Edgar Filing: LQ CORP INC

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

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FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 31, 2006

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

For the Transition Period from to

Commission File Number 000-25977

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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 (I.R.S. Employer
incorporation or organization) Identification No.)

888 Seventh Avenue, New York, NY 10019
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 974-5730

Securities Registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
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None None

Securities Registered pursuant to Section 12(g) of the Act:

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Common Stock, $0.001 par value

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer
|X|

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

As of June 30, 2006, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $5,271,629 based on the closing
sales price of the registrant's common stock as reported on the Over-the-Counter
Bulletin Board as of such date.

The number of shares outstanding of the registrant's common stock, par
value $.001 per share, as of March 15, 2007 was 3,214,408.

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L Q CORPORATION, INC.
FORM 10-K
For the Year Ended December 31, 2006
INDEX

Page

Part I

Item 1. Business 1
Item 1A. Risk Factors 2
Item 1B. Unresolved Staff Comments 4
Item 2. Properties 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6

Part II

Item 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer 7
Purchases of Equity Securities
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 13

Item 9A. Controls and Procedures 13
Item 9B. Other Information 13

Part III

Item 10. Directors, Executive Officers and Corporate Governance 14
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related 20
Stockholders Matters

Item 13. Certain Relationships and Related Transactions and
Director Independence 22
Item 14. Principal Accountant Fees and Services 23

Part IV

Item 15. Exhibits and Financial Statement Schedules 24

Signatures 25

PART I

Forward-Looking Statements

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

ITEM 1. BUSINESS

Overview

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

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

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

On September 8, 2005, the Company entered into a non-binding letter of intent
with Checkpoint Systems, Inc. ("Checkpoint") dated September 7, 2005 to acquire
substantially all of the net assets of Checkpoint's Access Control Products
Group ("ACPG") division. On October 26, 2005, the Company's Board of Directors
approved the transaction and on November 4, 2005 the parties entered into the
Checkpoint Asset Purchase Agreement. On December 30, 2005, the Company and
Checkpoint entered into a First Amendment to the Checkpoint Asset Purchase
Agreement to, among other things, extend the closing of the acquisition to
January 5, 2006. On January 6, 2006, the newly formed wholly owned subsidiary of
the Company, Sielox, LLC, ("Sielox"), completed the acquisition from Checkpoint
of substantially all of the assets of the ACPG division, effective as of the
close of business on December 30, 2005. The cash consideration for the
transaction was approximately $2.6 million, net of post-closing adjustments.
Expenses related to the transaction were approximately $0.3 million. The
acquisition of the net assets of ACPG are not included in the consolidated
statement of operations, for the year ended December 31, 2005, since the
acquisition was effective as of the close of business on December 30, 2005.

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

On January 6, 2006, the Company's newly formed wholly owned subsidiary, SES
Resources International, Inc. ("SES"), completed the acquisition of
substantially all of the assets of SES Resources, Ltd., a start up consulting

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

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

Our common stock is reported currently on the Over-the-Counter Bulletin Board.
Our common stock was traded on the NASDAQ National Market, but was delisted on
June 5, 2003. The market price per share of our stock increased significantly
following the implementation of our 1:250 reverse stock split and our 35:1
forward stock split (collectively, the "Reverse/Forward Stock Split") effective
as of June 8, 2004. The market price of our common stock as of March 15, 2007
was $1.19 per share. The market price of our common stock as of December 31,
2006 was $1.13 per share.

Please see our audited consolidated financial statements and the accompanying
notes for information regarding our revenues, net profits or losses and total
assets for each of the last three years.

Business

Access Control Products Group

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

SES Resources International

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

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

Industry

Access Control Products Group

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

SES Resources International

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

Strategy

Access Control Products Group

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

SES Resources International

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

Products

Access Control Products Group

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

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

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

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

SES Resources International

SES specializes in delivering critical strategic security and business
protection solutions including corporate investigations (e.g. know your
customer, know your employee, know your vendor reviews); due diligence reviews;
forensic accounting; anti-money laundering investigatory services consistent
with the requirements of the Patriot Act; anti-counterfeiting and intellectual
property protection; corporate health and wellness consultancy; emergency
preparedness and contingency planning; executive staffing solutions; and
education and government security training services.

Intellectual Property

ACPG is entitled to the exclusive use of certain patents and to the
non-exclusive use of certain patents which were acquired in the acquisition from
Checkpoint. Such patents and other intellectual property are utilized in the
Performa and Mirage ID card readers. ACPG also acquired identified trademarks as
well as licenses for specific intellectual properties which consist of critical
components to the Pinnacle and Threshold Enterprise operating systems. ACPG also
licenses two badging programs which it sells to third parties. ACPG pays
royalties on these licensing contracts. SES does not own or use any patents or
other material intellectual property in connection with its business.

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

Technology and Product Development

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

ACPG expended approximately $ 1.3 million, $1 million and $1.7 million in
product development activities during 2006, 2005 and 2004, respectively. The
emphasis of these activities is the continued broadening of the product lines
offered by ACPG, cost reductions of the current product lines, and an expansion
of the markets and applications for ACPG's products. ACPG's future growth in
revenues will be dependent, in part, on the products and technologies resulting
from these efforts. Registrant expects to continue to invest at comparable
levels in such activities in 2007 (and thereafter) in order to provide
additional functionality to ACPG's offerings to meet the needs of ACPG's
customer base.

Marketing Efforts

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

Components

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

Distribution

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

Competition

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

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

Employees

ACPG currently employs 22 people and SES currently employs 1 person. All
employees are located in the United States and none are represented by a union
or labor group.

Facilities

The Company's headquarters are located in New York City, in an office maintained
by Barington.

ACPG's primary facilities are located in Runnemede, New Jersey and SES's primary
facilities are located in Jericho, New York. Both facilities are leased.

2006 Developments

On May 5, 2006, William J. Fox delivered to the secretary of the Company notice
of his resignation as a director and President and Chief Executive Officer of
the Company, effective as of the close of business on May 15, 2006. Mr. Fox had
no disagreements with the Company on any matters related to the Company's
operations, policies or

practices. On May 9, 2006, the Board of Directors of the Company appointed
Sebastian E. Cassetta to serve as a director and as the Company's President and
Chief Executive Officer, effective as of May 16, 2006.

On May 10, 2006, the Board of Directors of the Company approved an amendment to
the services agreement between Barington Capital Group, L.P. ("Barington") and
the Company dated as of November 18, 2004 (as amended, the "Services
Agreement"). The amendment reduced the monthly fee payable to Barington for
performing certain administrative, accounting and other services on behalf of
the Company from $15,000 per month to $10,000 per month, effective as of March
1, 2006. Additionally, on July 12, 2006, the Board of Directors of the Company
approved another amendment to the Services Agreement to extend the terms of the
Services Agreement until December 31, 2007. The Services Agreement was
previously set to expire by its terms on June 30, 2006.

On September 15, 2006, Sielox entered into a strategic alliance agreement with
Costar Video Systems, LLC ("Costar"), a subsidiary of Dynabazaar, Inc., a
Delaware corporation ("Dynabazaar"), dated as of September 15, 2006, pursuant to
which the companies agreed to explore mutually beneficial opportunities to work
together, including, without limitation, through a joint venture, joint sales or
joint marketing arrangements, or other business arrangements or strategic
alliance. Costar designs, sources and distributes video and imaging products for
the security and industrial markets. Sielox and Costar are also parties to a
distribution agreement, dated July 31, 2006, pursuant to which Sielox was
appointed as an authorized distributor of certain products of Costar.

On October 20, 2006, James A. Mitarotonda delivered to the Secretary of the
Company notice of his resignation as a director and Chairman of the Board of the
Company, effective as of the close of business on October 23, 2006. Mr.
Mitarotonda had no disagreements with the Company on any matter relating to the
Company's operations, policies or practices, and resigned in order to ensure
that he had adequate time to devote to his other professional responsibilities.
On October 23, 2006, the Board of Directors of the Company appointed Steven
Berns, a director of the Company, to serve as Chairman of the Board of the
Company, effective as of the close of business on October 23, 2006. On October
23, 2006, the Board of Directors of the Company elected Dianne K. McKeever to
serve as a director of the Company, effective as of the close of business on
October 23, 2006. Ms. McKeever has been a research analyst at Barington since
October 2001.

Recent Developments

On January 5, 2007, we entered into an agreement and plan of merger (the "Merger
Agreement") with Dynabazaar and LQ Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Dynabazaar ("LMC"). On February 26, 2007, we entered
into an amended and restated agreement and plan of merger (the "Amended and
Restated Merger Agreement") with Dynabazaar and LMC, which amended and restated
the Merger Agreement. The Amended and Restated Merger Agreement provides that,
upon the terms and subject to the conditions set forth in such agreement, LMC
will merge with and into the Company with the Company continuing as the
surviving corporation and a wholly-owned subsidiary of Dynabazaar.

Under the terms of the Amended and Restated Merger Agreement, our stockholders
will receive 3.68 shares of Dynabazaar common stock for each share of our common
stock they hold. Upon completion of the merger, our stockholders will own
approximately 34% of the combined company and Dynabazaar stockholders will own
approximately 66% of the combined company on a fully-diluted basis. It is
anticipated that the combined company's shares will continue to trade on the
Over-The-Counter Bulletin Board.

The Boards of Directors of both Dynabazaar and the Company approved the Amended
and Restated Merger Agreement in accordance with the recommendation of the
special committees of independent directors formed by the Boards of Directors of
each company to evaluate the transaction.

The transaction is subject to stockholder approval and other customary
conditions and is expected to be completed during the first half of 2007. A
special meeting of stockholders of the Company will be announced in the near
future to obtain stockholder approval of the transaction.

Barington and certain of its affiliates which have joined with Barington in the
filing of a statement on Schedule 13D, collectively own greater than 10% of the
outstanding common stock of both Dynabazaar and the Company. Pursuant to a
letter agreement dated February 26, 2007, Barington agreed to vote, and to cause
its affiliates to vote,

all of our shares now owned or hereafter acquired by Barington and its
affiliates in favor of the transactions contemplated by the Amended and Restated
Merger Agreement, in proportion to the votes of our other stockholders.

James A. Mitarotonda, who serves as a director and the President and Chief
Executive Officer of Dynabazaaar, is Chairman, President and Chief Executive
Officer of a corporation that is the general partner of Barington. Sebastian E.
Cassetta, who serves as a director, President and Chief Executive Officer of the
Company, is a Senior Managing Director and the Chief Operating Officer of
Barington. Mr. Cassetta is also the Chief Executive Officer of Costar, a
subsidiary of Dynabazaar. Dianne K. McKeever, a research analyst at Barington,
serves as a director of the Company, and Michael McManus, a director of the
Company, holds an equity interest in certain affiliates of Barington. Barington
is a party to separate administrative services agreements with us and
Dynabazaar, pursuant to which Barington performs certain administrative,
accounting and other services on behalf of each company. Our and Dynabazaar's
principal executive offices are maintained by Barington.

ITEM 1A. RISK FACTORS

WE MUST OVERCOME PRICING COMPETITION WITH RESPECT TO OUR ACCESS CONTROL PRODUCTS
GROUP PRODUCTS. COMPETITIVE PRICING PRESSURES CAN CAUSE PROFIT EROSION.

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

WE MUST DEVELOP NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS TO REMAIN
COMPETITIVE. IF WE FAIL TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS ON A
TIMELY BASIS, WE MAY LOSE MARKET SHARE. OUR INVESTMENT IN THE PINNACLE SOFTWARE
SOLUTION MAY NOT REALIZE A RETURN ON INVESTMENT.

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

o invest significantly in research and product development;

o develop, introduce and support new products and enhancements on a
timely basis; and

o gain and consecutively increase market acceptance of our products.

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

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

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

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

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

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

o issuance of equity securities that would dilute current
stockholders' percentages of ownership;

o large one-time write-offs;

o the incurrence of debt and contingent liabilities;

o difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;

o diversion of management's attention from other business concerns;

o contractual disputes;

o risks of entering geographic and business markets in which we have
no or only limited prior experience; and

o potential loss of key employees of acquired organizations.

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

We (including the ACPG operations) have incurred losses in the past and may
incur losses in the future. The ACPG business incurred net losses of $0.9
million, $1.0 million and $1.4 million in 2006, 2005 and 2004, respectively.
Continued or increased net losses could have a material adverse effect on our
business, financial condition and results of operations and the value and market
price of our common stock.

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

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

CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

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

SES RESOURCES INTERNATIONAL, INC. IS A NEWLY FORMED BUSINESS.

As a newly formed organization, our subsidiary, SES Resources International,
Inc., or SES, has no independent record of performance in the following service
categories in which it is expected to specialize:

o corporate investigations (e.g. know your customer, know your
employee, know your vendor reviews);

o due diligence reviews;

o forensic accounting; anti-money laundering investigatory services
consistent with the requirements of the Patriot Act;

o anti-counterfeiting and intellectual property protection;

o corporate health and wellness consultancy;

o emergency preparedness and contingency planning; executive staffing
solutions; and

o education and government security training services

As a new business, SES may not be successful in being engaged by prospective
clients, which would have an adverse affect on revenues and results of
operations.

OUR SUCCESS IN THE SES BUSINESS DEPENDS ON OUR ABILITY TO EXPAND THE SES
ADVISORY PANEL.

SES intends to deliver critical strategic security and business protection
solutions based on best practices developed by accomplished retired law
enforcement agents and in association with an Advisory Panel comprised of senior
executive service level government risk assessment and law enforcement
professionals. We may not be able to identify additional senior executive
service law enforcement agents who are able to serve as Advisors on the Advisory
Panel. Such inability would harm the development of the SES business in general,
and prevent us from distinguishing ourselves in the marketplace in particular,
which could adversely affect revenues and results of operations.

SOME OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE HAVE, WHICH MAY LIMIT OUR
ABILITY TO EFFECTIVELY COMPETE WITH THEM.

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

o respond more quickly to new or emerging technologies or changes in
customer requirements;

o benefit from greater economies of scale;

o offer more aggressive pricing; and/or

o devote greater resources to the promotion of their products.

WE ARE DEPENDENT ON OUR KEY PERSONNEL, THE LOSS OF WHOM COULD NEGATIVELY AFFECT
BUSINESS.

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

OUR COMMON STOCK HAS BEEN DELISTED FROM NASDAQ, WHICH LIMITS THE MARKET FOR OUR
COMMON STOCK AND COULD ADVERSELY AFFECT THE ABILITY OF OUR STOCKHOLDERS TO
RESELL OUR COMMON STOCK.

Our common stock was delisted from the NASDAQ National Market for failure to
maintain certain listing requirements and a significantly reduced market price
of common stock. The stock may be less liquid and more volatile as a result, and
it may be more difficult to raise new operating funds in the public market. The
common stock is presently quoted only on the Over-the-Counter Bulletin Board
under the ticker symbol "LQCI.OB" and the ability of our stockholders to obtain
liquidity and consistent market prices for our shares has been significantly
impaired.

In addition, our common stock may constitute "penny stock" (as defined in Rule
3a51-1 promulgated under the Exchange Act) if it fails to meet certain criteria
set forth in such Rule. Various practice requirements are imposed on
broker-dealers who sell "penny stocks" to persons other than established
customers and accredited investors. For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transactions prior to
sale. Consequently, the Rule may deter broker-dealers from recommending or
selling our common stock, which could further affect the liquidity of the common
stock.

OUR BUSINESS IS SUBJECT TO INCREASINGLY COMPLEX CORPORATE GOVERNANCE, PUBLIC
DISCLOSURE, ACCOUNTING, AND TAX REQUIREMENTS THAT HAVE INCREASED BOTH COSTS AND
THE RISK OF NONCOMPLIANCE.

We are subject to rules and regulations of federal and state government as well
as the service on which our common stock is quoted. These entities, including
the Public Company Accounting Oversight Board, or PCAOB, the SEC, the Internal
Revenue Service and NASD, have issued a significant number of new and
increasingly complex requirements and regulations over the course of the last
several years and continue to develop additional regulations and requirements in
response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of
2002. Our efforts to comply with these requirements have resulted in, and are
likely to continue to result in, significant legal, accounting and other
expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In addition, we incur
additional costs associated with our public company reporting requirements.
These rules and regulations also may make it more difficult and more expensive
for us to obtain director and officer liability insurance, and we may be
required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage.

We are subject to periodic audits or other reviews by such governmental
agencies. The SEC periodically reviews our public company filings. Any such
examination or review frequently requires management's time and diversion of
internal resources and, in the event of an unfavorable outcome, may result in
additional liabilities or adjustments to our historical financial results.

RECENT CHANGES IN ACCOUNTING RULES, INCLUDING THE EXPENSING OF STOCK OPTIONS
GRANTED TO OUR EMPLOYEES, COULD HAVE A MATERIAL IMPACT ON OUR REPORTED BUSINESS
AND FINANCIAL RESULTS.

The U.S. generally accepted accounting principles are subject to interpretation
by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the PCAOB, the SEC, and various bodies formed to
promulgate and interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on our reported
financial results.

On December 15, 2004, the FASB issued SFAS 123R, Share-Based Payment, which
requires us to measure compensation expense for employee stock options using the
fair value method beginning the first quarter of fiscal year 2006, which is the
quarter ended March 31, 2006. SFAS 123R applies to all outstanding stock options
that are not vested at the effective date and grants of new stock options made
subsequent to the effective date. As a result of SFAS 123R, we recorded higher
levels of stock based compensation due to differences between the valuation

methods of SFAS 123R and Accounting Principles Board Opinion No. 25, or APB No.
25. In prior periods, we recorded any compensation expense associated with stock
option grants to employees using the intrinsic value method in accordance with
APB 25.

WE HAVE BEEN NAMED AS A PARTY IN CERTAIN CLASS ACTION LAWSUITS WHICH COULD
REQUIRE SIGNIFICANT MANAGEMENT TIME AND ATTENTION AND RESULT IN SIGNIFICANT
LEGAL EXPENSES AND MAY RESULT IN AN UNFAVORABLE OUTCOME WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOWS.

We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
The lawsuits have been filed by individual shareholders who purport to seek
class action status on behalf of all other similarly situated persons who
purchased our common stock between July 8, 1999 and December 6, 2000. A
consolidated amended class action complaint was filed on April 19, 2002. The
complaint alleges that certain underwriters of the IPO solicited and received
excessive and undisclosed fees and commissions in connection with that offering.
The complaint further alleges that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with our IPO which failed to accurately disclose the amount and nature of the
commissions and fees paid to the underwriter defendants. On or about October 8,
2002, the Court entered an Order dismissing the claims asserted against certain
individual defendants in the consolidated actions without any payment from these
individuals or us. On or about February 19, 2003, the Court entered an Order
dismissing with prejudice the claims asserted against us under Section 10(b) of
the Exchange Act. As a result, the only claims that remain against us are those
arising under Section 11 of the Securities Act. The parties have negotiated and
executed a definitive settlement agreement. The proposed settlement provides
that the class members in the class action cases brought against the
participating issuer defendants will be guaranteed a recovery of $1 billion by
insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, we and any other
participating issuer defendants will be required to assign to the class members
certain claims that they may have against the underwriters of their IPO's. The
proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating issuers'
directors and officers' liability insurance policy proceeds as opposed to funds
of the participating issuer defendants themselves. A participating issuer
defendant could be required to contribute to the costs of the settlement if that
issuer's insurance coverage were insufficient to pay that issuer's allocable
share of the settlement costs. If ultimately approved by the Court, the proposed
settlement would result in the dismissal, with prejudice, of all claims in the
litigation against us and all of the other issuer defendants who have elected to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. The proposed settlement does not provide for the resolution of any
claims against the underwriter defendants, and the litigation as against those
defendants is continuing. Consummation of the proposed settlement remains
conditioned upon obtaining approval by the Court. By order entered on September
1, 2005, the Court granted preliminarily approval of the proposed settlement and
directed that notice of the terms of the proposed settlement be provided to
class members. Thereafter, the court held a fairness hearing, on April 24, 2006,
at which objections to the proposed settlement were heard. The Court has yet to
issue a ruling on the motion for final approval. On December 5, 2006, the Court
of Appeals for the Second Circuit reversed the Court's order certifying a class
in six test cases that were selected by the underwriter defendants and
plaintiffs in the coordinated proceeding. The plaintiffs have filed a petition
seeking rehearing of the Second Circuit's class certification ruling, and the
District Court has ordered that all activity in the consolidated proceeding
before it, including consideration of the proposed settlement, will be stayed
pending the ruling on whether to entertain the petition for rehearing. The
Company was not party to one of the test cases, and it is unclear what impact,
if any, the Second Circuit's class certification ruling will have on our case or
the viability of the proposed settlement. In the event the settlement is not
finalized, the Company believes that it has meritorious defenses to plaintiffs'
claims and intends to defend the action vigorously.

The expense of defending this litigation may be significant. The amount of time
to resolve these lawsuits is unpredictable and defending us may divert
management's attention from the day-to-day operations of our business, which
could adversely affect our business, results of operations and cash flows. In
addition, an unfavorable outcome in such litigation could have a material
adverse effect on our business, results of operations and cash flows.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger, acquisition or other business combination that a
stockholder may consider favorable. These provisions include:

o authorizing the issuance of preferred stock without stockholder
approval;

o limiting the persons who may call special meetings of stockholders;

o prohibiting stockholder actions by written consent;

o prohibiting cumulative voting for the election of directors or any
other matter submitted to a vote of stockholders unless required by
the California General Corporation Law; and

o requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws.

We are incorporated in Delaware and certain provisions of Delaware law may also
discourage, delay or prevent someone from acquiring or merging with it, which
may cause the market price of its common stock to decline.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal corporate offices are located at 888 Seventh Avenue, 17th Floor,
New York, NY 10019. On January 27, 2006, we signed a five year lease on 8,900
square feet located at 170 Ninth Avenue, Runnemede, New Jersey. ACPG has
occupied this facility since April 1, 2006. Our SES unit, leases approximately
450 square feet in Jericho, New York.

ITEM 3. LEGAL PROCEEDINGS

by insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, we and any other
participating issuer defendants will be required to assign to the class members
certain claims that they may have against the underwriters of their IPOs. The
proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating issuers'
directors and officers' liability insurance policy proceeds as opposed to funds
of the participating issuer defendants themselves. A participating issuer
defendant could be required to contribute to the costs of the settlement if that
issuer's insurance coverage were insufficient to pay that issuer's allocable
share of the settlement costs. If ultimately approved by the Court, the proposed
settlement would result in the dismissal, with prejudice, of all claims in the
litigation against us and all of the other issuer defendants who have elected to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. The proposed settlement does not provide for the resolution of any
claims against the underwriter defendants, and the litigation as against those
defendants is continuing. Consummation of the proposed settlement remains
conditioned upon obtaining approval by the Court. By order entered on September
1, 2005, the Court granted preliminarily approval of the proposed settlement and
directed that notice of the terms of the proposed settlement be provided to
class members. Thereafter, the court held a fairness hearing, on April 24, 2006,
at which objections to the proposed settlement were heard. The Court has yet to
issue a ruling on the motion for final approval. On December 5, 2006, the Court
of Appeals for the Second Circuit reversed the Court's order certifying a class
in six test cases that were selected by the underwriter defendants and
plaintiffs in the coordinated proceeding. The plaintiffs have filed a petition
seeking rehearing of the Second Circuit's class certification ruling, and the
District Court has ordered that all activity in the consolidated proceeding
before it, including consideration of the proposed settlement, will be stayed
pending the ruling on whether to entertain the petition for rehearing. The
Company was not party to one of the test cases, and it is unclear what impact,
if any, the Second Circuit's class certification ruling will have on our case or
the viability of the proposed settlement. In the event the settlement is not
finalized, the Company believes that it has meritorious defenses to plaintiffs'
claims and intends to defend the action vigorously.

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

There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.

PART II

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

Market Price of Common Stock

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

High Low
---- ---
Year Ended December 31, 2006:
First Quarter .................................... $2.10 $1.64
Second Quarter ................................... $2.00 $1.64
Third Quarter .................................... $1.67 $1.25
Fourth Quarter ................................... $1.35 $1.12

High Low
---- ---
Year Ended December 31, 2005:
First Quarter .................................... $1.79 $1.61
Second Quarter ................................... $2.30 $1.65
Third Quarter .................................... $2.25 $1.80
Fourth Quarter ................................... $1.95 $1.64

The closing price per share of our common stock at March 15, 2007 was $1.19. As
of March 15, 2007, there were approximately 50 shareholders of record of our
common stock. Because many shares of our common stock are held by brokers and
other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders.

Dividend Policy

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

Performance Graph

The following graph compares the cumulative total return to stockholders on our
common stock with the cumulative total return of the Nasdaq Composite Index -
U.S. and a group of former peer issuers selected in good faith and comprised of
RealNetworks, Inc. (RNWK) and a group of new peer issues selected in good faith
and comprised of International Electronics Inc. and MDI, Inc. The graph assumes
that $100 was invested on December 31, 2001 in our common stock, the Nasdaq
Composite Index - U.S., the old peer group and the new peer group, including
reinvestment of dividends. No dividends have been declared or paid on our common
stock. Historic stock price performance is not necessarily indicative of future
stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among LQ Corporation Inc, The NASDAQ Composite Index,
An Old Peer Group And A New Peer Group

[The following information was depicted as a line chart in the printed material]

--------------------------------------------------------------------------------------------------------------------------------
12/01 3/02 6/02 9/02 12/02 3/03 6/03 9/03 12/03 3/04 6/04 9/04 12/04
--------------------------------------------------------------------------------------------------------------------------------

LQ Corporation Inc. 100.00 97.45 104.26 110.64 104.68 119.57 136.93 123.43 111.86 162.00 15.66 99.90 96.66
NASDAQ Composite 100.00 96.55 77.96 62.67 71.97 70.46 85.65 94.69 107.18 107.31 109.37 101.71 117.07
Old Peer Group 100.00 118.18 68.52 60.77 64.14 69.53 113.80 109.09 96.13 101.01 115.15 78.45 111.45
New Peer Group 100.00 118.18 68.52 60.77 64.14 69.53 113.80 109.09 96.13 101.01 115.15 78.45 111.45

-------------------------------------------------------------------------------------
3/05 6/05 9/05 12/05 3/06 6/06 9/06 12/06
-------------------------------------------------------------------------------------

LQ Corporation Inc. 89.64 103.14 104.22 94.50 108.00 89.64 67.50 61.02
NASDAQ Composite 107.68 110.67 116.98 120.50 130.63 121.99 125.49 137.02
Old Peer Group 97.31 83.50 96.13 130.64 138.89 180.13 178.62 184.18
New Peer Group 97.31 83.50 96.13 130.64 138.89 180.13 178.62 184.18

* $100 invested on 12/31/01 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.

Cumulative Total Return

--------------------------------------------------------------------------------
12/01 12/02 12/03 12/04 12/05 12/06
--------------------------------------------------------------------------------

LQ Corporation Inc 100.00 104.68 111.86 96.66 94.50 61.02
NASDAQ Composite 100.00 71.97 107.18 117.07 120.50 137.02
Old Peer Group 100.00 64.14 96.13 111.45 130.64 184.18
New Peer Group 100.00 64.14 96.13 111.45 130.64 184.18

The old peer group was selected for comparative purposes in light of the fact
that through January 2003 the Company provided an open platform that enabled the
digital delivery of media over the internet. The new peer group was selected due
to the fact that as a result of the acquisition of the ACPG business in December
2005, the Company now primarily develops, designs and distributes open
architecture access control software and related accessories such as readers and
ID cards.

ITEM 6. SELECTED FINANCIAL DATA

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

For the Years Ended December 31,
----------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(in thousands, except per share amounts)

Statement of Operations Data:
Net revenues:
Access Control Business ............................. $ 6,393 $ -- $ -- $ 4 $ 108
Services ............................................ 6 -- -- 39 374
----------------------------------------------------------------
Total net revenues ....................................... 6,399 -- -- 43 482
----------------------------------------------------------------
Cost of net revenues:
License ............................................. -- -- -- 5 388
Services ............................................ -- -- -- 2 654
Access Control Business ............................. 3,510 -- -- -- --
Non-cash cost of revenues ........................... -- -- -- -- 82
----------------------------------------------------------------
Total cost of net revenues ............................... 3,510 -- -- 7 1,124
----------------------------------------------------------------
Gross profit (loss) ...................................... 2,889 -- -- (36) (642)
----------------------------------------------------------------
Operating expenses:
Sales and marketing ................................. -- -- -- 277 3,765
Non-cash sales and marketing ........................ -- -- -- -- (28)
Research and development ............................ -- -- -- 165 9,111
Non-cash research and development ................... -- -- -- -- 6
General and administrative .......................... 3,616 993 968 6,658 10,712
Non-cash general and administrative ................. -- -- -- -- (1)
Impairment loss ..................................... -- -- -- -- 689
Technical and engineering ........................... 1,296 -- -- -- --
Restructuring ....................................... -- -- -- 4,411 1,163
----------------------------------------------------------------
Total operating expenses ................................. 4,912 993 968 11,511 25,419
----------------------------------------------------------------
Loss from operations ..................................... (2,023) (993) (968) (11,475) (26,061)

Other income (expense), net .............................. 109 236 121 313 1,886
Gain on sale of intellectual property .................... -- -- -- -- 7,000
Gain on sale of Digital Music fulfillment business ....... -- -- -- 2,868 --
Merger termination fee ................................... -- -- -- -- (2,100)
----------------------------------------------------------------
Net income (loss) ........................................ $ (1,914) $ (757) $ (847) $ (8,294) $(19,275)
================================================================
Net income (loss) per share:
Basic and diluted ................................... $ (0.60) $ (0.24) $ (0.26) $ (2.56) $ (6.04)
Weighted average shares ............................. 3,214 3,214 3,232 3,243 3,189
Cash distribution declared per common share .............. $ -- $ -- $ -- $ -- $ 2.50

For the Years Ended December 31,
-------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and marketable securities....... $1,950 $ 5,746 $ 6,432 $ 9,077 $ 73,985
Short-term investments................................. -- -- -- --
Working capital........................................ 2,595 4,638 6,421 7,334 14,227
Total assets........................................... 5,296 8,807 6,535 9,269 76,797
Long-term debt, less current portion................... -- -- -- -- --
Total stockholders' equity............................. 3,737 5,651 6,421 7,334 15,618

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

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

Overview

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

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

Description of Business

Summary

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

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

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

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

The following discussion of our financial condition and results of operations
should be read in conjunction with the description of our business and our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States, and the notes to those
statements included elsewhere in this Report.

Results of Operations for the Years Ended December 31, 2006, 2005, and 2004

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

2006 2005 2004
---- ---- ----
Statement of Operations Data:
Net revenues:
Access Control Products Group................. 99.9% -- --
SES........................................... 0.1% -- --
------------------------
Total net revenues................................. 100.0% -- --
------------------------
Cost of net revenues:
Access Control Products Group................. 55% -- --
------------------------
Total cost of net revenues......................... 55% -- --
------------------------
Gross profit (loss)................................ 45% -- --
------------------------

Operating expenses:
Sales and marketing........................... -- --

Non-cash sales and marketing.................. -- --
Research and development...................... -- --
Non-cash research and development............. -- --
General and administrative.................... 57%
Non-cash general and administrative........... -- --
Impairment loss............................... -- --
Technical and engineering 20% -- --
Restructuring................................. -- --
------------------------
Total operating expenses........................... 77% -- --
------------------------
Loss from operations............................... (32)% -- --
Other income (expense), net........................ 2% -- --
Gain on sale of intellectual property.............. -- --
Gain on sale of digital music fulfillment
business......................................... -- --
Merger termination fee............................. -- --
Loss in equity investment.......................... -- --
------------------------
Net income (loss) ................................. (30)% -- --
========================

Total Net Revenues

Total net revenues were $6,399 in 2006 compared to $0 in 2005 and 2004. The 100%
increase in 2006 is attributable to the activities of our recent acquisitions,
Sielox, and to a lesser extent, SES.

Total Cost of Net Revenues

Our gross profit increased to approximately 45% of total net revenues in 2006,
compared to 0% in 2005 and 2004. The increase in 2006 is attributable to the
activities of our recent acquisitions, Sielox, and to a lesser extent, SES.

Operating Expenses

General and Administrative. General and Administrative expenses increased to
$4.9 million in 2006 from approximately $0.9 million for 2005 and 2004,
respectively. The increase of approximately $4 million is attributable to the
activities of our recently acquired operating companies, Sielox (approximately
$3.4 million) and SES (approximately $0.2 million). Major items of expense were:
compensation and benefits $2,375, travel $143, advertising $96, commissions
$277, legal $198, trade shows $202, depreciation $134, professional services
$225, management fees $130 and directors and officers insurance $78.

General and Administrative expenses remained relatively the same in 2005 and
2004 at $0.9 million each of the two years. General and Administrative expenses
in 2005 include directors and officers liability insurance premium payments of
approximately $135,000, legal expenses of approximately $26,000, professional
services for audit and accounting of approximately $98,000, administrative fees
of approximately $180,000, director and officer remuneration of approximately
$197,000. General and Administrative expenses in 2004 include, directors and
officers liability insurance premium payments of approximately $224,000, legal
expenses of approximately $229,000, professional services for audit and
accounting of approximately $77,000, administrative fee of approximately
$141,000 and director remuneration of approximately $116,000.

Interest Income. Interest income consists of earnings on our cash, cash
equivalents and short-term investments. Interest income was $109,000 in 2006,
$233,000 in 2005 and $148,000 in 2004.

Other Income (Expense). Other income (expense) was $0 in 2006, $3,000 in 2005
and $(27,000) in 2004.

Operating Lease Agreements

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

Year Ending December 31,

2007 $ 87,000

2008 91,000

2009 91,000

2010 91,000

2011 23,000
--------
$383,000
========

Obligations under Capital Lease:

The Company leases certain equipment under a capital lease expiring in 2009. The
assets and liabilities under that capital lease are recorded at the lower of the
present value of the minimum payments or the fair value of the assets. The
assets are amortized over their estimated useful lives. Amortization of assets
acquired under capital lease obligations are included in depreciation and
amortization expense for the year ended December 31, 2006.

At December 31, 2006 and 2005, fixed assets, included $85 and $0, respectively,
and accumulated amortization included $21 and $0, respectively, related to
assets recorded under the capital lease.

Aggregate future minimum lease payments at December 31, 2006 are as follows:
($ in thousands)

December 31,

2007 $34

2008 34

2009 11
---

Total future minimum lease payments 79

Amount representing interest 11
---

Present value of future minimum lease payments 68

Less current portion 27
---

Long-term portion $41
---

Critical Accounting Policies

Our critical accounting policies are as follows:

o revenue recognition;

o allowance for doubtful accounts;

o accounting for contingencies;

o accounting for income taxes;

o business combinations;

o long-lived assets;

o intangible assets; and

o goodwill.

Revenue Recognition

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

Allowance for Doubtful Accounts

Accounts receivable are recorded at net realizable values. The Company maintains
an allowance for estimated losses resulting from the inability of customers to
make the required payments. The allowance is based on specific facts and
circumstances surrounding individual customers as well as historical experience.
Provisions for the losses on receivables are charged to income to maintain the
allowance at a level considered adequate to cover future losses. Receivables are
charged off against the reserve when they are deemed uncollectible.

Accounting for Contingencies

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

Accounting for Income Taxes

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

Business Combinations

In accordance with the provisions of SFAS No. 141, "Business Combinations"
("SFAS 141"), the purchase price of an acquired company is allocated between
intangible assets and the net tangible assets of the acquired business with the
residual of the purchase price recorded as goodwill. The determination of the
value of the intangible assets

acquired and their expected lives involves certain judgments and estimates.
These judgments can include, but are not limited to, the cash flows that an
asset is expected to generate in the future and the appropriate weighted average
cost of capital.

Long-lived Assets

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

Intangible Assets

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

Goodwill

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

New Accounting Pronouncements

Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
must be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. FIN 48 is effective for fiscal years
beginning after December 15, 2006. As such, the Company is required to adopt FIN
48 at the beginning of its fiscal year 2007. The Company is currently evaluating
the various requirements of FIN 48, but we have not yet determined the impact,
if any, on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted under other accounting
standards (except for measurement of share-based payments) and is expected to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal

years. We do not expect the adoption of SFAS 157 to have a material impact on
our consolidated financial statements.

In September 2006, the Securities and Exchange Commission (the "SEC") issued
staff Accounting Bulletin 108, "Considering the Effects of Prior Year
Misstatement when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 clarifies the staff's views regarding the
process of quantifying financial statement misstatements. SAB 108 allows
registrants to adjust prior year financial statements for immaterial errors in
the carrying amount of assets and liabilities as of the beginning of its fiscal
year, with an offsetting adjustment being made to the opening balance of
retained earnings. SAB 108 is effective for fiscal years ending on or after
November 15, 2006 with earlier adoption encouraged. We do not expect the
adoption of SAB 108 to have a material impact on our consolidated financial
statements.

In February 2007, the FASB issued SFAS No.159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
statement No. 115" (SFAS 159). This standard permits an entity to elect to
measure many financial instruments and certain others items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the provisions of
FASB Statement No. 157, "Fair Value Measurement". The Company is currently
evaluating the impact, if any, the adoption of SFAS 159 will have on our
consolidated financial statements.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the initial
and follow-on public offerings of common stock, private placements of our
preferred stock, equipment financing, lines of credit and short-term loans. As
of December 31, 2006, 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. On January 29, 2003, we
distributed $57.7 million to our common stockholders of record as of December
10, 2002. At December 31, 2005, we had approximately $5.7 million of cash and
cash equivalents. On January 6, 2006, approximately $2.6 million of cash was
paid to Checkpoint Systems, Inc. for the acquisition of Checkpoint's Access
Control Products Group ("ACPG") division. The effective date of this acquisition
was December 30, 2005. As of December 31, 2006, we had approximately $1.9
million of cash and cash equivalents.

Net cash used in operating activities was $1.0 million, $0.6 million and $2.6
million in 2006, 2005 and 2004, respectively. Net cash used in operating
activities in 2006 was primarily the result of net losses from operations of
approximately $1.9 million, a decrease in inventory of approximately $0.2
million, offset by an increase in accounts receivable of approximately $0.3
million and an increase in accounts payable and accrued expenses of
approximately $0.9 million.

Net cash used in operating activities in 2005 was primarily the result of net
losses from operations of $757,000 offset by accruals for legal and other
expenses of $375,000 and trade and accrued payables of $199,000. Net cash used
in operating activities in 2004 was primarily the result of net losses from
operations of $847,000, legal expenses of $360,000 and the settlement in the
BeMusic litigation of $1.4 million.

Net cash used in investing activities was approximately $2.8 million in 2006,
approximately $24,000 in 2005 and $0 in 2004. The increase in 2006 was due to
expenses relating to our acquisition activities, including approximately $2.6
million paid to Checkpoint for the acquisition of Sielox.

Net cash used in financing activities was $17,000, $0 and $67,000 in 2006, 2005
and 2004, respectively. The net cash used in financing activities in 2006 was
due to principal payments on Sielox's capital lease. The net cash used in
financing activities in 2004 was due to the purchase of fractional interests in
connection with the implementation of the Reverse/Forward Stock Split.

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
over the next 12 months.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements are included in this Annual
Report on Form 10-K under Item 15, Exhibits and Financial Schedules beginning at
page F-1. Reference is made to the Index to Financial Statements which appears
on page F-1 of this report. The Reports of Independent Registered Public
Accounting Firms, Financial Statements and Notes to Financial Statements which
are listed in the Index to Financial Statements and which appear beginning on
page F-2 of this report are incorporated into this Item 8.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of the end of the period covered by
this report, our chief executive 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 we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms.

No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).

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

The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

Transactions with Related Persons

In July 2003, we relocated our principal executive offices to 888 Seventh
Avenue, 17th Floor, New York, 10019, an office maintained by Barington Capital
Group, LP ("Barington"), a limited partnership whose general partner is a
corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is our former Chairman and former Chief
Executive Officer. Sebastian E. Cassetta, who serves as a director, President
and Chief Executive Officer of the Company, is Senior Managing Director and the
Chief Operating Officer of Barington. Dianne K. McKeever, a research analyst at
Barington, serves as one of our directors, and Michael McManus, a director of L
Q Corporation, holds an equity interest in certain affiliates of Barington.

From April 2003 through May 16, 2004, we paid Barington a monthly fee of $7,290
to perform certain administrative and accounting services on our behalf. We
entered into a new services agreement with Barington dated as of November 18,
2004, which ran through June 30, 2006. Under this agreement, we agreed to pay
Barington $8,000 per month for providing certain administrative, accounting and
other services on our behalf and a fee of $125 per hour for any legal services
provided by Barington at our request. We also agreed that in the event Barington
identifies for us at our request a business transaction such as a merger,
acquisition or joint venture, and provides us with financial consulting services
in connection with such business transaction, we will pay Barington a fee of two
percent of the amount of the consideration paid in the transaction. In
connection with the agreement, we granted to Barington or its designees stock
options to purchase 56,000 shares of our Common Stock. The options are fully
exercisable and were granted with an exercise price per share equal to $1.82,
the fair market value of our Common Stock on the grant date. The option grant
was reported in a Form 4 filed by Mr. Mitarotonda with the SEC on November 18,
2004, pending designation of the stock option recipients among Mr. Mitarotonda
and other designees of Barington. On April 14, 2005, Barington designated Mr.
Mitarotonda as a recipient of stock options to purchase 37,000 shares of the
Common Stock.

We entered into an amended services agreement with Barington dated as of January
1, 2005. Under the amended agreement, Barington was to be paid a fee of $15,000
per month for performing certain administrative, accounting and other services
on our behalf and a fee of $175 an hour for providing any legal services on our
behalf at our request.

Board of Directors of the Company approved another amendment to the services
agreement to extend the terms of the agreement until December 31, 2007. The
agreement was previously set to expire by its terms on June 30, 2006.

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

SES Resources is a minority shareholder of SES with 19.5% of the SES equity. Mr.
Bradley Schnur, one of the shareholders of the SES Resources, is serving as
President of SES. Two of the other SES Resources shareholders may become members
of the SES Advisory Panel in the future. Mr. Dennis Schnur, the remaining
shareholder of SES Resources, is Mr. B. Schnur's father and also serves as
Chairman of the SES Advisory Panel. Mr. Cassetta serves as Vice Chairman of the
SES Advisory Panel. As described above, Mr. Cassetta is presently the Senior
Managing Director and Chief Operating Officer of Barington. As remuneration for
their duties, Mr. D. Schnur and Mr. Cassetta, as well as other SES Advisory
Panel members, may receive remuneration fees in connection with the gross profit
earned by SES. In connection with the Acquisitions, Barington served as a
transaction advisor and received a fee of approximately $60,000 in January 2006.
Such amount was approved by our independent directors at a meeting of our Board
of Directors on October 26, 2005.

With respect to our merger with Dynabazaar, Barington and a group of other
investors which have joined with Barington in the filing of a statement on
Schedule 13D, collectively own greater than 10% of the outstanding common stock
of both Dynabazaar and us. Pursuant to a separate letter agreement dated
February 26, 2007, Barington agreed to vote, and to cause its affiliates to
vote, all of our shares now owned or hereafter acquired by Barington and its
affiliates in favor of the transactions contemplated by the Amended and Restated
Merger Agreement, in proportion to the votes of our other stockholders. Mr.
Mitarotonda is a director of Dynabazaar and its President and Chief Executive
Officer. Mr. Cassetta is the Chief Executive Officer of Costar Video Systems,
LLC, a subsidiary of Dynabazaar.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to the Company's CEO, William Fox, during 2006.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to Barington for serving as a transaction
advisor, during 2006. The other information called for by this item will be
filed as part of an amendment to this Form 10-K on or before April 30, 2007, in
accordance with General Instruction G(3).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The public accounting firm of Rothstein Kass & Company, PC has served as our
independent registered public accounting firm to perform the audit of our
financial statements for the fiscal year ended December 31, 2006 and December
31, 2005. The table below sets forth the aggregate audit fees, audit-related
fees, tax fees and all other fees billed for services rendered by our principal
accountants in our fiscal years ended December 31, 2006 and 2005.

Fiscal Fiscal
Fee Category 2006 2005
--------------------------------------------------------------------------
Audit Fees (1) $105,000 $ 72,500
Audit-Related Fees (2) -- --
Tax Fees (3) $ 19,427 $ 14,500
All Other Fees (4) $ 7,500 $ 80,953
-------- --------
Total All Fees $131,927 $167,953

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

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

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

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

PRE-APPROVAL POLICIES AND PROCEDURES OF AUDIT COMMITTEE

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

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

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Index to Financial Statements

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

(a)(2) Financial Statement Schedules

The financial statement schedule of L Q Corporation, Inc. for the years ended
December 31, 2006, 2005 and 2004 included in subsection (c) below is filed as
part of this Annual Report and should be read in conjunction with the Financial
Statement of L Q Corporation, Inc. - Schedule II - Valuation and Qualifying
Accounts. Schedules not listed have been omitted because the information
required to be set forth therein is not applicable or is included in the
Financial Statements or notes thereto.

(a)(3) Exhibits

Please see subsection (b) below.

(b) EXHIBITS

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

2.1 Asset Purchase Agreement between Sielox, LLC and Checkpoint Systems, Inc.
dated as of November 4, 2005(1)

2.2 Asset Purchase Agreement between S.E.S. Resources, Ltd. and SES Resources
International, Inc. dated as of December 30, 2005(1)

2.3 First Amendment to the Asset Purchase Agreement between Sielox, LLC and
Checkpoint Systems, Inc. dated as of December 30, 2005(1)

2.4 Agreement and Plan of Merger with Dynabazaar, Inc. and LQ Merger Corp.
dated as of January 5, 2007(2)

2.5 Letter Agreement dated January 5, 2007(2)

2.6 Amended and Restated Agreement and Plan of Merger with Dynabazaar, Inc.
and LQ Merger Corp. dated as of February 26, 2007(3)

2.7 Letter Agreement dated February 26, 2007(3)

3.1 Certificate of Incorporation as currently in effect(4)

3.2 Bylaws as currently in effect(5)

4.2 Form of Specimen Stock Certificate(6)

4.3 Second Amended and Restated Investor Rights Agreement dated July 31,
1998(6)

10.1 Form of Indemnification Agreement entered into between the registrant and
each of its directors and executive officers(6)

10.2 1996 Equity Incentive Plan(6)+

10.3 1999 Employee Stock Purchase Plan(6)+

10.4 Summary Plan Description of 401(K) Plan(6)+

10.5 2000 Nonstatutory Stock Option Plan(5)+

10.6 Settlement Agreement with BeMusic, Inc. dated as of January 17, 2003(7)

10.7 Settlement Agreement and Mutual Release with BeMusic, Inc. dated February
13, 2004(8)

10.8 Administrative Services Agreement with Barington Capital Group, L.P. dated
as of November 18, 2004(9)

10.9 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of January 1, 2005(9)

10.10 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of May 10, 2006(10)

10.11 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of July 12, 2006*

21.1 Subsidiaries of L Q Corporation, Inc.*

23.1 Consent of Rothstein Kass & Company, PC*

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*

* Filed herewith.

+ Management contracts and compensation plans and arrangements.

----------

(1) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on January 10, 2006.

(2) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007.

(3) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on February 27, 2007.

(4) Incorporated by reference to the Form 10-Q filed with the Securities and
Exchange Commission on May 13, 2005.

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

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

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

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

(9) Incorporated by reference to the Form 10-K filed with the Securities and
Exchange Commission on March 31, 2005.

(10) Incorporated by reference to the Form 10-Q filed with the Securities and
Exchange Commission on May 15, 2006.

L Q Corporation, Inc.
Consolidated Financial Statements

Table of Contents

Page
----
Report of Independent Registered Public Accounting Firm ............ F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005 ........ F-3
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 .................................. F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the years
ended December 31, 2006, 2005 and 2004 ............................ F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2006, 2005 and 2004 ............................ F-6
Notes to Consolidated Financial Statements .......................... F-7
Financial Statement Schedule II - Valuation and
Qualifying Account ................................................ F-28

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of L Q Corporation,
Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of L Q Corporation,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.

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

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

Roseland, New Jersey
March 8, 2007

F-2

L Q CORPORATION, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

December 31,
-----------------------
2006 2005
---- ----
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 1,950 $ 5,746
Accounts receivable, net of allowance for
doubtful accounts of approximately
$35 and $0, in 2006 and 2005, respectively ........ 1,335 1,097
Inventories ....................................... 703 855
Other current assets .............................. 125 96
----------------------
Total current assets .......................... 4,113 7,794
Fixed assets, net ................................ 237 14
Goodwill ......................................... 464 999
Intangible assets net ............................ 460 --
Security deposits ................................ 22 --
----------------------
Total assets .................................. $ 5,296 $ 8,807
======================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 1,103 $ --
Accrued expenses and other current liabilities .... 388 575
Obligation under capital lease, current portion ... 27 --
Due to Checkpoint ................................. -- 2,581
----------------------
Total current liabilities ..................... 1,518 3,156
----------------------

Long term liabilities obligation under capital lease,
less current portion ............................... 41 --

Commitments and contingencies

Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares
authorized, and 3,214,408 shares issued at
December 31, 2006 and 2005 ...................... 3 3
Additional paid-in capital ........................ 146,006 146,006
Accumulated deficit ............................... (142,181) (140,267)
Accumulated other comprehensive loss .............. (91) (91)
----------------------
Total stockholders' equity .................... 3,737 5,651
Total liabilities and stockholders' equity .... $ 5,296 $ 8,807
======================

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

F-3

L Q CORPORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

For the Years Ended December 31,
--------------------------------
2006 2005 2004
---- ---- ----
Net revenues ................................ $ 6,399 $ -- $ --
------------------------------
Cost of goods sold: ......................... 3,510 -- --
------------------------------
Gross profit ................................ 2,889 -- --
------------------------------

Operating expenses:
Selling, general and administrative
expenses ............................. 3,616 993 968
Technical and engineering expenses ..... 1,296 -- --
------------------------------
Total operating expenses ............. 4,912 993 968
------------------------------

Loss from operations ........................ (2,023) (993) (968)
Interest income ............................. 109 233 148
Other income (expense), net ................. -- 3 (27)
------------------------------
Net loss .................................... $(1,914) $ (757) $ (847)
==============================
Net loss per share:
Basic and diluted ...................... $ (0.60) $ (0.24) $ (0.26)
Weighted average shares ................ 3,214 3,214 3,232

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

F-4

L Q CORPORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2006, 2005 and 2004
(In thousands, except share amounts)

Accumulated
Other
Common Stock Additional Comprehensive Comprehensive
-------------------------- Paid-In Accumulated Income Income
Shares Amount Capital Deficit (Loss) Total (Loss)
----------- ----------- ---------- ----------- ------------- ----------- -------------

BALANCE AT
DECEMBER 31, 2003 23,176,858 $ 23 $ 146,053 $ (138,663) $ (79) $ 7,334
--------------------------------------------------------------------------------------
Effect of reverse/forward
split (19,932,879) (20) 20 -- -- -- --
Cancellation of common
stock (29,571) -- (67) -- -- (67) --
Cumulative translation
adjustments -- -- -- -- 1 1 1
Net loss -- -- -- (847) -- (847) (847)
-----------
Comprehensive loss -- -- -- -- -- -- $ (846)
-----------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2004 3,214,408 3 146,006 (139,510) (78) 6,421
--------------------------------------------------------------------------------------
Cumulative translation
adjustments -- -- -- -- (13) (13) (13)
Net loss -- -- -- (757) -- (757) (757)
-----------
Comprehensive loss -- -- -- -- -- -- $ (770)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2005 3,214,408 3 146,006 (140,267) (91) 5,651
--------------------------------------------------------------------------------------

Net loss and comprehensive
loss (1,914) (1,914) (1,914)
-----------

-----------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2006 3,214,408 $ 3 $ 146,006 $ (142,181) $ (91) $ 3,737 $ (1,914)
----------------------------------------------------------------------------------------------------------------------------------

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

F-5

L Q CORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Years Ended December 31,
--------------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net loss ................................. $(1,914) $ (757) $ (847)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............ 136 -- --
Provision for doubtful accounts .......... 35 -- --
Stock based compensation ................. 21 -- --
Increase (decrease) in cash attributable to
change in operating assets and liabilities:
Accounts receivable ...................... (273) -- 28
Inventories .............................. 152 -- --
Other current assets ..................... (29) 44 61
Accounts payable ......................... 1,103 -- --
Accrued expenses and other current
liabilities ............................ (208) 64 (1,821)
-----------------------------
Net cash used in operating activities ....... (977) (649) (2,579)
Cash flows from investing activities:
Purchase of fixed assets ................. (227) (24) --
Payment of security deposit .............. (22) -- --
Reimbursement from Checkpoint ............ 28 -- --
Acquisition of ACPG ...................... (2,581) -- --
-----------------------------
Net cash used in investing activities ....... (2,802) (24) --

Cash flows from financing activities:
Principal payments on capital lease ...... (17) -- --
Purchase of fractional shares ............ -- -- (67)
-----------------------------
Net cash used in financing activities ....... (17) -- (67)
Effect of exchange rates on cash and
cash equivalents .......................... -- (13) 1
Net decrease in cash and cash equivalents ... (3,796) (686) (2,645)
Cash and cash equivalents, beginning
of period ................................. 5,746 6,432 9,077
-----------------------------
Cash and cash equivalents, end of period .... $ 1,950 $ 5,746 $ 6,432
=============================

Supplemental Disclosures of non-cash
investing and financing Activities:
Reduction in the estimated fair value of
fixed assets required ..................... $ (14) $ --
Decrease in Goodwill due to the adjustment
of the estimated fair value of fixed
assets required ............................. 14 --
Fixed assets acquired under capital
lease obligation .......................... 85 --
Supplemental non-cash operating and
financing activities in connection with
Sielox, LLC acquisition:
Accounts receivable ..................... $ -- $(1,097) $ --
Inventories ............................. (855) --
Other current assets .................... (37) --
Property and equipment .................. (14) --
Goodwill ................................ (667) --
Accrued expenses ........................ 89 --
Due to Checkpoint, Inc. ................. 2,581 --
Acquisition costs ....................... (308) --
Acquisition related accrued expenses .... 308 --

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

F-6

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

L Q Corporation, Inc. (the "Company") was incorporated in California as "Liquid
Audio, Inc." in January 1996 and reincorporated in Delaware in April 1999. In
July 1999, the Company completed its initial public offering of common stock.
The Company's name was formally changed to "L Q Corporation, Inc." on January 7,
2004.

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

From January 2003 until December 30, 2005, the Company did not operate any
business and were settling our remaining claims and liabilities while reviewing
alternatives for the use or disposition of the Company's remaining assets.

The Company's common stock is reported currently on the Over-the-Counter
Bulletin Board. The Company's common stock was traded on the NASDAQ National
Market, but was delisted on June 5, 2003. The market price per share of the
Company's stock increased significantly following the implementation of the
1:250 reverse stock split and a 35:1 forward stock split effective as of June 8,
2004.

Checkpoint Acquisition

On September 8, 2005, the Company entered into a non-binding letter of intent
with Checkpoint Systems, Inc. ("Checkpoint"), dated September 7, 2005, to
acquire substantially all of the net assets of Checkpoint's Access Control
Products Group ("ACPG") division. On October 26, 2005, the Company's Board of
Directors approved the transaction and on November 4, 2005 the parties entered
into an asset purchase agreement. On December 30, 2005, the Company and
Checkpoint entered into an amendment to the asset purchase agreement to, among
other things, extend the closing of the acquisition to January 5, 2006. On
January 6, 2006, the newly formed, wholly-owned subsidiary of the Company,
Sielox, LLC, ("Sielox"), completed the acquisition from Checkpoint of
substantially all of the assets of the ACPG division, effective as of the close
of business on December 30, 2005. The cash consideration for the transaction was
approximately $2.6 million, subject to post-closing adjustments, an escrow, and
related expenses estimated to be $0.3 million. The acquisition of the net assets
of ACPG are not included in the consolidated statement of operations, for the
year ended December 31, 2005, since the acquisition was effective as of the
close of business on December 30, 2005.

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

SES Resources, Ltd.

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

F-7

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

preparedness and contingency planning; executive staffing solutions; and
education and government security training services.

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

On May 10, 2006, the Board of Directors of the Company approved an amendment to
the services agreement between Barington and the Company dated as of November
18, 2004 (as amended, the "Services Agreement"). Pursuant to the amendment,
Barington will continue to provide certain administrative, accounting and other
services on the Company's behalf for a fee of $10,000 per month and legal
services on the Company's behalf at the Company's request for a fee of $175 per
hour. The Company believes that the fees payable to Barington are less than
those that would be charged in arm's length transactions between unaffiliated
third parties. Additionally, on July 12, 2006, the Board of Directors of the
Company approved another amendment to the Services Agreement to extend the terms
of the Services Agreement until December 31, 2007. The Services Agreement was
previously set to expire by its terms on June 30, 2006.

On September 15, 2006, Sielox, LLC ("Sielox") entered into a strategic alliance
agreement with Costar Video Systems, LLC ("Costar"), a subsidiary of Dynabazaar,
Inc. ("Dynabazaar"), dated as of September 15, 2006, pursuant to which the
companies agreed to explore mutually beneficial opportunities to work together,
including, without limitation, through a joint venture, joint sales or joint
marketing arrangements, or other business arrangements or strategic alliance.
Costar designs, sources 'and distributes video and imaging products for the
security and industrial markets. Sielox and Costar are also parties to a
distribution agreement, dated July 31, 2006, pursuant to which Sielox was
appointed as an authorized distributor of certain products of Costar.

On October 20, 2006, James A. Mitarotonda delivered to the Secretary of the
Company notice of his resignation as a director and Chairman of the Board of the
Company, effective as of the close of business on October 23, 2006. Mr.
Mitarotonda had no disagreements with the Company on any matter relating to the
Company's operations, policies or practices, and resigned in order to ensure
that he had adequate time to devote to his other professional responsibilities.
On October 23, 2006, the Board of Directors of the Company appointed Steven
Berns, a director of the Company, to serve as Chairman of the Board of the
Company; effective as of the close of business on October 23, 2006. On October
23, 2006, the Board of Directors of the Company elected Dianne K. McKeever to
serve as a director of the Company, effective as of the close of business on
October 23, 2006.

Barington and a group of other investors which have joined with Barington in the
filing of a statement on Schedule 13D collectively own greater than 10% of the
outstanding common stock of the Company. Mr. Mitarotonda is Chairman, President
and Chief Executive Officer of a corporation that is the general partner of
Barington. Sebastian E. Cassetta, who serves as a director, President and Chief
Executive Officer of the Company, is Senior Managing Director and the Chief
Operating Officer of Barington. Mr. Cassetta is also the Chief Executive Officer
of Costar. The Company is party to the Services Agreement, as noted above, under
which Barington provides, among other things, certain administrative, accounting
and other services on the Company's behalf. Barington is a party to a similar
services agreement with Dynabazaar and Barington and a group of other investors
which have joined with Barington in the filing of a statement on Schedule 13D
collectively own greater than 10% of the outstanding common stock of Dynabazaar.

On May 11, 2006, William J. Fox delivered to the secretary of the Company notice
of his resignation as a director and President and Chief Executive officer of
the Company, effective as of the close of business on May 15, 2006. Mr. Fox had
no disagreements with the Company on any matters related to the Company's
operations, policies or practices. On May 9, 2006, the Board of Directors of the
Company appointed Sebastian E. Cassetta to serve as a director and as the
Company's President and Chief Executive Officer, effective as of May 16, 2006.

F-8

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Liquidity

The Company has incurred losses and negative cash flows from operations for
every year since inception. For the year ended December 31, 2006, the Company
incurred a net loss of approximately $1.9 million and negative cash flows from
operations of approximately $1.0 million. As of December 31, 2006, the Company
had an accumulated deficit of approximately $142.2 million. The Company feels
its existing cash and cash equivalents are sufficient to fund the Company's
current operations and satisfy its obligations. The Company believes these
obligations will primarily relate to costs associated with the satisfaction of
any potential legal judgments or settlements and the expenses associated with
the operations of Sielox, LLC and SES. Such activities may have an impact on the
Company's liquidity.

Reclassifications

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

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents. At December 31, 2006,
and at various times during the year, balances of cash at financial institutions
exceeded the federally insured limit. The Company has not experienced any losses
in such accounts and believes it is not subject to any significant credit risk
on cash and cash equivalents. The following schedule summarizes the estimated
fair value of the Company's cash and cash equivalents (in thousands):

December 31,
-----------------
2006 2005
---- ----
Cash and cash equivalents:
Cash................................................ $ 46 $ 2,644
Money market funds.................................. 1,904 3,102
----------------
$1,950 $ 5,746
=================

Concentration of Credit Risk

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

Fair Value of Financial Instruments

F-9

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Accounts Receivable, Net

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

Inventories

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

Concentration of Suppliers

The Company purchased approximately 63% of its inventories from three suppliers
during the year ended December 31, 2006. At December 31, 2006, these suppliers
were approximately 63% of accounts payable.

Property and Equipment, Net

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

Impairment of Long-Lived Assets

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

Intangible Assets

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

Goodwill

Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
effective December 31, 2001, goodwill is no longer being amortized. The Company
tests goodwill for impairment on an annual basis, relying on a

F-10

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

number of factors including operating results, business plans and future cash
flows. Recoverability of goodwill is evaluated using a two-step process. The
first step involves a comparison of fair value of the Company with its carrying
value. If the carrying amount exceeds its fair value, the second step of the
process involves a comparison of the fair value and carrying value of the
goodwill. If the carrying value exceeds its fair value, an impairment loss is
recognized in an amount equal to the excess.

Accrued Warranty Costs

The Company provides product warranties for various products. The warranties
vary in length depending on the product. The Company accrues warranty costs
based on historical data of warranty transactions. Accrued warranties are
reported under accrued expenses and other current liabilities at December 31,
2006, and 2005.

Revenue Recognition

Royalty Expenses

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

Research and Development Costs

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

Advertising Costs

Advertising costs are charged to operations when incurred.

Shipping and Handling Costs

Amounts billed to a customer for shipping and handling are accounted for in
revenues, and shipping and handling costs in cost of revenues.

Stock-Based Compensation ($ in thousands)

On January 1, 2006, the Company adopted SFAS No. 123(R), "Accounting for
Stock-Based Compensation (Revised)" ("SFAS No. 123(R)") This statement requires
companies to record compensation expense for share-based awards issued to
employees and directors in exchange for services provided. The amount of
compensation expense is based on the estimated fair value of the awards on their
grant dates and is recognized, on a straight line basis, over the applicable
vesting period. In addition, SFAS No. 123(R) requires forfeitures of share-based
awards to be estimated at the time of grant and revised, if necessary, in
subsequent periods if those estimates change based on the actual amount of
forfeitures. In the pro-forma information required under SFAS No. 123 for
periods prior to January 1, 2006, the Company accounted for forfeitures as they
occurred.

The fair value of stock options is determined using an option-pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and the
expected dividends on it, and the risk free interest rate over the expected life
of the option.

The Company recognized compensation expense of $21 in the Company's consolidated
financial statements, all of which was for stock options. This amount includes
compensation expense for stock options which were granted prior to January 1,
2006 but were not yet vested as of that date. Such compensation expense was
estimated in

F-11

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accordance with the provisions of SFAS No. 123(R). The compensation expense also
includes the expense recognized for stock options granted subsequent to January
1, 2006. Such compensation expense was estimated based on the grant date fair
value in accordance with provisions of SFAS No. 123(R). Compensation expense
increased by $19 during the year ended December 31, 2006 as result of
implementing SFAS No. 123 (R).

Consistent with the disclosure provisions of SFAS No. 123, the Company's net
loss and basic and diluted net loss per share would have been adjusted for the
years ended December 31, 2005 and 2004 to the pro forma amounts indicated below
in thousands, except per share amounts.

Year Ended December 31,
-----------------------
2005 2004
---- ----

Net income (loss) - as reported ........................ $ (757) $( 847)

Deduct: Total stock-based employee compensation
expense determined under fair-value-based
method, net of tax effects ........................ 18 54
-------------------
Net income (loss) - pro forma .......................... $ (775) $(901)
===================
Basic and diluted net income (loss)
per share - as reported .............................. (0.24) (0.26)
Basic and diluted net income (loss)
per share - pro forma ................................ $(0.24) $(0.28)

The Company calculated the fair value of each option grant on the date of grant
using the Black-Scholes option pricing method as prescribed by the SFAS No. 123
(R) using the following assumptions:

Year Ended December 31,
---------------------------
2006 2005 2004
---- ---- ----
Risk-free interest rate ....................... 4.34% 3.53% 4.00%
Weighted-average expected life (in years) ..... 10 10 10
Expected dividend yield ....................... 0.0% 0.0% 0.0%
Expected stock price volatility ............... 19.16% 36.39% 36.39%

Year Ended December 31,
---------------------------
2006 2005 2004
---- ---- ----

Weighted-average fair value of options
granted during the period ................... $1.73 $1.85 $1.82
===========================
Weighted-average fair value of purchase
rights granted during the period ............ $-- $-- $--
===========================

Net Loss Per Share

F-12

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

Year Ended December 31,
---------------------------
2006 2005 2004
Numerator:
Net loss ................................... $(1,914) $(757) $(847)
===========================
Denominator:
Weighted-average shares .................... 3,214 3,214 3,232
---------------------------
Denominator for basic and diluted
calculation .............................. 3,214 3,214 3,232
===========================
Net income (loss) per share:
Basic and diluted .......................... $(0.60) $(0.24) $(0.26)
============================

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

Year Ended December 31,
--------------------------
2006 2005 2004
---- ---- ----
Common stock options .......................... 185 350 361
Common stock warrants ......................... -- -- --

Foreign Currency Translation

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

Income Taxes

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

F-13

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Loss

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

Segment Information ($ in thousands)

The Company complies with the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the method companies report information about operating segments
in financial statements. SFAS No. 131 focuses on the internal organization that
is used by management for making operating decisions and assessing performance
as the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The Company has determined that it operates in two operating segments. The
following information related to revenues, net losses and total assets are the
only measures used by chief operating decision makers of the Company to evaluate
segment performance.

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

Year Ended December 31,
--------------------------
2006 2005 2004
---- ---- ----
Domestic ...................................... $6,399 $-- $--
International ................................. -- -- --
--------------------------
$6,399 $-- $--
==========================

It is impractical for the Company to compute revenues by type of product and
service for the years ended December 31, 2006, 2005 and 2004.

The following table represents total net revenues of each of the Company's
reporting segments ($ in thousands):

Year Ended December 31,
---------------------------
2006 2005 2004
---- ---- ----
Sielox, LLC ................................... $6,393 $-- $--
SES International Resources, Inc. ............. 6
------ ---- ----
Total ......................................... $6,399 $ $
====== ==== ====

The following table represents the total loss of each of the Company's reporting
segments ($ in thousands):

Year Ended December 31,
---------------------------
2006 2005 2004
---- ---- ----
Sielox, LLC ................................... $(917) $ -- $ --
SES International Resources, Inc. ............. (190)

F-14

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

General Corporate ............................. (807) (757) (847)
------- ----- -----
Total ......................................... $(1,914) $(757) $(847)
======= ===== =====

The following table represents the total assets of each of the Company's
reporting segments ($ in thousands):

December 31,
---------------------
2006 2005
---- ----
Sielox, LLC ................................... $3,295 $2,687
SES International Resources, Inc. ............. 5 --
General Corporate ............................. 1,996 6,120

Total ......................................... $5,296 $8,807
====== ======

Substantially all of the Company's assets as of December 31, 2006, and 2005 were
located in the United States.

New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
under SFAS No. 109, "Accounting for Income Taxes." Under FIN 48, the tax effects
of a position taken on a tax return should be recognized only if it is
"more-likely-than-not" that the position would be sustained based solely on its
technical merits as of the reporting date. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition, and also requires significant new
annual disclosures in the notes to the consolidated financial statements.
Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
must be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. FIN 48 is effective for fiscal years
beginning after December 15, 2006. As such, the Company is required to adopt FIN
48 at the beginning of its fiscal year 2007. The Company is currently evaluating
the various requirements of FIN 48, but we have not yet determined the impact,
if any, on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is expected to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 clarifies the staff's views regarding the process of quantifying
financial statement misstatements. SAB 108 allows registrants to adjust prior
year financial statements for immaterial errors in the carrying amount of assets
and liabilities as of the beginning of this fiscal year, with an offsetting
adjustment being made to the opening balance of retained earnings. SAB 108 is
effective for fiscal years ending on or after

F-15

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

November 15, 2006 with earlier adoption encouraged. We do not expect the
adoption of SAB 108 to have a material impact on our consolidated financial
statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
statement No. 115" ("SFAS 159"). This standard permits an entity to elect to
measure many financial instruments and certain others items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the provisions of
FASB Statement No. 157, "Fair Value Measurement." The Company is currently
evaluating the impact, if any, the adoption of SFAS 159 will have on our
consolidated financial statements.

NOTE 2. Business Acquisitions

ACPG Acquisition

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

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the date of acquisition.

December 31, 2005 Amount
----------------- -------------
(In thousands)
Accounts receivable.............................. $ 1,097
Inventories 855
Proprietary Technology 449
Customer Relationships........................... 72
Goodwill......................................... 464
Other assets..................................... 37
-------
Total assets acquired............................ $ 2,974
Current liabilities.............................. (89)
-------
Net assets acquired.............................. $ 2,885
=======

Goodwill and intangible assets arose from the ACPG acquisition. The aggregate of
the purchase price plus acquisition costs of approximately $2,900 exceeded the
fair market value for all identifiable net assets. An independent appraisal was
conducted of all tangible and intangible assets (including, but not limited to,
inventory, fixed assets, developed software, hardware designs, customer lists,
patents, trademarks and trade names, etc.) received as a result of the
acquisition of ACPG. The results of this appraisal gave rise to, among other
things, goodwill. Goodwill of approximately $464 and intangible assets of
approximately $521 were recorded, net of purchase price adjustments based on the
independent appraisal. Based on the results of the independent appraisal on the
intangible assets acquired, the Company booked amortization of $61 which was
charged to operations for the year ended December 31, 2006.

The following unaudited pro forma information presents results of operations of
L Q Corporation, Inc. as if the acquisition of ACPG occurred as of January 1,
2004. Although prepared on a basis consistent with L Q Corporation, Inc.
consolidated financial statements, these unaudited pro forma results do not
purport to be

F-16

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 2. Business Acquisitions (Continued)

indicative of the actual results of operations of the combined companies which
would have been achieved had these events occurred at the beginning of the
periods presented nor are they indicative of future results. ($ in thousands)

Year Ended December 31,
-----------------------
2005 2004
-------- --------
Net sales ............................................. $ 6,390 $ 6,560
Cost of goods sold .................................... (3,681) (3,549)
---------------------
Gross profit .......................................... 2,709 3,011
General and administrative expenses ................... 4,734 5,370
---------------------
Net loss from operations .............................. (2,025) (2,359)
Interest income ....................................... 236 148
Pro forma adjustment to interest income ............... (161)(A) (34) (A)
Proforma adjustment for amortization of intangible
assets acquired ..................................... (61) (61)
---------------------
Other income (expense), net ........................... (12) (27)
---------------------
Net income (loss) ..................................... $(2,023) $(2,333)
=====================
Net income (loss) per share - as reported ............. $ (0.24) $ (0.26)
Net income (loss) per share - pro forma ............... $ (0.63) $ (0.72)
Weighted-average shares ............................... 3,214 3,232

NOTE 3. Related Parties

F-17

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 3. Related Parties (Continued)

As of May 10, 2006, the Board of Directors of the Company approved an amendment
to the services agreement between Barington and the Company dated as of November
18, 2004. Pursuant to the amendment, Barington will continue to provide certain
administrative, accounting and other services on our behalf for a fee of $10,000
per month and legal services on our behalf at our request for a fee of $175 per
hour. Additionally, on July 12, 2006, the Board of Directors of the Company
approved another amendment to the services agreement to extend the terms of the
agreement until December 31, 2007. The agreement was previously set to expire by
its terms on June 30, 2006.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to the Company's CEO, William Fox, during 2006.

In connection with the Company's acquisitions of ACPG and SES, fees of
approximately $60,000 were paid to Barington for serving as a transaction
advisor, during 2006.

NOTE 4. Balance Sheet Components

Inventories, Net

The components of inventories at December 31, 2006 and 2005 are as follows ($ in
thousands):

F-18

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet Components Financial Statements

NOTE 4. Balance Sheet Components (Continued)

2006 2005
---- -----
Finished goods........ $541 $ 581
Raw materials ........ 162 274
---- -----
$703 $ 855
==== =====

Fixed Assets, Net

At December 31, 2006 and 2005, fixed assets, net consists of the following ($ in
thousands):

2006 2005
---- ----
Furniture, fixtures and equipment $153 $14
Computer equipment 75
Leasehold improvements 84
---- ---
312 14

Less accumulated depreciation
and amortization 75
---- ---
$237 $14
====

Goodwill and Intangible Assets, Net:

The intangible assets acquired as result of the ACPG acquisition have been
adjusted as of December 31, 2006, from December 31, 2005 as a result of the
completion of an independent appraisal, adjustments to the estimated fair values
of the assets, acquired, and post closing adjustments to the purchase price. The
components of intangible assets acquired as a result of the ACPG acquisition are
as follows ($ in thousands):

December 31, December 31
2006 2005
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets

Proprietary Technology ......................... $449 $ 56 $ -- $--
Existing Customer Relationships ................ 72 5 -- --
---- ---- ---- ---
Total ....................................... 521 $ 61 -- $--

Unamortized intangible assets
Goodwill .................................... 464 999
---- ----
Total ....................................... $985 $999
---- ----

F-19

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 4. Balance Sheet Components (Continued)

Amortization expense for the year ended December 31, 2006 was $61.

As the intangible assets acquired in connection with the ACPG acquisition were
acquired with an effective date of December 31, 2005, there was no amortization
expense for the year ended December 31, 2005. Estimated amortization expense
applicable to amortizable intangible assets for each of the next 5 years is $61.

All intangible assets of the Company are attributable to the Sielox, LLC
reporting segment and the weighted average amortization for the Company's
intangible assets is 9 years. The estimated useful life for Proprietary
Technology and Existing Relationships is 8 and 15 years, respectively.

Due to Checkpoint

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

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following ($ in
thousands):

December 31,
---------------
2006 2005
---- ----
Accrued expenses and other current liabilities:
Consulting and professional services $182 $ 486
Commissions 78
Royalties......................................... 29
Warranty reserve.................................. 10 25
Other............................................. 89 64
----------------
$ 388 $ 575
================

NOTE 5. Common Stock

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

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

NOTE 6. Preferred Stock Rights Agreements

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

F-20

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 7. Income Tax

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

December 31,
------------------
2006 2005
---- ----
Deferred tax assets
Net operating loss and tax credit carryforwards $ 9,653 $ 8,785
Depreciation and amortization 37 41
------------------
Total deferred tax assets 9,690 8,826
Less: Valuation allowance (9,690) (8,826)
-------------------
Total deferred tax assets $ -- $ --
===================

At December 31, 2006, the Company had approximately $20.89 million of federal
and state net operating loss carryforwards available to offset future taxable
income. The federal and state net operating loss carryforwards expire beginning
in 2013. At December 31, 2006, the Company had approximately $2.0 million of
federal and state research and development tax credit carryforwards available to
offset future taxes. The federal tax credit carryforward expire in varying
amounts beginning in 2011. The California tax credit carryforward can be carried
forward indefinitely.

The total net operating loss carry-forwards ("NOL") of $138.0 million has been
reduced, for financial reporting purposes by $117.2 million for federal and
$48.9 million for state, which is unlikely ever to be utilized due to the
application of the Section 382 provisions. The remainder of the NOL also likely
might effectively be obviated if certain future events were to occur that would
invoke additional Section 382 provisions. Future use of the NOL's therefore is
extremely speculative and should not be presumed absent extensive analysis of
the complex Section 382 provisions.

The Company has incurred a loss in each period since its inception. Based on the
available objective evidence, including the Company's history of losses,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company has provided for a full
valuation allowance against its total deferred tax assets at December 31, 2006
and 2005. The valuation allowance increased by approximately $864,000 and
$125,000 in the year ended December 31, 2006, and 2005 respectively.

NOTE 8. Commitments and Contingencies

Obligations Under Capital Leases:

The Company leases certain equipment under a capital lease expiring in 2009. The
assets and liabilities under that capital lease are recorded at the lower of the
present value of the minimum payments or the fair value of the assets. The
assets are amortized over their estimated useful lives. Amortization of assets
under capital lease is included in depreciation and amortization expense for the
year ended December 31, 2006.

At December 31, 2006 and 2005, fixed assets included $85 and $0 respectively,
and accumulated amortization included $21 and $0 , respectively, related to
assets recorded under the capital lease.

Aggregate future minimum lease payments at December 31, 2006 are as follows:

F-21

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 8. Commitments and Contingencies (Continued)

December 31,

2007 $34
2008 34
2009 11
---
Total future minimum lease payments 79
Amount representing interest 11
---
Present value of future minimum
lease payments 68
less current portion 27
---
long-term portion $41
===

Rent expense consists of the following ($ in thousands):

Year Ended December 31,
----------------------------------
2006 2005 2004
---- ---- ----
Rent expense ...................... $ 96 $ 10 $532

Operating Lease Agreements

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

Year Ending December 31,

2007 $87,000

2008 91,000

2009 91,000

2010 91,000

2011 23,000
--------
$383,000
========

Litigation

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

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

F-22

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 8. Commitments and Contingencies (Continued)

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

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

F-23

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 8. Commitments and Contingencies (Continued)

of the terms of the proposed settlement be provided to class members.
Thereafter, the court held a fairness hearing, on April 24, 2006, at which
objections to the proposed settlement were heard. The Court has yet to issue a
ruling on the motion for final approval. On December 5, 2006, the Court of
Appeals for the Second Circuit reversed the Court's order certifying a class in
six test cases that were selected by the underwriter defendants and plaintiffs
in the coordinated proceeding. The plaintiffs have filed a petition seeking
rehearing of the Second Circuit's class certification ruling, and the District
Court has ordered that all activity in the consolidated proceeding before it,
including consideration of the proposed settlement, will be stayed pending the
ruling on whether to entertain the petition for rehearing. Dynabazaar was not
party to one of the test cases, and it is unclear what impact, if any, the
Second Circuit's class certification ruling will have on our case or the
viability of the proposed settlement. In the event the settlement is not
finalized, the Company believes that it has meritorious defenses to plaintiffs'
claims and intends to defend the action vigorously.

Guarantees, Warranties and Indemnification

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

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

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

NOTE 9. Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited quarterly results of operations for
the periods shown:

For the Three Months Ended
------------------------------------------------------------------------------------
March June Sept. Dec. March June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31,
2006 2006 2006 2006 2005 2005 2005 2005
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share and weighted-average share amounts)

Net revenue $ 1,533 $ 1,669 $ 1,658 $ 1,539 $ -- $ -- $ -- $ --
Gross profit (loss) 677 754 698 760 -- -- -- --
Net loss (516) (354) (592) (452) (112) (192) (166) (287)
Net loss per share, basic and diluted (.16) (.11) (.18) (.14) (.03) (.06) (.05) (.09)
Weighted-average shares used in per share
calculation 3,214 3,214 3,214 3,214 3,214 3,214 3,214 3,214

F-24

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 10. Reverse/Forward Stock Split

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

NOTE 11. Employee Benefits

Stock Option Plans

In September 1996, the Board of Directors adopted the 1996 Equity Incentive Plan
(the "1996 Plan"), which initially provided for the granting of up to 1,144,000
incentive stock options and nonqualified stock options. In August 1997, October
1998 and April 1999, an additional 441,000, 88,000 and 1,600,000 shares,
respectively, were authorized for grants under the 1996 Plan. Under the 1996
Plan, incentive stock options may be granted to employees of the Company and
nonqualified stock options and stock purchase rights may be granted to
consultants, employees, directors and officers of the Company. Options granted
under the 1996 Plan are for periods not to exceed ten years, and must be issued
at prices not less than 100% and 85%, for incentive and nonqualified stock
options, respectively, of the fair market value of the stock on the date of
grant as determined by the Board of Directors. Options granted under the 1996
Plan generally vest 25% after the first year and then 2.083% each month
thereafter until 100% vested. Options granted to stockholders who own greater
than 10% of the outstanding stock must be for periods not to exceed five years
and must be issued at prices not less that 110% of the estimated fair market
value of the stock on the date of grant as determined by the Board of Directors.
In April 1999, the 1996 Plan was also amended to provide for annual increases on
January 1 equal to the lesser of 1,500,000 shares, 5% of the outstanding shares
on such date or a lesser amount determined by the Board of Directors. For the
year ended December 31, 2006, approximately 123,000 options were granted under
the 1996 plan.

In April 2000, the Board of Directors adopted the 2000 Nonstatutory Stock Option
Plan (the "2000 Plan"), which provided for the granting of up to 500,000
nonqualified stock options. Under the 2000 Plan, stock options may be granted to
employees of the Company. Options granted under the 2000 Plan are for periods
not to exceed ten years, and are issued at prices determined by the Board of
Directors or any of its committees. Options granted under the 2000 Plan vest at
terms and conditions determined by the Board of Directors or any of its
committees. Options granted for the year ended December 31, 2000 vest 25% after
the first year and then 2.083% each month thereafter until 100% vested. Options
granted for the year ended December 31, 2001 vest 2.083% each month until 100%
vested. No options were granted under the 2000 Plan for the year ended December
31, 2006 and 2005, respectively.

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

Options
Available Weighted
for Grant Shares Per Share
--------- ------ ---------
Balance at December 31, 2003 4,187 1,368 $0.29

Options granted (188) 188 1.82

Options exercised -- -- --

Options canceled 1,195 (1,195) 0.29
----- ------ -----

Balance at December 31, 2004 5,194 361 1.93

Options granted (6) 6 1.85

F-25

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 11. Employee Benefits (Continued)

Options exercised

Options canceled 17 (17) 1.93
----------------------------
Balance at December 31, 2005 5,205 350 1.93

Options granted (123) 123 1.73

Options exercised

Options canceled 289 (289) 1.90
----------------------------
Balance at December 1, 2006 5,371 184 $1.82
============================

The following table summarizes information concerning outstanding and
exercisable options for all the stock option plans as of December 31, 2006
(shares in thousands):

Options Outstanding Options Vested and Exercisable
---------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Price Number Exercise Price
Range of Exercise Price Outstanding Life (Years) Per Share Outstanding Per Share
----------------------- ----------- ------------ -------------- ----------- --------------

$0.79 4 5.8 $0.79 4 $0.79
$2.07 46 6.3 2.07 46 $2.07
$1.82 47 7.9 1.82 47 $1.82
$1.85 4 8.8 1.85 2 $1.85
$1.73 83 9.0 $1.73 -- $1.73
-------------------------------------------------------------------
184 7.9 $1.82 99 $1.89
===================================================================

Employee Stock Purchase Plan

In April 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan (the "Purchase Plan") and reserved 500,000 shares of common stock for
issuance thereunder. The Purchase Plan was approved by the stockholders in June
1999. On January 1, each year, the aggregate number of shares reserved for
issuance under the Purchase Plan is increased by the lesser of 750,000 shares,
3% of the outstanding shares on such date or a lesser amount determined by the
Board of Directors. The Purchase Plan became effective on the first business day
on which price quotations for the Company's common stock were available on the
Nasdaq National Market, which was July 8, 1999. Employees are eligible to
participate if they are customarily employed by the Company or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year and do not (i) immediately after grant own stock possessing 5% or
more of the total combined voting capital stock, or (ii) possess rights to
purchase stock under all of the employee stock purchase plans at an accrual rate
which exceeds $25,000 worth of stock for each calendar year. The Purchase Plan
permits participants to purchase common stock through payroll deductions up to
15% of the participant's compensation, as defined in the Purchase Plan, but
limited to 2,500 shares per participant per purchase period. Each offering
period includes four six-month purchase periods, and the Purchase Plan was
amended in June 2000 so that purchase periods begin on April 1 and October 1 of
each year, except for the offering period which started on the first trading day
on or after the effective date of the public

F-26

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE 11. Employee Benefits (Continued)

offering. The price at which the common stock is purchased under the Purchase
Plan is 85% of the lesser of the fair market value at the beginning of the
offering period or at the end of the purchase period. The Purchase Plan will
terminate after a period of ten years unless terminated earlier as permitted by
the Purchase Plan. Common stock issued under the plan was 34,940. No shares of
Common Stock were issued under the Purchase Plan in 2006 and 2005 respectively.

Note 12. Subsequent Events

On January 5, 2007, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with Dynabazaar and LQ Merger Corp., a Delaware
corporation and a wholly-owned subsidiary of Dynabazaar ("LMC"), which Merger
Agreement was amended and restated on February 26, 2007 (the "Amended and
Restated Merger Agreement"). The Amended and Restated Merger Agreement provides
that, upon the terms and subject to the conditions set forth in the Amended and
Restated Merger Agreement, LMC will merge with and into the Company, with the
Company continuing as the surviving corporation and our wholly-owned subsidiary.

Under the terms of the Amended and Restated Merger Agreement, the Company's
stockholders will receive 3.68 shares of Dynabazaar common stock for each share
of the Company's common stock they hold. Upon completion of the merger, the
Company's stockholders will hold approximately 34% of the combined company and
our stockholders will hold approximately 66% of the combined company on a
fully-diluted basis. It is anticipated that the combined company's shares will
continue to trade on the Over-The-Counter Bulletin Board.

Both the Company's and Dynabazaar's Board of Directors approved the Amended and
Restated Merger Agreement in accordance with the recommendation of the special
committees of independent directors formed by the Board of Directors of each
company to evaluate the transaction.

F-27

L Q CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

L Q CORPORATION, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

The following is a summary of valuation and qualifying accounts for the periods
shown: ( $ in thousands )

Balance at Balance
Beginning Charged to at End of
Description of Period Operations Deductions Period
----------- --------- ---------- ---------- ------

Year ended December 31, 2004:
Allowance for doubtful accounts $ -- $ -- $-- $ --
Deferred tax asset valuation allowance 8,543 158 -- 8,701
Year ended December 31, 2005:
Allowance for doubtful accounts -- -- -- --
Deferred tax asset valuation allowance 8,701 125 -- 8,826
Year ended December 31, 2006
Allowance for doubtful accounts -- 35 -- 35
Deferred tax asset valuation allowance $8,826 $ 864 $-- $9,690

F-28

EXHIBIT INDEX

2.1 Asset Purchase Agreement between Sielox, LLC and Checkpoint Systems, Inc.
dated as of November 4, 2005(1)

2.2 Asset Purchase Agreement between S.E.S. Resources, Ltd. and SES Resources
International, Inc. dated as of December 30, 2005(1)

2.3 First Amendment to the Asset Purchase Agreement between Sielox, LLC and
Checkpoint Systems, Inc. dated as of December 30, 2005(1)

2.4 Agreement and Plan of Merger with Dynabazaar, Inc. and LQ Merger Corp.
dated as of January 5, 2007(2)

2.5 Letter Agreement dated January 5, 2007(2)

2.6 Amended and Restated Agreement and Plan of Merger with Dynabazaar, Inc.
and LQ Merger Corp. dated as of February 26, 2007(3)

2.7 Letter Agreement dated February 26, 2007(3)

3.1 Certificate of Incorporation as currently in effect(4)

3.2 Bylaws as currently in effect(5)

4.2 Form of Specimen Stock Certificate(6)

4.3 Second Amended and Restated Investor Rights Agreement dated July 31,
1998(6)

10.1 Form of Indemnification Agreement entered into between the registrant and
each of its directors and executive officers(6)

10.2 1996 Equity Incentive Plan(6)+

10.3 1999 Employee Stock Purchase Plan(6)+

10.4 Summary Plan Description of 401(K) Plan(6)+

10.5 2000 Nonstatutory Stock Option Plan(5)+

10.6 Settlement Agreement with BeMusic, Inc. dated as of January 17, 2003(7)

10.7 Settlement Agreement and Mutual Release with BeMusic, Inc. dated February
13, 2004(8)

10.8 Administrative Services Agreement with Barington Capital Group, L.P. dated
as of November 18, 2004(9)

10.9 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of January 1, 2005(9)

10.10 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of May 10, 2006(10)

10.11 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of July 12, 2006*

21.1 Subsidiaries of L Q Corporation, Inc.*

23.1 Consent of Rothstein Kass & Company, PC*

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*

* Filed herewith.

+ Management contracts and compensation plans and arrangements.

----------
(1) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on January 10, 2006.