusted to reflect the Reverse/Forward Stock Split. No shares    of common stock were repurchased by us through a publicly announced plan or    program.




ITEM  3. DEFAULTS UPON SENIOR SECURITIES





None





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





None.





ITEM  5.  OTHER INFORMATION





None





ITEM  6.  EXHIBITS





|3.1   | Certificate of Incorporation as currently in effect    (7)                                                                   
|----- | -----------------------------------------------------------------------------------------------------------------------------
|3.2   | Bylaws as currently in effect (2)                                                                                            
|4.2   | Form of Specimen Stock Certificate (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)                                                                                  




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|10.50 | 2000 Nonstatutory Stock Option Plan (2)                                                                    
|----- | -----------------------------------------------------------------------------------------------------------
|10.71 | Settlement Agreement with BeMusic, Inc. dated as of    January 17, 2003 (3)                                
|10.72 | Sublease Termination Agreement with Openwave    Systems, Inc., dated as of July 14, 2003 (5)               
|10.73 | Personal Property Lease Termination Agreement with    Openwave Systems, Inc., dated as of July 14, 2003 (5)
|10.74 | Settlement Agreement and Mutual Release with    BeMusic, Inc. dated February 13, 2004 (6)                  
|11.1  | Statement regarding computation of per share    earnings (4)                                               
|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          




|   
|---
|(1)
|(2)
|(3)
|(4)
|(5)
|(6)
|(7)




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L Q CORPORATION, INC.





SIGNATURES





Pursuant to the requirements 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.





|                           | L Q CORPORATION, INC.   
|-------------------------- | ------------------------
|DATE:    November 12, 2004 |                         
|                           |                         
|                           | /s/ James A. Mitarotonda
|                           |                         
|                           | James A. Mitarotonda    
|                           | Chairman                
|                           |                         
|                           |                         
|                           | /s/ Melvyn Brunt        
|                           |                         
|                           | Melvyn Brunt            
|                           | Chief Financial Officer 




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