** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM10-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, 2007** |
|                                                 |       |                                                                                          |
| **o**                                                | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                   to                   **

** **

**Commission File No**.**000-31332**

 

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** **

**LIQUIDMETAL TECHNOLOGIES, INC.****(**Exact name of Registrant as specified in its charter**)**

 

| **Delaware**                                                     | ** ** | **33-0264467**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |

** **

**30452 EsperanzaRancho Santa Margarita, CA 92688** (address of principal executiveoffice, zip code)

 

Registrant’stelephone number, including area code: **(949) 635-2100**

** **

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

** **

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

 
| **Title of each Class**         |
|---------------------------------|
| Common  Stock, $0.001 par value |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.Yes  o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.Yes  o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for at least the past 90 days. Yes  x   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K  o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o                        |   | Smaller reporting company x |
|----------------------------|--------|---------------------|--------|------------------------------------------------|--------|-----------------------------|
|                       |   |                |   | (Do not check if a  smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o  No x

 

Theaggregate market value of the registrant’s Common Stock held by non-affiliatesof the registrant as of June 30, 2007 was approximately $30,991,876. Forpurposes of this calculation only, (i) shares of Common Stock are deemedto have a market value of $0.85 per share, the closing price of the CommonStock as reported on the OTC Bulletin Board on June 29, 2007, and(ii) each of the executive officers, directors and persons holding morethan 10% of the outstanding Common Stock as of June 30, 2007 is deemed tobe an affiliate.

 

 

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**TABLE OF CONTENTS**

 
| ** **    | ** **                                                                                       | ** ** | **Page** |
|---------------|--------------------------------------------------------------------------------------------------|------------|----------|
| PART I        |                                                                                             |       |     |
| Item 1   | Business                                                                                         |       | 3        |
| Item 1A.      | Risk Factors                                                                                     |       | 13       |
| Item 1B.      | Unresolved  Staff Comments                                                                       |       | 23       |
| Item 2.  | Properties                                                                                       |       | 23       |
| Item 3.  | Legal  Proceedings                                                                               |       | 24       |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                             |       | 25       |
| PART II       |                                                                                             |       |     |
| Item 5.  | Market For  Registrant’s Common Equity and Related Stockholder Matters                      |       | 26       |
| Item 6.  | Selected  Consolidated Financial Data                                                            |       | 27       |
| Item 7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       | 29       |
| Item 7A. | Quantitative  and Qualitative Disclosures About Market Risks                                     |       | 41       |
| Item 8.  | Financial  Statements and Supplementary Data                                                     |       | 41       |
| Item 9.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            |       | 41       |
| Item 9A.      | Controls and  Procedures                                                                         |       | 41       |
| Item 9B.      | Other Information                                                                                |       | 44       |
| PART III      |                                                                                             |       |     |
| Item 10. | Directors  and Executive Officers of the Registrant                                              |       | 45       |
| Item 11. | Executive  Compensation                                                                          |       | 48       |
| Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |       | 56       |
| Item 13. | Certain  Relationships and Related Transactions                                                  |       | 61       |
| Item 14.      | Principal Accounting Fees and Services                                                           |       | 63       |
| PART IV       |                                                                                             |       |     |
| Item 15. | Exhibits and  Financial Statement Schedules                                                      |       | 63       |

 

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**PART I**

** **

**Forward-Looking Statements**

** **

This annual report on Form 10-K of LiquidmetalTechnologies, Inc. contains “forward-looking statements” that may state ourmanagement’s current expectations, estimates, forecasts, and projections aboutthe company and its business. Any statement in this report that is not astatement of historical fact is a forward-looking statement, and in some cases,words such as “believe,” “estimate,” “project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. Forward-looking statements involve risks anduncertainties that could cause actual outcomes and results to differ materiallyfrom the anticipated outcomes or result. These statements are not guarantees offuture performance, and undue reliance should not be placed on these statements.It is important to note that Liquidmetal Technologies, Inc.’s actual resultscould differ materially from what is expressed in our forward-lookingstatements due to the risk factors described in the section of this reportentitled “Risk Factors” in Item 1A of this report as well as the followingrisks and uncertainties:

 

•      Our history ofoperating losses and uncertainty surrounding our ability to achieve or sustainprofitability;

•      Our limitedhistory of developing, manufacturing, and selling products made from our bulkamorphous alloys;

•      Lengthy customeradoption cycles and unpredictable customer adoption practices;

•      Our ability toidentify, develop, and commercialize new product applications for ourtechnology;

•      Competition fromcurrent suppliers of incumbent materials or producers of competing products;

•      Our ability toidentify, consummate, and/or integrate strategic partnerships;

•      The potentialfor manufacturing problems or delays; and

•      Potentialdifficulties associated with protecting or expanding our intellectual propertyposition.

 

Liquidmetal Technologies, Inc. undertakes noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

**Item 1.Business**

 

In this annual report on Form 10-K, unless thecontext indicates otherwise, references to “the Company”, “LiquidmetalTechnologies”, “our Company”, “we”, “us”, and similar references refer toLiquidmetal Technologies, Inc. and its subsidiaries.

 

**Overview**

 

We are a materialstechnology company that develops and commercializes products made fromamorphous alloys.  Our Liquidmetal® family of alloys consists of a varietyof proprietary coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology. We develop, manufacture, andsell products and components from bulk amorphous alloys to customers in variousindustries, and we also partner with third-party licensees and distributors todevelop and commercialize bulk Liquidmetal alloy products. We believe that ourproprietary bulk alloys are the only commercially viable bulk amorphous alloyscurrently available in the marketplace.  In addition to our bulk alloys,we market and sell a line of proprietary amorphous alloy-based industrialcoatings under the Liquidmetal® ArmacorTM Coatings brand.

 

Amorphous alloys areunique materials that are distinguished by their ability to retain a randomatomic structure when they solidify, in contrast to the crystalline atomicstructure that forms in other metals and alloys when they solidify. Liquidmetalalloys possess a combination of performance, processing, and potential costadvantages that we believe will make them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys such asTi-6Al-4V, but they also have some of the beneficial processing characteristicsmore commonly associated with plastics. We believe these advantages couldresult in Liquidmetal alloys supplanting high-performance alloys, such astitanium and stainless steel, and other incumbent materials in a wide varietyof applications. Moreover, we believe these advantages could enable theintroduction of entirely new products and applications that are not possible orcommercially viable with other materials.

 

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**General CorporateInformation**

 

**We were originally incorporated in California in 1987,and we reincorporated in Delaware in May 2003.  Our principal executiveoffices are located at 30452 Esperanza, Rancho Santa Margarita, California92688. Our telephone number at that address is (949) 635-2100. Previously, ourprincipal executive offices were located in Lake Forest, California. In May2007, we relocated all corporate and research and development functions intoour new facility in Rancho Santa Margarita. Our Internet website address iswww.liquidmetal.com and all of our filings with the Securities and ExchangeCommission are available free of charge on our website.**

** **

**Subsidiaries andOther Locations**

** **

We currently own and operate a manufacturingfacility in Pyongtaek, South Korea, which became operational in the thirdquarter of 2002.  This Korean subsidiary handles our Bulk Liquidmetalalloy business which includes market opportunities to manufacture and sellcomponents made out our bulk alloys.  We operate a distribution warehousedivision in Huntsville, Texas to handle our Liquidmetal alloy industrialcoatings which are used primarily as protective coatings for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used by coal burning power plants.  Lastly, we acquired acoatings application business based in Dothan, Alabama in the second quarter of2007 which is used to support our industrial coatings business.

 

**Segments**

** **

In April2002, we began classifying operations into two reportable segments: Liquidmetalalloy industrial coatings and bulk Liquidmetal alloys. The Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used by coal burning power plants. Bulk Liquidmetal alloysinclude market opportunities to manufacture and sell components made out of ourbulk alloys. The expenses incurred by the bulk Liquidmetal alloy segment aremanufacturing, research and development costs, and selling expenses associatedwith identifying and developing market opportunities. Bulk Liquidmetal alloyproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment. Revenue and expensesassociated with research and development services are included in the bulkLiquidmetal alloy segment.

 

ResultsofsegmentoperationsandassetsareincludedinNote 16totheConsolidatedFinancialStatements containedin this Form 10-K.

** **

**Our Technology**

 

The performance, processing, and potentialcost advantages of Liquidmetal alloys are a function of their unique atomicstructure and their proprietary material composition.

 

***UniqueAtomic Structure***

*** ***

The atomic structure ofLiquidmetal alloys is the fundamental feature that differentiates them fromother alloys and metals. In the molten state, the atomic particles of allalloys and metals have an amorphous atomic structure, which means that the atomic particles appear in a completelyrandom structure with no discernible patterns. However, when non-amorphousalloys and metals are cooled to a solid state, their atoms bond together in arepeating pattern of regular and predictable shapes, or crystalline grains.This process is analogous to the way ice forms when water freezes andcrystallizes. In non-amorphous metals and alloys, the individual crystallinegrains contain naturally occurring structural defects that limit the potential strengthand performance characteristics of the material. These defects, known asdislocations, consist of discontinuities or inconsistencies in the patternedatomic structure of each grain. Unlike other alloys and metals, bulkLiquidmetal alloys can retain their amorphous atomic structure throughout thesolidification process and therefore do not develop crystalline grains and theassociated dislocations. Consequently, bulk Liquidmetal alloys exhibit superiorstrength and other superior performance characteristics compared to theircrystalline counterparts. Our Liquidmetal alloy coatings, in contrast to ourbulk alloys, have a crystalline atomic structure when initially applied, buttheir atomic structure becomes amorphous as the coatings rub against surfacesunder force, thus improving their performance over time.

 

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Priorto 1993, commercially viable amorphous alloys could be created only in thinforms, such as coatings, films, or ribbons. However, in 1993, researchers atthe California Institute of Technology (Caltech) developed the firstcommercially viable amorphous alloy in a bulk form. Today, bulk Liquidmetalalloys can be formed into objects that are up to one inch thick, and we are notaware of any other commercially available amorphous alloys that can achievethis thickness. We have the exclusive right to commercialize bulk amorphousalloy technology through a license agreement with Caltech and other patentsthat we own.

 

***ProprietaryMaterial Composition***

 

Theconstituent elements and percentage composition of Liquidmetal alloys arecritical to their ability to solidify into an amorphous atomic structure. Wehave several different alloy compositions that have different constituentelements in varying percentages. These compositions are protected by variouspatents that we own or exclusively license from third parties, includingCaltech. The raw materials that we use in Liquidmetal alloys are readilyavailable and can be purchased from multiple suppliers.

 

**Advantages ofLiquidmetal Alloys**

 

Liquidmetal alloys possess a uniquecombination of performance, processing and cost advantages that we believemakes them superior in many ways to other commercially available materials fora variety of existing and potential future product applications.

 

***PerformanceAdvantages***

 

Ourbulk Liquidmetal alloys provide several distinct performance advantages overother materials, and we believe that these advantages make the alloys desirablein applications that require high yield strength, strength-to-weight ratio,elasticity and hardness.

 

Thehigh yield strength of bulk Liquidmetal alloys means that a high amount ofstress must be exerted to create permanent deformation. However, because theyield strength is so high, the yield strength of many of our bulk Liquidmetalalloy compositions is very near their ultimate strength, which is the measureof stress at which total breakage occurs. Therefore, very little additionalstress may be required to break an object made of bulk Liquidmetal alloys oncethe yield strength is exceeded. Although we believe that the yield strength ofmany of our bulk alloys exceeds the ultimate strength of most other commonlyused alloys and metals, our bulk alloys may not be suitable for certain applications,such as pressurized tanks, in which the ability of the material to yieldsignificantly before it breaks is more important than its strength advantage.Additionally, although our bulk alloys show a high resistance to crackinitiation because of their very high strength and hardness, certain of ourbulk alloys are sensitive to crack propagation under certain long-term,cyclical loading conditions. Crack propagation is the tendency of a crack togrow after it forms. We are currently developing new alloy compositions thathave improved material properties to overcome these limitations.

 

***ProcessingAdvantages***

 

Theprocessing of a material generally refers to how a material is shaped, formed,or combined with other materials to create a finished product. Bulk Liquidmetalalloys possess processing characteristics that we believe make them preferableto other materials in a wide variety of applications. In particular, our alloysare amenable to processing options that are similar in many respects to thoseassociated with plastics. For example, we believe that bulk Liquidmetal alloyshave superior net-shape casting capabilities as compared to high-strengthcrystalline metals and alloys.  “Net-shape casting” is a type of castingthat permits the creation of near-to-net shaped products that reduce costlypost-cast processing or machining. Additionally, unlike most metals and alloys,our bulk Liquidmetal alloys are capable of being thermoplastically molded inbulk form. Thermoplastic molding consists of heating a solid piece of materialuntil it is transformed into a moldable state, although at temperatures muchlower than the melting temperature, and then introducing it into a mold to formnear-to-net shaped products.  Accordingly, thermoplastic molding can bebeneficial and economical for net shape fabrication of high-strength products.

 

BulkLiquidmetal alloys also permit the creation of composite materials that cannotbe created with most non-amorphous metals and alloys. A composite is a materialthat is made from two or more different types of materials. In general, theability to create composites is beneficial because constituent materials can becombined with one another to optimize the composite’s performancecharacteristics for different applications. In other metals and alloys, thehigh temperatures required for processing could damage some of the composite’sconstituent materials and therefore limit their utility. However, therelatively low melting temperatures of bulk Liquidmetal alloys allow mildprocessing 

 

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conditionsthat eliminate or limit damage to the constituent materials when creatingcomposites. In addition to composites, we believe that the processingadvantages of Liquidmetal alloys will ultimately allow for a variety of otherfinished forms, including sheets and extrusions.

 

Notwithstandingthe foregoing advantages, our bulk Liquidmetal alloys possess certainlimitations relative to processing. The beneficial processing features of ourbulk alloys are made possible in part by the alloys’ relatively low meltingtemperatures. Although a lower melting temperature is a beneficialcharacteristic for processing purposes, it renders certain bulk alloycompositions unsuitable for certain high-temperature applications, such as jetengine exhaust components. Additionally, the current one-inch thicknesslimitation of our zirconium-titanium bulk alloy renders our alloys currentlyunsuitable for use as structural materials in large-scale applications, such asload-bearing beams in building construction. We are currently engaged inresearch and development with the goal of developing processing technology andnew alloy compositions that will enable our bulk alloys to be formed intothicker objects.

 

***CostAdvantages***

 

Liquidmetalalloys have the potential to provide cost advantages over other high-strengthmetals and alloys in certain applications. Because bulk Liquidmetal alloy hasprocessing characteristics similar in some respects to plastics, which lendsitself to near-to-net shape casting and molding, Liquidmetal alloys can in manycases be shaped efficiently into intricate, engineered products. Thiscapability can eliminate or reduce certain post-casting steps, such asmachining and re-forming, and therefore has the potential to significantlyreduce processing costs associated with making parts in high volume.

 

Additionally,because the near-to-net shape processing of Liquidmetal alloys reduces the needfor capital-intensive heavy industrial equipment such as that found in foundryand forging operations, Liquidmetal alloys can be processed with a smallermachinery footprint, which allows for more efficient development of facilitiesand reduced permitting and regulatory costs. We believe that these advantages mayallow our customers an opportunity to maintain or improve the performance oftheir products without a commensurate increase in cost.

 

**Our Strategy**

** **

As a result of the experience and knowledgethat we have gained through our activities to date, and recognizing thatdeveloping and commercializing a revolutionary new technology is anevolutionary process, we are continually modifying our business strategy toenable us to better capitalize on our evolving core strengths and moreeffectively pursue revenue growth and profitability. The key elements of ourstrategy include:

 

•*              Identifying andDeveloping New Applications for Our Liquidmetal Alloy Technology.* We intendto continue to identify and develop new applications that will benefit from theperformance, processing, and cost advantages of Liquidmetal alloys.

 

•*              Focusing OurMarketing and Internal Manufacturing Activities on Select Products withExpected Higher Gross-Margins.*We intend to focus our marketing andinternal manufacturing activities on select products with anticipated highergross margins.  This strategy is designed to align our product developmentinitiatives with our manufacturing processes and manufacturing cost structure,and to reduce our exposure to more commodity-type product applications that areprone to unpredictable demand and fluctuating pricing.  Our focus isprimarily on higher-margin products that possess design features that takeoptimal advantage of our existing and developing manufacturing technology andthat command a price commensurate with the performance advantages of ouralloys.  In addition to our focus on products with higher gross margins,we will continue to engage in prototype manufacturing, both for internallymanufactured products and for products that will ultimately be licensed to ormanufactured by third parties.

 

•*              Further DevelopingOur Manufacturing Processes, Capabilities, and Efficiencies for BulkLiquidmetal Alloys.* We intend toimprove and enhance our internal manufacturing processes, capabilities, andefficiencies in order to maintain quality control over products made from bulkLiquidmetal alloys, to focus on improvements to the processing of our alloys,and to protect our intellectual property. As our alloys become more pervasive,however, we expect to enter into additional strategic relationships that wouldinvolve the licensing of Liquidmetal technology to third parties for certainmarket segments.

 

•              *Pursuing Strategic Partnerships In Order to MoreRapidly Develop and Commercialize Products*. We intend to actively pursue and support strategic partnerships thatwill enable us to leverage the resources, strength, and technologies of othercompanies in order to more rapidly develop and commercialize products. These partnerships may include licensing transactions in which we license fullcommercial rights to our technology in

 

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aspecific application area, or they may include transactions of a more limitedscope in which, for example, we outsource manufacturing activities or grantdistribution rights.  We believe that utilizing such a partnering strategywill enable us to reduce our working capital burden, better fund productdevelopment efforts, better understand customer adoption practices, leveragethe technical and financial resources of our partners, and more effectivelyhandle product design and process challenges.  As this partnering strategyevolves, a growing portion of our revenue mix may be comprised of revenue fromthe provision of product development services, technical support, andengineering services, as well as revenues from royalties on the sale ofLiquidmetal alloy products by our partners.

 

•              *Advancing the Liquidmetal® Brand*. We believe that building our corporate brandwill foster continued adoption of our technology. Our goal is to positionLiquidmetal alloys as a superior substitute for materials currently used in avariety of products across a range of industries. Furthermore, we seek toestablish Liquidmetal alloys as an enabling technology that will facilitate thecreation of a broad range of commercially viable new products. To enhanceindustry awareness of our company and increase demand for Liquidmetal alloys,we are reviewing various brand development strategies that could includecollaborative advertising and promotional campaigns with select customers,industry conference and trade show appearances, public relations, and othermeans.

 

**Applications forLiquidmetal Alloys**

** **

We have focused our commercialization efforts forLiquidmetal alloys on five identified product areas.  We believe thatthese areas are consistent with our strategy in terms of market size, buildingbrand recognition, and providing an opportunity to develop and refine ourprocessing capabilities. Although we believe that strategic partneringtransactions could create valuable opportunities beyond the parameters of thesetarget markets, we anticipate continuing to pursue these markets bothinternally and in conjunction with partners.

 

***Components for Electronic Products***

*** ***

We produce components for electronic devices using our bulkLiquidmetal alloys and believe that our alloys offer enhanced performance anddesign benefits for these components in certain applications.  BulkLiquidmetal alloys can be used for various structural components of a cellularphone, including the shield, faceplate, hinge, hinge housings, back plate, sideplates, brackets, and the cover on the phones. We initially targeted theelectronic casings market because of its potential for high product volumes andbranding opportunities; however, unpredictable customer adoption practices,short product model lives, processing limitations, and intense pricingpressures make it very challenging to compete in this high-volume market. Accordingly, we are currently limiting our focus in this market tohigher-margin applications that have the potential to benefit from the uniqueperformance characteristics of bulk Liquidmetal alloys.  We continue tobelieve that the high strength-to-weight ratio and elastic limit of bulk Liquidmetalalloys enable the production of stronger and thinner electronic devices ascompared to plastic, zinc, and magnesium, and we intend to focus on productsthat require these design and performance benefits.

 

***Sporting Goods and Leisure Products***

*** ***

Weare developing a variety of applications for Liquidmetal alloys in the sportinggoods and leisure products area.

 

In the sporting goodsindustry, we believe that the high strength, hardness, and elasticity of ourbulk alloys have the potential to enhance performance in a variety of products,and we further believe that many sporting goods products are conducive to ourinternal manufacturing strategy of focusing on high-margin products that meetour design criteria.  Substantial opportunities also exist for ouramorphous alloy coatings, powders and composites. In 2003, Rawlings SportingGoods Company launched a new line of baseball and softball bats that utilize aLiquidmetal alloy coating, and HEAD NV Sport launched a new line of HEAD®Liquidmetal® tennis racquets that incorporates Liquidmetal alloy in compositeform in their racquet design. In 2005, we have also launched goods that utilizeLiquidmetal alloy including skis.  Other potential applications for ouralloys in this industry include golf clubs, eyewear, fishing, hunting, andother sport products.

 

In the leisure productscategory, we believe that bulk Liquidmetal alloys can be used to efficientlyproduce intricately engineered designs with high-quality finishes, such aspremium watchcases, and we further believe that Liquidmetal alloy technologycan be used to make high-quality, high-strength jewelry from preciousmetals.  We have successfully produced prototype rings made from anamorphous Liquidmetal platinum alloy that is harder (and hence more scratchresistant) than conventional platinum jewelry.

 

In order to acceleratethe commercialization of Liquidmetal alloys in the jewelry and high-end luxuryproducts market, in June 2003, we entered into an exclusive, ten-year licenseagreement with LLPG, Inc. (“LLPG”).  Under the terms of the agreement,LLPG has the right to commercialize Liquidmetal alloys, particularlyprecious-metal based compositions, in jewelry and high-end luxury productmarkets.

 

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***Medical Devices***

*** ***

We are engaged inproduct development efforts relating to various medical devices that could bemade from Liquidmetal alloys. We believe that the unique properties of bulkLiquidmetal alloys provide a combination of performance and cost benefits thatcould make them a desirable replacement to incumbent materials, such asstainless steel and titanium, currently used in various medical deviceapplications.  Our ongoing emphasis in 2006 and 2007 has been on surgicalinstrument applications for Liquidmetal alloys. These include, but are notlimited to, specialized blades, orthopedic instruments utilized for implantsurgery procedures, dental devices, and general surgery devices. The potentialvalue offered by our alloys is high performance in some cases and costreduction in others, the latter stemming from the ability of Liquidmetal alloysto be net shape cast into components, thus reducing costs of secondaryprocessing. The status of most components in the prototyping phase is subjectto non-disclosure agreements with our customers.

 

We believe that ourfuture success in the medical device market will be driven largely bystrategically aligning ourselves with well-established companies that areuniquely positioned to facilitate the introduction of Liquidmetal alloys intothis market, especially as it relates to the unique processing challenges andstringent material qualification requirements that are prevalent in thisindustry.  We also believe that our prospects for success in this market willbe enhanced through our focus on optimizing existing alloy compositions anddeveloping new alloy compositions to satisfy the industry’s rigorous materialqualification standards.

 

***Industrial Coatings and Powders***

*** ***

We continue to marketand sell amorphous alloy industrial coatings and powders under the Liquidmetal®ArmacorTM Coatings brand name. Liquidmetal alloy coatings are usedprimarily as a protective coating for industrial machinery and equipment. Sincethe inception of this business in the late 1980s, our proprietary coatings havedemonstrated a high degree of hardness and low coefficient of friction which,when combined with their strong adhesion properties, reduce the wear andconsequent failure of the machinery and equipment on which they are used. In contrastto our bulk alloys, we sell Liquidmetal coatings primarily in the form of awire or powder feedstock that is melted and applied to machinery or equipmentthrough welding or thermal spray processes.

 

Our Liquidmetalcoatings are widely used in the oil drilling industry as a protective coatingon drill pipe and casings, and we estimate that our coatings represent adominant share of annual worldwide sales of hard band coatings for new oildrill pipe. Drilling often places tremendous stress on pipes and casings,especially whenever the drill changes direction. Both the drill pipe and casingexperience excessive wear, which leads to higher replacement costs and greaterfailure rates. Liquidmetal coatings are used to provide a protective coating,or hard band, around the outside of the drill pipe and the inside of casings toreduce wear and failure rates and accordingly reduce operating costs.

 

Liquidmetal coatingshave also been sold into the power generation industry specifically for thepurpose of coating boiler tubes in coal-burning power plants in order to extendthe lives of these boilers. Boiler tubes are subject to high heat, erosion, andcorrosion and often require costly replacement, both in terms of replacementparts and length of downtime for installation. Additionally, residue build-upin boiler tubes of coal burning power plants creates operating inefficiencies.Historic performance and testing of Liquidmetal coatings have demonstrated thatour coatings extend the life of these boiler tubes meaningfully beyond theircurrent average life depending on the specific environment. In addition, ourcoatings have demonstrated the ability to reduce build-up of residue on boilertubes, helping to improve the efficiencies of the boilers. Historically, we havenot concentrated sales efforts on the boiler tube market in a substantial way.However, given the size of the market and potential opportunities for ourcoatings, we have recently dedicated greater effort to this area.

 

***Defense Applications***

 

We are working with theU.S. Department of Defense, as well as a variety of defense-related researchand development agencies and large defense contractors, to develop variousdefense-related applications for Liquidmetal alloys. For example, we arecurrently developing prototype kinetic energy penetrator rods for use inarmor-piercing ammunition systems. Kinetic energy penetrators, or KEPs, arearmor piercing munitions that are currently made primarily from depleteduranium (DU) or tungsten heavy alloys (WHA). From inception of our KEP researchprogram in 2002 through 2007, the KEP program as expended approximately $12.4million to replicate the terminal ballistic performance on depleted uranium inmedium caliber ammunition. Latest ballistic tests under the Liquidmetal KEPprogram have demonstrated that tungsten KEPs perform significantly bettercompared to currently used WHA.

 

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We also continueto work with a number of defense-related research and development agencies andlarge defense companies to identify additional military applications that may benefit from using Liquidmetalalloys. We believe that our alloys can present opportunities that we cancapitalize on the trend toward lighter but stronger weapon systems in the U.S.military, and our strategy is to align ourselves with the largest and mostsignificant players in this industry.  Product development programs fordefense applications are currently underway with several leading defensecontractors, including Alliant Techsystems, General Dynamics, and Lockheed Martin Missiles and Fire Control.

 

**Going Concern/Liquidity**

** **

We have experiencedsignificant operating losses since our inception. Our net loss for the fiscalyears ended December 31, 2007, 2006, and 2005 was $5.6 million, $14.5 million, and$7.1 million, respectively.  In the audit report on our financialstatements for our fiscal years ended December 31, 2007 and 2006, our auditorsincluded a going-concern qualification indicating that our significant operatinglosses and working capital deficit cause substantial doubt about our ability tocontinue as a going concern. By issuing an opinion stating that there issubstantial doubt about our ability to continue as a going concern, ourauditors have indicated that they are uncertain as to whether we have thecapability to continue our operations without additional funding.  On February 22, 2008, we received $1.7million distribution from our majority owned subsidiary, Liquidmetal Coatings,LLC (“LMC”) from which it issued and sold $2.5 million in preferred membershipunits to two existing holders of LMC common membership units. The preferred units issued by LMC have an accruing priority return of 14%per year and are redeemable by the preferred holders on the fourthanniversary of the issue date.

 

We anticipate that the$1.7 million distribution received will be sufficient to pursue ourcurrent operating plan only through the second quarter of 2008, and we willtherefore require additional funding at or prior to that time.  We are actively seeking additional sourcesof capital and seeking to restructure and/or modify existingindebtedness.  The amount of funding that we seek and the timing of suchfundraising efforts will depend on the extent to which we are able to increaserevenues through obtaining additional purchase orders for our products and/orthe extent to which we can restructure or modify our debt.  Because wecannot be certain that we will be able to obtain adequate funding from debt,equity, or other traditional financing sources, we are also actively exploringseveral strategic financing options, including the possible sale of ourmanufacturing plant in South Korea (which would then be replaced with a smallerfacility) and additional licensing and outsourcing of our manufacturingoperations.

 

We cannot guaranteethat adequate funds will be available when needed, and if we do not receivesufficient capital, we may be required to alter or reduce the scope of ouroperations.

 

Additionally, we haveapproximately $3.0 million of principal and accrued interest outstanding as ofDecember 31, 2007, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  Subsequent to December 31, 2007 and as of thefiling of this report, we repaid $1.9 million of principal and accrued interestdue under the Bridge Notes and have approximately $1.1 million of principal andaccrued interest outstanding.  We intend tofully repay the amounts due under the Bridge Notes.  However, as of thefiling of this report we do not have sufficient funds to repay the BridgeNotes.  As a result, we are currently in default under the BridgeNotes.   Such a default may have material adverse effect on ouroperations, financial condition, and results of operations. We have notreceived a formal notice of default and we are currently working to resolvethis matter with the investors holding our Bridge Notes.

 

We were required under our amendedSecurity Purchase Agreement, dated April 23, 2007, between our company andholders of our 8% convertible subordinated notes due January 2010 (the “January2010 Notes”), to repay outstanding debt under previously issued promissorynotes, including the Bridge Notes (“Debt Satisfaction Covenant”) by October 1,2007.  As we have not yet fully repaid our Bridge Notes, we are not incompliance with this covenant and are subject to default under the January 2010Notes.  Such a default may have material adverse effect on our operations,financial condition, and results of operations. We have not received a formalnotice of default under this covenant and we are currently working to resolvethis matter.

 

**Liquidmetal Golf**

 

From 1997 untilSeptember 2001, we were engaged in the retail marketing and sale of golf clubsthrough a majority owned subsidiary, Liquidmetal Golf. The retail business ofLiquidmetal Golf was discontinued in September 2001. Although the retail golfclub business has been discontinued, Liquidmetal Golf is engaged in thedevelopment of golf club components for golf original equipment manufacturersthat will integrate these components into their own clubs and then sell themunder their respective brand names. Liquidmetal Technologies owns 79% of theoutstanding common stock in Liquidmetal Golf.

 

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Our Liquidmetal Golfsubsidiary has the exclusive right and license to utilize our Liquidmetal alloytechnology for purposes of golf equipment applications. This right and licenseis set forth in an intercompany license agreement between LiquidmetalTechnologies and Liquidmetal Golf. This license agreement provides thatLiquidmetal Golf has a perpetual and exclusive license to use Liquidmetal alloytechnology for the purpose of manufacturing, marketing, and selling golf clubcomponents and other products used in the sport of golf. In consideration ofthis license, Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golfcommon stock to Liquidmetal Technologies.

 

**Our IntellectualProperty**

 

Our intellectualproperty consists of patents, trade secrets, know-how, and trademarks.Protection of our intellectual property is a strategic priority for ourbusiness, and we intend to vigorously protect our patents and otherintellectual property. Our intellectual property portfolio includes 36 owned orlicensed U.S. patents and numerous patent applications relating to thecomposition, processing, and application of our alloys, as well as variousforeign counterpart patents and patent applications.

 

Our initial bulkamorphous alloy technology was developed by researchers at the CaliforniaInstitute of Technology (“Caltech”). We have purchased patent rights thatprovide us with the exclusive right to commercialize the amorphous alloy andother amorphous alloy technology acquired from Caltech through a licenseagreement (“Caltech License Agreement”) with Caltech. In addition to thepatents and patent applications that we license from Caltech, we are building aportfolio of our own patents to expand and enhance our technology position.These patents and patent applications primarily relate to various applicationsof our bulk amorphous alloys, the composition of our coatings and powders, andthe processing of our alloys. The patents relating to our coatings expire onvarious dates between 2006 and 2022, and the patents relating to our bulkamorphous alloys expire on various dates between 2013 and 2025. Our policy isto seek patent protection for all technology, inventions, and improvements thatare of commercial importance to the development of our business, except to theextent that we believe it is advisable to maintain such technology or inventionas a trade secret.

 

In order to protect theconfidentiality of our technology, including trade secrets, know-how, and otherproprietary technical and business information, we require that all of ouremployees, consultants, advisors and collaborators enter into confidentialityagreements that prohibit the use or disclosure of information that is deemedconfidential. The agreements also obligate our employees, consultants, advisorsand collaborators to assign to us developments, discoveries and inventions madeby such persons in connection with their work with us.

 

**Research and Development**

 

We areengaged in ongoing research and development programs that are driven by thefollowing key objectives:

** **

•*             **Enhance Material Processing andManufacturing Efficiencies.*We plan to continue research and development of processes and compositions thatwill decrease our cost of making products from Liquidmetal alloys.

 

•*             **Optimize Existing Alloys andDevelop New Compositions.*Webelieve that the primary technology driver of our business will continue to beour proprietary alloy compositions. We plan to continue research anddevelopment on new alloy compositions to generate a broader class of amorphousalloys with a wider range of specialized performance characteristics. During2003 and continuing into 2007, we have successfully expanded our portfolio ofbulk amorphous alloys to include additional zirconium-titanium alloys, as wellas alloys based on other metals, such as iron, gold, and platinum. Although these various compositions are at different stages of development andonly a few are currently suitable for commercial use, we believe that a largeralloy portfolio will enable us to increase the attractiveness of our alloys asan alternative to incumbent materials and, in certain cases, drive down productcosts.  We also believe that our ability to optimize our existing alloycompositions will enable us to better tailor our alloys to our customers’specific application requirements.

 

•*             **Develop New Applications.* Wewill continue research and development of new applications for Liquidmetalalloys. We believe the range of potential applications will broaden byexpanding the forms, compositions, and methods of processing of our alloys.

 

We conduct our researchand development programs internally and also through strategic relationshipsthat we enter into with third parties. Our internal research and developmentefforts are conducted by a team of 14 scientists and engineers whom we eitheremploy directly or engage as consultants.  Included among this team areProfessor William Johnson, who discovered our initial bulk amorphous alloy atCaltech in 1993.  Professor Johnson was an employee of our company fromOctober 2001 through December 2003 and then became a consultant to ourcompany.  Professor Johnson continues to be a member of our board ofdirectors.

 

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In addition to ourinternal research and development efforts, we enter into cooperative researchand development relationships with leading academic institutions.  We haveentered into development relationships with other companies for the purpose ofidentifying new applications for our alloys and establishing customerrelationships with such companies. Some of our product development programs arepartially funded by our customers. We are also engaged in negotiations withother potential customers regarding possible product development relationships.Our research and development expenses for the years ended December 31, 2007,2006, and 2005, were $1.1 million, $1.0 million, and $1.1 million,respectively.

 

**Manufacturing**

 

Wecurrently own and operate a 166,000 square foot manufacturing facility inPyongtaek, South Korea, which became operational in the third quarter of2002.  We opened a 14,400 square foot facility in Weihai, China in August2004 to facilitate our bulk alloy manufacturing business.  Effective June1, 2007, we discontinued our operation in Weihai and transferred ourmanufacturing staff and equipment in Weihai to Grace Metal, a South Koreancorporation, as result of a strategy to shift the cost and burden of ourmanufacturing operations to a third party.  We believe that thesefacilities will meet our anticipated manufacturing needs for the foreseeablefuture, although these needs may change depending upon the actual andforecasted orders we receive for our products. We currently intend to developsupplemental research and development, prototyping and manufacturingcapabilities elsewhere, including the United States, for purposes of meetingour long-term manufacturing needs and our customers’ requirements.

 

InJune 2006, we entered into a joint venture agreement with SAGA, SpA in Padova,Italy, (‘SAGA”) a specialist precision parts manufacturer. The joint venture isnamed Liquidmetal SAGA Italy, Srl (“LSI”), under which LSI is currently actingas a contract manufacturer to our company for the purpose of producingprototypes and certain products in Europe.  In June 2007, we entered intoa licensing agreement with Grace Metal a 10-year exclusive license tomanufacture Liquidmetal alloys for customers whose principal headquarters ormajor operations are based in South Korea.

 

**Raw Materials**

 

Liquidmetalalloy compositions are comprised of many elements, all of which are availablecommodity products. We believe that each of these raw materials is readilyavailable in sufficient quantities from multiple sources on commerciallyacceptable terms. However, any substantial increase in the price orinterruption in the supply of these materials could have an adverse effect onour profitability.

 

**Customers**

 

During2007, two customers, Grant Prideco and Grace Metal, accounted for 10% or more ofour revenue from continuing operations.  During 2006, one customer,Flextronics Manufacturing LTD, who is a direct supplier to SanDisk, accountedfor 10% or more of our revenue from continuing operations. During 2005,one customer, Samsung, accounted for 10% or more of our revenue from continuingoperations.  We expect that a significant portion of our revenue maycontinue to be concentrated in a limited number of customers, even as our bulkLiquidmetal alloy business grows.

 

**Competition**

 

We are not aware of anyother company or business that manufactures, markets, distributes, or sellsbulk amorphous alloys or products made from bulk amorphous alloys. We believeit would be difficult to develop a competitive bulk amorphous alloy withoutinfringing our patents. However, our bulk Liquidmetal alloys face competitionfrom other materials, including metals, alloys, plastics and composites, whichare currently used in the commercial applications that we pursue. For example,we face significant competition from plastics and zinc in our electronicscomponents business, and titanium and composites will continue to be usedwidely in medical devices and sporting goods. Based on our experience withdeveloping products for a variety of customers, we believe that the selectionof materials by potential customers will continue to be product-specific innature, with the decision for each product being driven primarily by theperformance needs of the application and secondarily by cost considerations anddesign flexibility. Because of the relatively high strength of our alloys andthe design flexibility of our process, we are most competitive when thecustomer is seeking a higher strength as well as greater design flexibilitythan currently available with other materials. However, if currently availablematerials, such as plastics, are strong enough for the application, our alloysare often not competitive those applications with respect to price. We alsobelieve that our alloys are generally not competitive with the cost of some ofthe basic metals, such as steel, aluminum or copper, when such basic metals canbe used in specific applications, but our alloys are generally more competitivewith price on more exotic metals, such as titanium. Our alloys could also facecompetition from new materials that may be developed in the future, includingnew materials that could render our alloys obsolete.

 

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OurLiquidmetal alloy coatings face competition from industrial coatings currentlymanufactured or sold by other companies. At present, the primary competitors ofour coatings business are Varco International, Inc. and Arnco TechnologyTrust, Limited. Although we believe, based on market data gathered by us, thatour coatings compete favorably with these companies’ products and that wecontinue to maintain the dominant market share with respect to protectivecoatings for oil drill pipe and casings, these competitors are largerwell-established businesses that have substantially greater financial,marketing, and other resources than we do.

 

We will also experienceindirect competition from the competitors of our customers. Because we willrely on our customers to market and sell finished goods that incorporate ourcomponents or products, our success will depend in part on the ability ofour customers to effectively market and sell their own products and compete intheir respective markets.

 

**Backlog**

 

In our bulk alloy segment, because of the minimal lead-time associated withorders of bulk alloy parts, we generally do not carry a significant backlog. Inour coatings segment, we typically ship our coating products shortly afterreceipt of an order, and our coatings backlog is therefore also insignificant.In both our bulk alloy segment and coatings segment, the backlog as of anyparticular date gives no indication of actual sales for any succeeding period.

 

**Sales and Marketing**

 

We direct our marketing efforts towards customers that will incorporate ourcomponents and products into their finished goods. To that end, we willcontinue to hire business development personnel who, in conjunction withengineers and scientists, will actively identify potential customers that may beable to benefit from the introduction of Liquidmetal alloys to their products.In some cases, we will develop applications in conjunction with existing orpotential customers. By adopting this strategy, we intend to take advantage ofthe sales and marketing forces and distribution channels of our customers tofacilitate the commercialization of our alloys. We also direct businessdevelopment efforts toward companies who we believe could be viable candidatesfor potential partnering transactions, such as licensing relationships,distribution arrangements, joint ventures, and the like.

 

**Employees**

 

As of December 31, 2007, we had 98 full-time and 78 part-timeemployees. As of that date, 57 of our Korean operation employees wererepresented by a labor union. We have not experienced any work stoppages andwe consider our employee relations to be favorable.

 

**Governmental Regulation**

 

Medical instrumentsincorporating our Liquidmetal alloys will be subject to regulation in theUnited States by the FDA and corresponding state and foreign regulatoryagencies. Any orthopedic devices that we develop will be regulated in a similarmanner. Medical device manufacturers to whom we intend to sell our products may needto obtain FDA approval before marketing their medical devices that incorporateour products. Medical device manufacturers may need to obtain similarapprovals before marketing these medical device products in foreign countries.

 

Because we intend tosell our medical device products to medical device manufacturers, we do notbelieve that we will need to obtain FDA approval or similar foreign approvalsbefore selling products to medical device manufacturers. Nonetheless, as amanufacturer of medical device components, we would be subject to qualitycontrol and record keeping requirements of FDA and other federal and statestatutes and regulations, as well as similar regulations in foreign countries.

 

The process ofobtaining and maintaining required FDA and foreign regulatory approvals formedical devices that incorporate our products could be lengthy, expensive, anduncertain for our customers. Additionally, regulatory agencies can delay orprevent product introductions. Generally, before a medical device manufacturercan market a product incorporating one of our products, our customer mustobtain for their finished product marketing clearance through a 510(k) premarketnotification or approval of a pre-market approval application, or PMA. The FDAwill typically grant a 510(k) clearance if the applicant can establishthat the device is substantially equivalent to a predicate device. It generallytakes a number of months from the date of a 510(k) submission to obtainclearance, but it may take longer, particularly if a clinical trial isrequired.

 

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The FDA may findthat a 510(k) is not appropriate for a medical device that incorporatesour product or that substantial equivalence has not been shown and as a resultwill require a PMA. A PMA application must be submitted if a proposed medicaldevice does not qualify for a 510(k) pre-market clearance procedure. PMAapplications must be supported by valid scientific evidence to demonstrate thesafety and effectiveness of the device, typically including the results ofclinical trials, bench tests, and laboratory and animal studies. The PMAprocess can be expensive, uncertain and lengthy, requires detailed andcomprehensive data, and generally takes significantly longer than the 510(k) process.Additionally, the FDA may never approve the PMA.

 

Similar regulations inforeign countries vary significantly from country to country and with respectto the nature of the particular medical device. The time required to obtainthese foreign approvals to market our products may be longer or shorterthan that required in the United States, and requirements for such approval may differfrom FDA requirements.

 

**Environmental Law Compliance**

 

Our manufacturing operations are subject to national,state, and local environmental laws in each of China, South Korea, and theUnited States. We believe that we are in material compliance with allapplicable environmental regulations. While we continue to incur costs tocomply with environmental regulations, we do not believe that such costs willhave a material effect on our capital expenditures, earnings, or competitiveposition.

 

**Item1A. Risk Factors**

 

This report contains forward-looking statements(within the meaning of the Private Securities Litigation Reform Act of1995) that are based on management’s current expectations, estimates,forecasts, and projections about the Company and its business. In addition,other written or oral statements which constitute forward-looking statements may bemade from time to time by or on behalf of Liquidmetal Technologies, Inc.Any statement in this report that is not a statement of historical fact is aforward-looking statement, and in some cases, words such as “believe,” “estimate,”“project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” andsimilar expressions identify forward-looking statements. Forward-lookingstatements involve risks and uncertainties that could cause actual outcomes andresults to differ materially from the anticipated outcomes or result. Thesestatements are not guarantees of future performance, and undue reliance shouldnot be placed on these statements. Liquidmetal Technologies, Inc.undertakes no obligation to update publicly any forward-looking statements,whether as a result of new information, future events or otherwise.

 

Factors that could cause actual results todiffer materially from what is expressed or forecasted in our forward-lookingstatements include, but are not limited to, the following:

 

**We have incurredsignificant operating losses in the past and may not be able to achieve orsustain profitability in the future.**

 

We have experienced significant operatinglosses since our inception. Our net loss for the fiscal years ended December 31,2007, 2006, and 2005, was $5.6 million, $14.5 million, and $7.1 million,respectively. We had an accumulated deficit of approximately $154.7 million at December 31,2007. Of this accumulated deficit, $44.5 million was attributable to lossesgenerated by our discontinued equipment manufacturing and retail golfoperations. We anticipate that we may continue to incur operating lossesfor the foreseeable future. Consequently, it is possible that we may neverachieve positive earnings and, if we do achieve positive earnings, we may notbe able to achieve them on a sustainable basis.

 

**We may requireadditional funding, which may not be available on favorable terms or atall.**

 

Our future capitalrequirements will depend on the amount of cash generated by our operations. Ourprojections of cash flows from operations and, consequently, future cash needsare subject to substantial uncertainty. In addition, in our audit report on ourfinancial statements for our fiscal years ended December 31, 2007 and2006, our auditors included a going-concern qualification indicating that oursignificant operating losses and working capital deficit cause substantialdoubt about our ability to continue as a going concern. By issuing an opinionstating that there is substantial doubt about our ability to continue as agoing concern, our auditors have indicated that they are uncertain as towhether we have the capability to continue our operations without additionalfunding. On February 22,2008, we received $1.7 million distribution from our majority owned subsidiary,Liquidmetal Coatings, LLC (“LMC”) from which it issued and sold $2.5 million inpreferred membership units to two existing holders ofLMC common membership units. The preferred units issued byLMC have an accruing priority return of 14% per year and are redeemable bythe preferred holders on the fourth anniversary of the issue date.

 

Weanticipate that the $1.7 million cash distribution received will be sufficientto pursue our current operating plan only through the second quarter of2008, and we will therefore require additionalfunding at or prior to that time. As a result, we are actively seekingadditional sources of capital. The amount of funding that we seek and thetiming of such

 

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fundraising effortswill depend on the extent to which we are able to increase revenues throughobtaining additional purchase orders for our products and/or the extent towhich we can restructure or modify our debt. Because we cannot be certain thatwe will be able to obtain adequate funding from debt, equity, or othertraditional financing sources, we are also actively exploring several strategicfinancing options, including the possible sale of our manufacturing plant inSouth Korea (which would then be replaced with a smaller facility) and additional licensing and outsourcing of ourmanufacturing operations. We cannot guaranteethat adequate funds will be available when needed, and if we do not receivesufficient capital, we may be required to alter or reduce the scope of ouroperations. If we raise additional funds by issuing equity securities, existingstockholders may be diluted. In addition, if shares of our common stock orsecurities convertible into or exercisable for our common stock are issued inconsideration of such funds at an effective per share price lower than theconversion and exercise prices of our currently outstanding convertible notesand warrants, then anti-dilution provisions in such convertible notes andwarrants would be triggered, thus possibly causing even greater dilution o ourthen-existing stockholders if the notes are converted or the warrants areexercised. See “RISK FACTORS— Our convertible notes and warrants containanti-dilution provisions that, if triggered, could cause substantial dilutionto our then-existing stockholders.”

 

**Wehave a limited history of developing, manufacturing, and selling products madefrom our bulk amorphous alloys.**

 

We have marketed andsold industrial coatings to distributors in the coatings industry since 1987.Prior to the third quarter of 2002, our experience selling products made frombulk amorphous alloys has been limited to our discontinued retail golfbusiness, which had a different marketing strategy than the one we arecurrently employing. Therefore, we have a relatively limited history of producingbulk amorphous alloy components and products on a mass-production basis. Furthermore,our ability to produce our products in desired quantities and at commerciallyreasonable prices is uncertain and is dependent on a variety of factors thatare outside of our control, including the nature and design of the component,the customer’s specifications, and required delivery timelines.

 

**Werely on assumptions about the markets for our products and components that, ifincorrect, may adversely affect our profitability.**

 

We have a relativelyshort history producing bulk amorphous alloy components on a mass-productionbasis. We have made assumptions regarding the market size for, and themanufacturing requirements of, our products and components based in part oninformation we received from third parties and also from our limited history.If these assumptions prove to be incorrect, we may not achieve anticipatedrevenue targets or profitability.

 

**If wecannot establish and maintain relationships with customers that incorporate ourcomponents and products into their finished goods, we will not be able toincrease our revenue and commercialize our products.**

 

Our business is basedupon the commercialization of a new and unique materials technology. Ourability to increase our revenues will depend on our ability to successfullymaintain and establish relationships with customers who are willing toincorporate our proprietary alloys and technology into their finished products.However, we believe that the size of our company and the newness of ourtechnology and manufacturing process may continue to make it challengingto maintain and establish such relationships. In addition, we rely and willcontinue to rely to a large extent on the manufacturing, research, anddevelopment capabilities, as well as the marketing and distributioncapabilities, of our customers in order to commercialize our products. Ourfuture growth and success will depend in large part on our ability toenter into these relationships and the subsequent success of theserelationships. If our products are selected for use in a customer’s products,we still may not realize significant revenue from that customer if thatcustomer’s products are not commercially successful.

 

**It may takesignificant time and cost for us to develop new customer relationships, which may delayour ability to generate additional revenue or achieve profitability.**

 

Our ability to generaterevenue from new customers is generally affected by the amount of time it takesfor us to, among other things:

 

•                  identify a potential customer and introduce the customer to Liquidmetalalloys;

 

•                  work with the customer to select and design the parts to be fabricated fromLiquidmetal alloys;

 

•                  make the molds and tooling to be used to produce the selected part;

 

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•                  make prototypes and samples for customer testing;

 

•                  work with our customers to test and analyze prototypes and samples; and

 

•                  with respect to some types of products, such as medical devices, to obtainregulatory approval.

 

We currently do nothave a sufficient history of selling products made from our bulk amorphousalloys to predict accurately the length of our average sales cycle. We believethat our average sales cycle from the time we deliver an active proposal to acustomer until the time our customer fully integrates our bulk amorphous alloysinto its product could be a significant period of time. Our history to date hasdemonstrated that the sales cycle could extend significantly longer than weanticipate. The time it takes to transition a customer from limited productionto full-scale production runs will depend upon the nature of the processes andproducts into which our alloys are integrated. Moreover, we have found thatcustomers often proceed very cautiously and slowly before incorporating afundamentally new and unique type of material into their products.

 

**Afterwe develop a customer relationship, it may take a significant amount oftime for that customer to develop, manufacture, and sell finished goods thatincorporate our components and products.**

 

Our experience hasshown that our customers will perform numerous tests and extensivelyevaluate our components and products before incorporating them into theirfinished products. The time required for testing, evaluating, and designing ourcomponents and products into a customer’s products, and in some cases,obtaining regulatory approval, can take a significant amount of time, with anadditional period of time before a customer commences volume production ofproducts incorporating our components and products, if ever. Moreover, becauseof this lengthy development cycle, we may experience a delay between thetime we accrue expenses for research and development and sales and marketingefforts and the time when we generate revenue, if any. We may incursubstantial costs in an attempt to transition a customer from initial testingto prototype and from prototype to final product. If we are unable to minimizethese transition costs, or to recover the costs of these transitions from ourcustomers, our operating results will be adversely affected.

 

**Alimited number of our customers generate a significant portion of our revenue.**

 

For the near future, weexpect that a significant portion of our revenue will be concentrated in alimited number of customers. For example, for the year ended December 31,2007, revenues from two customers, Grant Prideco and Grace Metal, representedapproximately 22% of total revenues from continuing operations, for the yearended December 31, 2006, revenues from one customer, FlextronicsManufacturing LTD, represented approximately 13% of total revenues fromcontinuing operations, and for the year ended December 31, 2005, revenuesfrom one customer, Samsung, represented approximately 10% of total revenue fromcontinuing operations. Revenues from direct suppliers to SanDisk wereapproximately 6% and 22% of total revenues for the years ended December 31,2007 and 2006, respectively. Revenues from direct suppliers to Samsung representedapproximately 12%, 15%, and 14% of total revenues from continuing operationsfor the years ended December 31, 2007, 2006, and 2005, respectively. Areduction, delay, or cancellation of orders from one or more of these customersor the loss of one or more customer relationships could significantly reduceour revenue. Unless we establish long-term sales arrangements with thesecustomers, they will have the ability to reduce or discontinue their purchasesof our products on short notice.

 

**Weexpect to rely on our customers to market and sell finished goods thatincorporate our products and components, a process over which we will havelittle control.**

 

Our future revenuegrowth and ultimate profitability will depend in part on the ability ofour customers to successfully market and sell their finished goods thatincorporate our products. We will have little control over our customers’marketing and sales efforts. These marketing and sales efforts may beunsuccessful for various reasons, any of which could hinder our ability toincrease revenue or achieve profitability. For example, our customers may nothave or devote sufficient resources to develop, market, and sell their finishedgoods that incorporate our products. Because we typically will not have exclusivesales arrangements with our customers, they will not be precluded fromexploring and adopting competing technologies. Also, products incorporatingcompeting technologies may be more successful for reasons unrelated to theperformance of our customers’ products or the marketing efforts of ourcustomers.

 

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**Ourgrowth depends on our ability to identify, develop, and commercialize newapplications for our technology.**

 

Our future growth andsuccess will depend in part on our ability to identify, develop, andcommercialize, either alone or in conjunction with our customers, newapplications and uses for Liquidmetal alloys. If we are unable to identify anddevelop new applications, we may be unable to develop new products orgenerate additional revenue. Successful development of new applications for ourproducts may require additional investment, including costs associatedwith research and development and the identification of new customers. Inaddition, difficulties in developing and achieving market acceptance of newproducts would harm our business.

 

**We may notbe able to effectively compete with current suppliers of incumbent materials orproducers of competing products.**

 

The future growth andsuccess of our bulk amorphous alloy business will depend in part on ourability to establish and retain a technological advantage over other materialsfor our targeted applications. For many of our targeted applications, we willcompete with manufacturers of similar products that use different materials.These different materials may include plastics, titanium alloys, orstainless steel, among others. For example, we have targeted the cellular phonecomponent market as an application for bulk Liquidmetal alloys. In this market,we believe we will compete with other manufacturers of cellular phonecomponents who use plastics or metal to construct their components. These othermanufacturers may be able to manufacture their cellular phone components,particularly those made from plastics, at significantly less cost than ouralloys. In other markets, we will compete directly with suppliers of theincumbent material. In addition, in each of our targeted markets, our successwill depend in part on the ability of our customers to competesuccessfully in their respective markets. Thus, even if we are successful inreplacing an incumbent material in a finished product, we will remain subjectto the risk that our customer will not compete successfully in its own market.

 

**Our bulkamorphous alloy technology is still at an early stage of commercializationrelative to many other materials.**

 

Our bulk amorphousalloy technology is a relatively new technology as compared to many othermaterial technologies, such as plastics and widely-used high-performancecrystalline alloys. Historically, the successful commercialization of a newmaterials technology has required the persistent improvement and refining ofthe technology over a sometimes lengthy period of time. Accordingly, we believethat our company’s future success will be dependent on our ability to continueexpanding and improving our technology platform by, among other things,constantly refining and improving our manufacturing processes, optimizing ourexisting amorphous alloy compositions for various applications, and developingand improving new bulk amorphous alloy compositions. Our failure to furtherexpand our technology base could limit our growth opportunities and hamper ourcommercialization efforts.

 

**Futureadvances in materials science could render Liquidmetal alloys obsolete.**

 

Academic institutionsand business enterprises frequently engage in the research and testing of newmaterials, including alloys and plastics. Advances in materials science couldlead to new materials that have a more favorable combination of performance,processing, and cost characteristics than our alloys. The future development ofany such new materials could render our alloys obsolete and unmarketable or may impairour ability to compete effectively.

 

**Ourgrowth depends upon our ability to retain and attract a sufficient number ofqualified employees.**

 

Our business is basedupon the commercialization of a new and unique materials technology. Our futuregrowth and success will depend in part on our ability to retain keymembers of our management and scientific staff, who are familiar with thistechnology and the potential applications and markets for it. For example, as aresult of their experience and knowledge of our alloy technology, we believe thatour future growth and success will depend in large part on the efforts ofLarry Buffington, our President and Chief Executive Officer. We do not have “keyman” or similar insurance on any of these individuals. If we lose theirservices or the services of other key personnel, our financial results orbusiness prospects may be harmed. Additionally, our future growth andsuccess will depend in part on our ability to attract, train, and retainscientific engineering, manufacturing, sales, marketing, and managementpersonnel. We cannot be certain that we will be able to attract and retain thepersonnel necessary to manage our operations effectively. Competition forexperienced executives and scientists from numerous companies and academic andother research institutions may limit our ability to hire or retainpersonnel on acceptable terms. In addition, many of the companies with which wecompete for experienced personnel have greater financial and other resourcesthan we do. Moreover, the employment of non-citizens may be restricted byapplicable immigration laws.

 

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**We may notbe able to successfully identify, consummate, or integrate strategicpartnerships.**

 

As a part of ourbusiness strategy, we intend to pursue strategic partnering transactions thatprovide access to new technologies, products, markets, and manufacturingcapabilities. These transactions could include licensing agreements, jointventures, or even business combinations. We believe that these transactionswill be particularly important to our future growth and success due to the sizeand resources of our company and the newness of our technology. For example, wemay determine that we may need to license our technology to a largermanufacturer in order to penetrate a particular market. In addition, we may pursuetransactions that will give us access to new technologies that are useful inconnection with the composition, processing, or application of Liquidmetalalloys. We may not be able to successfully identify any potentialstrategic partnerships. Even if we do identify one or more potentiallybeneficial strategic partnering, we may not be able to consummate thesetransactions on favorable terms or obtain the benefits we anticipate from sucha transaction.

 

**We may encountermanufacturing problems or delays or may be unable to produce high-qualityproducts at acceptable costs.**

 

We have relativelylimited experience in manufacturing our products and may be required tomanufacture a range of products in high volumes while ensuring high quality andconsistency. Although we currently own and operate a 166,000 square feetmanufacturing facility in South Korea, we cannot guarantee that the facilitywill be able to produce the intended products with production yields, qualitycontrols, and production costs that provide us with acceptable margins orprofitability or satisfy the requirements of our customers.

 

**Weexpect to derive a substantial portion of our revenue from sales outside theUnited States, and problems associated with international business operationscould affect our ability to manufacture and sell our products.**

 

We expect that we willcontinue to manufacture a substantial portion of our initial bulk Liquidmetalalloy products in our South Korean facility and derive a material portion ofour revenues from customers in South Korea and revenues from productsmanufactured by our licensing partner in China. For our fiscal years ended December 31,2007, 2006, and 2005, approximately 27%, 12%, and 31%, of our revenues camefrom customers located in South Korea, respectively. As a result, ourmanufacturing operations and financial results are subject to risks ofpolitical instability, including the risk of conflict between North Korea andSouth Korea and tensions between the United States and North Korea. Inaddition, we anticipate that the trend of foreign customers accounting for asignificant portion of our total revenues may continue. Specifically, weexpect to continue to derive a significant amount of revenue from sales tocustomers located in Asia. A downturn in the economies of Asian countries whereour products will be sold, particularly South Korea’s economy, could materiallyharm our business.

 

Consequently, ouroperations and revenue likely will be subject to a number of risks associatedwith foreign commerce, including:

 

•                  staffing and managing our manufacturing facility located in South Korea;

 

•                  product or material transportation delays or disruption, including theavailability and costs of air and other transportation between our South Koreanfacility and the United States;

 

•                  political and economic instability, including instability involving Chinaand North Korea that may disrupt our operations in South Korea;

 

•                  potentially adverse tax consequences, which may reduce theprofitability of products manufactured overseas or sold to overseas customers;

 

•                  burden of complying with complex foreign laws and treaties, which couldlimit our ability to conduct our business as contemplated in South Korea; and

 

•                  trade protection laws, policies, and measures and other regulatoryrequirements affecting trade and investment that could adversely affect theprofitability of our South Korean Operations, including loss or modification ofexemptions for taxes and tariffs.

 

Moreover, customers may sellfinished goods that incorporate our components and products outside of theUnited States, which exposes us indirectly to additional foreign commerce risks.

 

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**A substantialincrease in the price or interruption in the supply of raw materials for ouralloys could have an adverse effect on our profitability.**

 

Our proprietary alloycompositions are comprised of many elements, all of which are availablecommodity products. Although we believe that each of these raw materials iscurrently readily available in sufficient quantities from multiple sources oncommercially acceptable terms, if the prices of these materials substantiallyincrease or there is an interruption in the supply of these materials, suchincrease or interruption could adversely affect our profitability. For example,if the price of one of the elements included in our alloys substantiallyincreases, we may not be able to pass the price increase on to our customers.

 

**Ourbusiness is subject to the potential adverse consequences of exchange ratefluctuations.**

 

We expect to conductbusiness in various foreign currencies and will be exposed to market risk fromchanges in foreign currency exchange rates and interest rates. Fluctuations inexchange rates between the U.S. dollar and such foreign currencies may havea material adverse effect on our business, results of operations, and financialcondition and could specifically result in foreign exchange gains and losses.The impact of future exchange rate fluctuations on our operations cannot beaccurately predicted. To the extent that the percentage of our non-U.S. dollarrevenue derived from international sales increases in the future, our exposureto risks associated with fluctuations in foreign exchange rates will increasefurther. Moreover, as a result of operating a manufacturing facility in SouthKorea, a substantial portion of our costs are and will continue to bedenominated in the South Korean won. Adverse changes in the exchange rates ofthe South Korean won to the U.S. dollar will affect our costs of goods sold andoperating margins and could result in exchange losses. The average foreignexchange rates for the years ended December 31, 2007, 2006, and 2005 were935, 967, and 1,028 South Korean Won to the U.S. dollar, respectively. Thefluctuations in the exchange rates resulted in foreign currency translationgains of $0.2 million, $0.3 million, and $0.3 million for the years ended December 31,2007, 2006, and 2005, respectively.

 

**Ourinability to protect our licenses, patents, and proprietary rights in theUnited States and foreign countries could harm our business because thirdparties may take advantage of our research and development efforts.**

 

We have an exclusivelicense from the California Institute of Technology, or Caltech, to severalpatents and patent applications relating to amorphous alloy technology, and wehave obtained several of our own patents. Our success depends in part onour ability to obtain and maintain patent and other proprietary rightprotection for our technologies and products in the United States and othercountries. If we are unable to obtain or maintain these protections, we may notbe able to prevent third parties from using our proprietary rights.Specifically, we must:

 

•                  protect and enforce our owned and licensed patents and intellectualproperty;

 

•                  exploit our patented technology (owned and licensed); and

 

•                  operate our business without infringing on the intellectual property rightsof third parties.

 

Our licensed technologycomprises several issued United States patents covering the composition andmethod of manufacturing of the family of Liquidmetal alloys. We also holdseveral United States and corresponding foreign patents covering themanufacturing processes of Liquidmetal alloys and their use. The patentsrelating to our coatings have various expiration dates until 2022, and thoserelating to our bulk amorphous alloys have expiration dates between 2013 and2025. Patents covering the sale of our ArmacoreTM coatings material expiredduring 2005. We continue to hold other coatings related patents; however, if weare unable to protect our proprietary rights prior to the expiration of thesepatents, we may lose the advantage we have established as being the firstto market bulk amorphous alloy products. In addition, the laws of some foreigncountries do not protect proprietary rights to the same extent as the laws ofthe United States, and we may encounter significant problems and costs inprotecting our proprietary rights in these foreign countries.

 

Patent law is stillevolving relative to the scope and enforceability of claims in the fields inwhich we operate. Our patent protection involves complex legal and technicalquestions. Our patents and those patents for which we have license rights may bechallenged, narrowed, invalidated, or circumvented. We may be able toprotect our proprietary rights from infringement by third parties only to theextent that our proprietary technologies are covered by valid and enforceablepatents or are effectively maintained as trade secrets. Furthermore, others may independentlydevelop similar or alternative technologies or design around our patentedtechnologies. Litigation or other proceedings to defend or enforce ourintellectual property rights could require us to spend significant time andmoney and could otherwise adversely affect our business.

 

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**Othercompanies may claim that we infringe their intellectual property rights,which could cause us to incur significant expenses or prevent us from sellingour products.**

 

Our success depends, inpart, on our ability to operate without infringing on valid, enforceablepatents or proprietary rights of third parties and not breaching any licensesthat may relate to our technology and products. Future patents issued tothird parties may contain claims that conflict with our patents and thatcompete with our products and technologies, and third parties could assertinfringement claims against us. Any litigation or interference proceedings,regardless of their outcome, may be costly and may requiresignificant time and attention of our management and technical personnel.Litigation or interference proceedings could also force us to:

 

•                   stop or delay using our technology;

 

•                   stop or delay our customers from selling, manufacturing or using productsthat incorporate the challenged intellectual property;

 

•                   pay damages; or

 

•                   enter into licensing or royalty agreements that may be unavailable onacceptable terms.

 

**Ourlevel of indebtedness reduces our financial flexibility and could impede ourability to operate.**

 

As of December 31,2007, our long-term debt was $20.7 million net of debt discount of $10.5million, including the current portion of such debt. Our long-term debt(including the current portion) includes the following:

 

•                  $0.5 million in principal outstanding under our Korean subsidiary’s loanfrom Kookmin Bank of South Korea;

 

•                  $17.8 million in principal outstanding under the 8% ConvertibleSubordinated Notes due January 2010 (the “January 2010 Notes”) issuedin our January 3, 2007 private placement, as amended; and

 

•                  $2.6 million in principal outstanding under the 8% Unsecured SubordinatedNotes issued in May 2006, September 2006, and December 2006private placements.

 

•                  $3.7 million in principal outstanding under the Bank Midwest term loanissued in July 2007

 

•                  $6.6 million in principal outstanding under the C3 Capital PartnersSubordinated Promissory Notes due July 2012 issued in July 2007

 

As of December 31,2007, our short-term debt was $2.2 million. Our short-term debt included thefollowing:

 

•                  $1.0 million in outstanding advances received under a factoring, loan, andsecurity agreement executed in April 2005, as amended, with a financingcompany.

 

•                  $1.2 million in outstanding advances received under a revolving loan fromBank Midwest issued in July 2007.

 

Under our loan fromKookmin Bank, we are obligated to make equal monthly payments of principal andinterest of $0.1 million each through the period ending in February 2008. Subsequentto December 31, 2007 and as of the filing of this report, we repaid $0.3million of principal and accrued interest due under the Kookmin Note and haveapproximately $0.2 million of principal and accrued interest outstanding. Underour January 2010 Notes we are required to make cash interest payments tothe noteholders of $0.4 million per quarter until such notes are converted orpaid.

 

The $2.7 million inaggregate principal amount under the 8% Unsecured Subordinated Notes became duein August 2007, and $17.8 million in aggregate principal amount under our January 2010Notes will become due beginning July 31, 2008 through January 3,2010.

 

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Our level of debtaffects our operations in several important ways, including the following:

 

•                  a significant portion of our cash flow from operations is likely to bededicated to the payment of the principal of and interest on our indebtedness;

 

•                  we may be unable to refinance our indebtedness on terms acceptable tous or at all;

 

•                  our cash flow may be insufficient to meet our required principal andinterest payments; and

 

•                  we may be unable to obtain additional loans as a result of covenantsand agreements with existing debt holders.

 

In addition, ourconvertible notes and related documents contain restrictive covenants pursuantto which we generally may not incur any indebtedness that would be seniorto, or on the same rank as, the convertible notes with respect to payment orsecurity. These covenants may curtail our ability to raise capital in thefuture or otherwise restrict our ability to enter into a transaction that webelieve would be in the best interest of our stockholders.

 

**We have not fully repaid our 8% unsecuredsubordinated notes due August 17, 2007.**

 

We have approximately$3.0 million of principal and accrued interest outstanding as of December 31,2007, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007. Subsequent to December 31, 2007 and as of the filing of thisreport, we repaid $1.9 million of principal and accrued interest due under theBridge Notes and have approximately $1.1 million of principal and accruedinterest outstanding. We intend to fully repay the amounts due underthe Bridge Notes. However, as of the filing of this report we do not havesufficient funds to repay the Bridge Notes. As a result, we are currentlyin default under the Bridge Notes.  Sucha default may have material adverse effect on our operations, financialcondition, and results of operations. We have not received a formal notice ofdefault and we are currently working to resolve this matter with the investorsholding our Bridge Notes.

 

Additionally, we were required under our amended Security PurchaseAgreement, dated April 23, 2007, between our company and holders of our 8%convertible subordinated notes due January 2010 (the “January 2010Notes”), to repay outstanding debt under previously issued promissory notes,including the Bridge Notes (“Debt Satisfaction Covenant”) by October 1,2007. As we have not yet fully repaid our Bridge Notes, we are not incompliance with this covenant and are subject to default under the January 2010Notes. Such a default may have material adverse effect on our operations,financial condition, and results of operations. We have not received a formalnotice of default under this covenant and we are currently working to resolvethis matter.

 

**Evolvingregulation of corporate governance and public disclosure may result inadditional expenses and continuing uncertainty.**

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations,are creating uncertainty for public companies. As a result of these new rules andthe size and limited resources of our company, we will incur additional costsassociated with our public company reporting requirements, and we may notbe able to comply with some of these new rules. For example, we were not ableto comply with Section 404 of the Sarbanes-Oxley Act of 2002 for our 2005and 2004 fiscal years. In addition, these new rules could make it moredifficult or more costly for us to obtain certain types of insurance, includingdirector and officer liability insurance, and this could make it difficult forus to attract and retain qualified persons to serve on our board of directors.

 

We are presentlyevaluating and monitoring developments with respect to new and proposed rules andcannot predict or estimate the amount of the additional costs we may incuror the timing of such costs. These new or changed laws, regulations, andstandards are subject to varying interpretations, in many cases due to theirlack of specificity, and as a result, their application in practice may evolveover time as new guidance is provided by regulatory and governing bodies. Thiscould result in continuing uncertainty regarding compliance matters and highercosts necessitated by ongoing revisions to disclosure and governance practices.

 

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We are committed tomaintaining high standards of corporate governance and public disclosure. As aresult, we intend to invest resources to comply with evolving laws,regulations, and standards, and this investment may result in increasedgeneral and administrative expenses and a diversion of management time andattention from revenue-generating activities to compliance activities. If ourefforts to comply with new or changed laws, regulations, and standards differfrom the activities intended by regulatory or governing bodies due toambiguities related to practice, regulatory authorities may initiate legalproceedings against us and we may be harmed.

 

**Thetime and cost associated with complying with government regulations to which wecould become subject could have a material adverse effect on our business.**

 

Some of theapplications that we have identified or may identify in the future may besubject to government regulations. For example, any medical devices such asprecision ophthalmic instruments and orthopedic devices made from our alloyslikely will be subject to extensive government regulation in the United Statesby the Food and Drug Administration, or FDA. Any medical device manufacturersto whom we sell Liquidmetal alloy products may need to comply with FDArequirements, including premarket approval or clearance under Section 510(k) ofthe Food Drug and Cosmetic Act before marketing in the United StatesLiquidmetal alloy medical device products. These medical device manufacturers may berequired to obtain similar approvals before marketing these medical devices inforeign countries. Any medical device manufacturers with which we jointlydevelop and sell medical device products may not provide significantassistance to us in obtaining required regulatory approvals. The process ofobtaining and maintaining required FDA and foreign regulatory approvals couldbe lengthy, expensive, and uncertain. Additionally, regulatory agencies candelay or prevent product introductions. The failure to comply with applicableregulatory requirements can result in substantial fines, civil and criminalpenalties, stop sale orders, loss or denial of approvals, recalls of products,and product seizures.

 

In addition, theprocessing of beryllium, a minor constituent element of some of our alloys, canresult in the release of beryllium into the workplace and the environment andin the creation of beryllium oxide as a by-product. Beryllium is classified asa hazardous air pollutant, a toxic substance, a hazardous substance, and aprobable human carcinogen under environmental, safety, and health laws, andvarious acute and chronic health effects may result from exposure toberyllium. We are required to comply with certain regulatory requirements andto obtain a permit from the U.S. Environmental Protection Agency or othergovernment agencies to process beryllium. Our failure to comply with present orfuture governmental regulations related to the processing of beryllium couldresult in suspension of manufacturing operations and substantial fines orcriminal penalties.

 

To the extent that ourproducts have the potential for dual use, such as military and non-militaryapplications, they may be subject to import and export restrictions of theU.S. government, as well as other countries. The process of obtaining anyrequired U.S. or foreign licenses or approvals could be time-consuming, costly,and uncertain. Failure to comply with import and export regulatory requirementscan lead to substantial fines, civil and criminal penalties, and the loss ofgovernment contracting and export privileges.

 

**Theexistence of minority stockholders in our Liquidmetal Coatings and LiquidmetalGolf subsidiary creates potential for conflicts of interest.**

 

We directly own 69.25%of outstanding common membership units of Liquidmetal Coatings, LLC, oursubsidiary that has exclusive right over industrial coatings market and 79% ofthe outstanding capital stock of Liquidmetal Golf, our subsidiary that has theexclusive right to commercialize our technology in the golf market. Theremaining 30.75% of Liquidmetal Coatings, LLC common membership units are ownedby 4 members and the remaining 21% of Liquidmetal Golf stock is owned byapproximately 95 stockholders of record. As a result, conflicts of interest may developbetween us and the minority members of Liquidmetal Coatings and stockholders ofLiquidmetal Golf. To the extent that our officers and directors are alsoofficers or directors of Liquidmetal Coatings and Liquidmetal Golf, matters may arisethat place the fiduciary duties of these individuals in conflicting positions. JohnKang, our Chairman, is also manager of Liquidmetal Coatings and director ofLiquidmetal Golf.

 

**Ourstock price has experienced volatility and may continue to experiencevolatility.**

 

During 2007, thehighest bid price for our common stock was $1.63 per share, while the lowestbid price during that period was $0.67 per share. The trading price of ourcommon stock could continue to fluctuate widely due to:

 

•                  quarter-to-quarter variations in results of operations;

 

•                  loss of a major customer;

 

•                  announcements of technological innovations by us or our potentialcompetitors;

 

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•                  changes in, or our failure to meet, the expectations of securitiesanalysts;

 

•                  new products offered by us or our competitors;

 

•                  announcements of strategic relationships or strategic partnerships; or

 

•                  other events or factors that may be beyond our control.

 

In addition, thesecurities markets in general have experienced extreme price and trading volumevolatility in the past. The trading prices of securities of many companies atour stage of growth have fluctuated broadly, often for reasons unrelated to theoperating performance of the specific companies. These general market andindustry factors may adversely affect the trading price of our commonstock, regardless of our actual operating performance. If our stock price isvolatile, we could face securities class action litigation, which couldresult in substantial costs and a diversion of management’s attention andresources and could cause our stock price to fall.

 

**Ourconvertible notes and warrants contain anti-dilution provisions that, iftriggered, could cause substantial dilution to our then-existing stockholders.**

 

The convertible notesand warrants issued in our January 2007 private placement contain “full-ratchet”anti-dilution rights. As a result of these anti-dilution rights, under our January 2010Notes, if we issue or grant in the future any rights to purchase any of ourcommon stock, or other security convertible into our common stock, for aneffective per share price less than the conversion price then in effect, theconversion price of all unconverted January 2010 Notes will be decreasedto equal such lower price. With regard to the warrants issued in connectionwith the January 2010 Notes, if we, in the future, issue or grant anyrights to purchase any of our common stock, or other security convertible intoour common stock, for a per share price less than the conversion price of the January 2010Notes then in effect, the exercise price of the warrants will be reduced toequal such lower price and the number of shares of our common stock for whichthe warrants may be exercised will be increased so that the totalaggregate exercise price remains constant. The foregoing adjustments to theconversion price of the notes and the exercise price of the warrants will notapply to certain exempt issuances, including issuances pursuant to employeestock option plans and strategic transactions

 

In addition to theabove-described full-ratchet anti-dilution rights, certain other notes andwarrants previously issued by us contain “weighted-average” anti-dilutionprovisions. As of December 31, 2006, we had warrants to purchase 973,064shares at an exercise price of $2.58 per share, and warrants to purchase3,777,714 shares at an exercise price of $2.00 per share, each of which notesand warrants contain weighted-average anti-dilution provisions. Under theseprovisions, if we issue shares in the future for consideration below theconversion or exercise prices then in effect, then (with certain exceptions,including the issuance of stock options) the conversion price for ourconvertible notes would automatically be reduced (allowing the holders of thenotes to receive additional shares of common stock upon conversion) and theexercise price of the warrants would automatically be reduced (with acorresponding increase in the number of shares issuable pursuant to suchwarrants).  To illustrate the impact ofthese weighted-average anti-dilution provisions, because of the issuance of theJanuary 2010 Notes in January 2007 and the reduction of theconversion price of certain previously issued convertible notes in February 2007,the above-described warrants outstanding as of December 31, 2006 have beenadjusted to represent warrants to purchase 860,521 shares at an exercise priceof $2.07 per share, and warrants to purchase 4,845,600 shares at an exerciseprice of $1.72 per share as of December 31, 2007. Thus, an aggregate of955,343 additional shares of our common stock have become issuable pursuant tosuch previously granted warrants as a result of the operation of theseweighted-average anti-dilution provisions.  It is also possible that a future triggeringof the full-ratchet anti-dilution rights in our January 2010 Notes couldresult in a corresponding triggering of the above-described weighted-averageanti-dilution provisions in the other notes and warrants.

 

If our available fundsand cash generated from operations are insufficient to satisfy our liquidityrequirements in the future, then we may need to raise substantialadditional funds in the future to support our working capital requirements andfor other purposes. If shares of our common stock or securities convertibleinto or exercisable for our common stock are issued in consideration of suchfunds at an effective per share price lower than the conversion and exerciseprices of our convertible notes and warrants, then these anti-dilutionprovisions would be triggered, thus possibly causing substantial dilution toour then-existing stockholders if the notes are converted or the warrants areexercised. Further, subsequent sales of the shares in the public market coulddepress the market price of our stock by creating an excess in supply of sharesfor sale.

 

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**We havenever paid dividends on our common stock, and we do not anticipate paying anycash dividends in the foreseeable future.**

 

We have paid no cashdividends on our common stock to date. We currently intend to retain our futureearnings, if any, to fund the development and growth of our businesses, andupon the completion of this offering, we do not anticipate paying any cashdividends on our capital stock for the foreseeable future. In addition, theterms of existing or any future debts may preclude us from payingdividends on our stock. As a result, capital appreciation, if any, of ourcommon stock will be your sole source of gain for the foreseeable future.

 

**Antitakeoverprovisions of our certificate of incorporation and bylaws and provisions ofapplicable corporate law could delay or prevent a change of control that you may favor.**

 

Provisions in ourcertificate of incorporation, our bylaws, and Delaware law could make it moredifficult for a third party to acquire us, even if doing so would be beneficialto our stockholders. These provisions could discourage potential takeoverattempts and could adversely affect the market price of our shares. Because ofthese provisions, you might not be able to receive a premium on yourinvestment. These provisions:

 

•                  authorize our board of directors, without stockholder approval, to issue upto 10,000,000 shares of “blank check” preferred stock that could be issued byour board of directors to increase the number of outstanding shares and preventa takeover attempt;

 

•                  limit stockholders’ ability to call a special meeting of our stockholders;

 

•                  provide for a classified board of directors; and

 

•                  establish advance notice requirements to nominate directors for election toour board of directors or to propose matters that can be acted on bystockholders at stockholder meetings.

 

The provisionsdescribed above could delay or make more difficult transactions involving achange in control of us or our management.

 

**Anongoing investigation by the Department of Justice could have a materialadverse impact on our company.**

 

In August 2006, wereceived a federal grand jury subpoena for the production of documents relatedto the period from January 1, 1999 though the present. The documents beingsought include accounting records, documents relating to our relationship withGrowell Metal of Korea, and documents and records relating to transactions incompany stock by officers and directors. The subpoena was issued in connectionwith a grand jury investigation being conducted by the U.S. Department ofJustice, Criminal Division, in the Middle District of Florida concerningalleged accounting improprieties involving our company, among other things. Wehave been, and intend to continue to be, fully cooperative with the authoritiesin connection with the Department of Justice’s subpoena and investigation. However,in the event that current or former members of our senior management were to beimplicated in any wrongdoing, it could have a material adverse impact on ourcapital resources and business focus.

 

**Item1B. Unresolved Staff Comments**

 

None

 

**Item 2.Properties**

 

Our principal executiveoffices and principal research and development offices are located in RanchoSanta Margarita, California and consist of approximately 15,000 square feet.This facility is occupied pursuant to a lease agreement that expires in April 20,2012.

 

In Kingwood, Texas, welease an office for our coatings business segment. This facility, which isapproximately 432 square feet, is leased through August 1, 2012.

 

In Huntsville, Texas,we lease a warehouse for our coatings business segment. This facility, which isapproximately 4,500 square feet, is leased through August 1, 2012.

 

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InDothan, Alabama, we lease an application facility for our coatings businesssegment. This facility, which is approximately 5,000 square fee, is leasedthrough June 30, 2010.

 

Our principalprototyping and manufacturing facility is in Pyongtaek, South Korea, andconsists of approximately 166,000 square feet. We lease the land on which thisfacility is located, although we own the buildings, fixtures, and all personalproperty located on the land. The parcel of land consists of approximately fouracres and is leased through 2022.

 

We currently expectthat the foregoing facilities will meet our anticipated internal manufacturing,research, warehousing, and administrative needs for the foreseeable future.

 

**Item 3. Material Legal Proceedings**

 

Department of JusticeInvestigation

 

In August 2006,the United States Department of Justice (“DOJ”) instituted a grand juryproceeding in the Middle District of Florida to investigate, among otherthings, alleged accounting improprieties in relation to certain of our businesstransactions and a personal stock transaction by our former chief executiveofficer. The grand jury proceeding is based primarily upon the same underlyingfacts and circumstances as alleged in the federal class action and shareholderderivative actions. To date, subpoenas for the production of documents and/orgrand jury testimony have been issued to our company and several present andformer officers and directors. We are cooperating with the DOJ in itsinvestigation.

 

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**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

The election of our directors was submitted toa vote of stockholders in our 2007 Annual Meeting of Stockholders on November 15,2007.

 

Our board of directors is divided into threeclasses (designated “CLASS I,” “CLASS II,” and “CLASS III”), asnearly equal in number as possible, with each class serving three-year termsexpiring at the third annual meeting of stockholders after their elections oruntil their respective successors have been elected and qualified.

 

Five directors were nominated and elected on November 15,2007 as follows:

 

•                  CLASS I directors whose term is scheduled to expire at the 2009 annualmeeting of stockholders or the first annual meeting thereafter: Robert Biehland John Kang. Mr. Biehl and Mr. Kang received 35,448,832 and34,691,884 votes for re-election, respectively. Additionally, 1,550,374 and2,307,322 votes were withheld for Mr. Biehl and Mr. Kang,respectively;

 

•                  CLASS II directors whose term is scheduled to expire at the 2010annual meeting of stockholders or the first annual meeting thereafter::  Dean Tanella and CK Cho. Mr. Tanella andMr. Cho received 34,902,134 and 34,756,195 votes for re-election,respectively. Additionally, 2,097,072 and 2,243,011 votes were withheld for Mr. Tanellaand Mr. Cho, respectively; and

 

•                  CLASS III director whose term is scheduled to expire at the 2008annual meeting of stockholders or the first annual meeting thereafter: WilliamJohnson. Mr. Johnson received 35,472,532 votes for re-election.Additionally, 1,526,674 votes were withheld for Mr. Johnson.

 

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**PART II**

 

**Item 5. Market For Registrant’s Common Equity andRelated Stockholder Matters**

 

Our commonstock is currently quoted on the OTC Bulletin Board under the symbol “LQMT.”  On March 17, 2008, the last reportedsales price of our common stock was $0.70 per share. As of March 17, 2008,we had 248 record holders of our common stock.

 

The followingtable sets forth, on a per share basis, the range of high and low bidinformation for the shares of our common stock for each full quarterly periodwithin the two most recent fiscal years and any subsequent interim period forwhich financial statements are included. These quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions.

 
| **2007**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 0.72       |    | $          | 0.68 |   |
| Third Quarter  |       | $        | 0.81       |    | $          | 0.76 |   |
| Second Quarter |       | $        | 0.86       |    | $          | 0.84 |   |
| First Quarter  |       | $        | 1.01       |    | $          | 0.96 |   |

 
| **2006**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 1.80       |    | $          | 1.42 |   |
| Third Quarter  |       | $        | 2.01       |    | $          | 1.31 |   |
| Second Quarter |       | $        | 2.34       |    | $          | 1.31 |   |
| First Quarter  |       | $        | 1.75       |    | $          | 0.87 |   |

 

We have never paid acash dividend on our common stock. We do not anticipate paying any cashdividends on our common stock in the foreseeable future, and we plan to retainour earnings to finance future growth.

 

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**Item 6. Selected Consolidated Financial Data**

 

The following table shows ourselected consolidated financial data as of and for the years ended December 31,2003 through 2007.

 
| ** **                                                                                      | ** ** | **For the Years Ended December 31,**      | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                      | ** ** | ** **                                                         | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Consolidated Statement of Operations Data:**                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                         |       | $                                                                  | 29,022     |   | $ | 27,669 |   | $ | 16,365 |   | $ | 17,429 |   | $ | 13,658 |   |
| Cost of sales                                                                                   |       | 26,459                                                             |       | 22,418 |   | 15,129 |   | 12,168 |   | 18,162 |   |
| Gross profit (loss)                                                                             |       | 2,563                                                              |       | 5,251 |   | 1,236 |   | 5,261 |   | (4,504 | ) |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses                                                   |       | 8,921                                                              |       | 9,962 |   | 8,534 |   | 11,591 |   | 17,729 |   |
| Research and development expenses                                                               |       | 1,123                                                              |       | 950 |   | 1,120 |   | 1,467 |   | 8,780 |   |
| Impairment of goodwill                                                                          |       | —                                                             |       | — |   | — |   | — |   | 184 |   |
| Impairment of long lived assets                                                                 |       | —                                                             |       | — |   | 4,487 |   | — |   | 2,684 |   |
| Total operating expenses                                                                        |       | 10,044                                                             |       | 10,912 |   | 14,141 |   | 13,058 |   | 29,377 |   |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before interest, other income, income  taxes, minority interest and discontined operations |       | (7,481                                                             | )          | (5,661 | ) | (12,905 | ) | (7,797 | ) | (33,881 | ) |
| Loss from extinguishments of debt                                                               |       | (648                                                               | )          | — |   | (1,247 | ) | (2,941 | ) | — |   |
| Change in value of warrants, gain                                                               |       | 4,923                                                              |       | 279 |   | 3,985 |   | 747 |   | — |   |
| Change in value of conversion feature, gain  (loss)                                             |       | 6,965                                                              |       | (226 | ) | 9,118 |   | 2,093 |   | — |   |
| Other income                                                                                    |       | 226                                                                |       | 572 |   | — |   | 302 |   | — |   |
| Interest expense                                                                                |       | (9,364                                                             | )          | (9,509 | ) | (6,021 | ) | (6,577 | ) | (390 | ) |
| Interest income                                                                                 |       | 123                                                                |       | 23 |   | 17 |   | 37 |   | 304 |   |
| Gain on sale of marketable securities  held-for-sale                                            |       | —                                                             |       | — |   | — |   | — |   | 1,178 |   |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before income taxes, minority interest  and discontinued operations                        |       | (5,256                                                             | )          | (14,522 | ) | (7,053 | ) | (14,136 | ) | (32,789 | ) |
| Income taxes                                                                                    |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Minority interests                                                                              |       | (384                                                               | )          | — |   | — |   | — |   | 21 |   |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from continuing operations                                                                 |       | (5,640                                                             | )          | (14,522 | ) | (7,053 | ) | (14,136 | ) | (32,768 | ) |
| (Loss) income from operations of  discontinued operations, net                                  |       | —                                                             |       | — |   | — |   | (749 | ) | (964 | ) |
| Gain from disposal of discontinued operations,  net                                             |       | —                                                             |       | — |   | — |   | — |   | 127 |   |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                        |       | $                                                                  | (5,640     | ) | $ | (14,522 | ) | $ | (7,053 | ) | $ | (14,885 | ) | $ | (33,605 | ) |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss per share from continuing operations -  basic and diluted                                  |       | $                                                                  | (0.13      | ) | $ | (0.33 | ) | $ | (0.17 | ) | $ | (0.34 | ) | $ | (0.79 | ) |
| Loss per share from discontinued operations                                                     |       | $                                                                  | —     |   | — |   | $ | — |   | $ | (0.02 | ) | $ | (0.02 | ) |
| Net loss per share                                                                              |       | $                                                                  | (0.13      | ) | $ | (0.33 | ) | $ | (0.17 | ) | $ | (0.36 | ) | $ | (0.81 | ) |
|                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average common shares - basic and  diluted                                             |       | 44,730                                                             |       | 43,809 |   | 41,833 |   | 41,610 |   | 41,505 |   |

 

27

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| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**               | ** ** |
|                                                        |       |                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                   |       | $                                     | 1,180      |   | $ | 144 |   | $ | 1,392 |   | $ | 742 |   | $ | 3,127 |   |
| Working capital (deficiency)                                |       | (12,359                               | )          | (23,157 | ) | (10,993 | ) | (14,910 | ) | (698 | ) |
| Total assets                                                |       | 22,513                                |       | 22,244 |   | 21,563 |   | 28,508 |   | 30,852 |   |
| Long-term debt, including current portion,  net of discount |       | 20,680                                |       | 14,705 |   | 6,776 |   | 6,628 |   | 4,047 |   |
| Shareholders’ equity (deficiency)                      |       | (14,580                               | )          | (10,363 | ) | (1,320 | ) | 4,191 |   | 16,163 |   |
|                                                             |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

28

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**Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*This management’s discussion and analysis should beread in the conjunction with the condensed consolidated financial statementsand notes included elsewhere in this report on Form 10-K.*

 

*This management’s discussion and analysis, as well asother sections of this report on Form 10-K, may contain “forward-lookingstatements” that involve risks and uncertainties, including statementsregarding our plans, future events, objectives, expectations, forecasts, orassumptions. Any statement that is not a statement of historical fact is aforward-looking statement, and in some cases, words such as “believe,” “estimate,”“ project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,” andsimilar expressions identify forward-looking statements. These statementsinvolve risks and uncertainties that could cause actual outcomes and results todiffer materially from the anticipated outcomes or results, and undue relianceshould not be placed on these statements. These risks and uncertaintiesinclude, but are not limited to, the matters discussed under the caption “RiskFactors” in Item 1A of this report and other risks and uncertaintiesdiscussed in filings made with the Securities and Exchange Commission(including risks described in subsequent reports on Form 10-Q, Form 10-K,Form 8-K, and other filings). Liquidmetal Technologies, Inc.disclaims any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.*

 

##### **OVERVIEW**

##### ** **

We are amaterials technology company that develops and commercializes products madefrom amorphous alloys. Our Liquidmetal® family of alloys consists of a varietyof proprietary coatings, powders, bulk alloys, and composites that utilize theadvantages offered by amorphous alloy technology. We develop, manufacture, andsell products and components from bulk amorphous alloys to customers in variousindustries, and we also partner with third-party licensees to develop andcommercialize bulk Liquidmetal alloy products. We believe that our proprietarybulk alloys are the only commercially viable bulk amorphous alloys currentlyavailable in the marketplace. In addition to our bulk alloys, we market andsell a line of proprietary amorphous alloy-based industrial coatings under theLiquidmetal® ArmacorTM coatings brand.

 

Amorphousalloys are unique materials that are distinguished by their ability to retain arandom atomic structure when they solidify, in contrast to the crystallineatomic structure that forms in other metals and alloys when they solidify. Liquidmetalalloys possess a combination of performance, processing, and potential costadvantages that we believe can make them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys such asTi-6Al-4V, but they also have some of the beneficial processing characteristicsmore commonly associated with plastics. We believe these advantages could resultin Liquidmetal alloys supplanting high-performance alloys, such as titanium andstainless steel, and other incumbent materials in a wide variety ofapplications. Moreover, we believe these advantages could enable theintroduction of entirely new products and applications that are not possible orcommercially viable with other materials.

 

Our revenues arederived from two principal operating segments: Liquidmetal alloy industrialcoatings and bulk Liquidmetal alloy products.  Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used in coal-burning power plants. Bulk Liquidmetal alloysegment revenue includes sales of parts or components of electronic devices,medical products, and sports and leisure goods; tooling and prototype parts(including demonstration parts and test samples) for customers with products indevelopment, product licensing and arrangements, and research and developmentrevenue relating primarily to defense and medical applications.  We expectthat these sources of revenue will continue to significantly change thecharacter of our revenue mix.

 

The cost of sales forour Liquidmetal coatings segment consists primarily of the costs of outsourcingour manufacturing to third parties. Consistent with our expectations, our costof sales has been increasing over historical results as we further build ourbulk Liquidmetal alloy business. Although we plan to continue outsourcing themanufacturing of our coatings, we will internally manufacture many productsderived from our bulk Liquidmetal alloys.

 

Selling, general, andadministrative expenses currently consist primarily of salaries and relatedbenefits, severance costs, travel, consulting and professional fees,depreciation and amortization, insurance, office and administrative expenses,and other expenses related to our operations.

 

Research anddevelopment expenses represent salaries, related benefits expense, stock-basedcompensation, depreciation of research equipment, consulting and contractservices, expenses incurred for the design and testing of new processingmethods, expenses for the development of sample and prototype products, andother expenses related to

 

29

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the research anddevelopment of Liquidmetal alloys. Costs associated with research anddevelopment activities are expensed as incurred. We plan to enhance ourcompetitive position by improving our existing technologies and developingadvances in amorphous alloy technologies. We believe that our research anddevelopment efforts will focus on the discovery of new alloy compositions, thedevelopment of improved processing technology, and the identification of newapplications for our alloys.

 

We maintain certain ofour raw material inventories in amounts in excess of our operating cycle of oneyear due to the nature of our manufacturing process, production lead time, andthe recyclability of our raw material. These inventories were classified aslong-term inventory as of December 31, 2004.  During 2005, wedetermined that our projected raw material requirements were not sufficientenough to warrant the use of such raw materials. As a result, we determined thatthe carrying value of raw materials held by our South Korea subsidiary,Liquidmetal Korea, exceeded its fair value in the amount of $2.7 million duringthe fiscal year 2005.

 

Idle equipment consistsof certain equipment held by us for use in expansion of bulk alloy partsmanufacturing.  Due to excess manufacturingcapacity, we classified the equipment as idle equipment as of December 31,2005 and 2004.  While the equipment may be used internally to meet futurecapacity requirements, considering our current revenue and foreseeableproduction requirements, we do not anticipate utilizing this equipmentinternally in the near future. As a result, we determined that the carryingvalue of idle equipment held by its subsidiary, Liquidmetal Technologies Korea,exceeded its fair value in the amount of $1.7 million during the second quarterof fiscal year 2005.

 

Impairment ofLong-Lived Assets consists of a write-down of $2.7 million of raw materialsconsidered to be long term inventory and $1.7 million of idle equipment. During 2005, while we may use the excess raw materials beyond one year tofulfill future customer order, we determined that our capacity was notsignificant enough to warrant holding this inventory as a long termasset.  Further, while we have actively marketed the idle equipment forultimate sale since early 2004, we were unable to sell this equipment. Inaddition, while the equipment may be used internally to meet future capacityrequirements, considering the revenues during 2005, we did not anticipateutilizing this equipment internally in the near future.  As such, during2005 we have reduced the carrying values of the excess raw material and idleequipment.

 

Change in Value ofWarrants consists of changes to the fair value of warrants outstanding at eachperiod.  The warrants have been accounted for as a liability in accordancewith Emerging Issues Task Force Issue No. 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” with the change in fair values reported in earnings. Thefair values are determined using a Black-Scholes pricing model and fluctuationsin our stock price have had the greatest impact on the valuation of outstandingwarrants.

 

Change in Value ofConversion Feature consists of changes to the fair value of the embeddedconversion feature of our senior convertible notes.  The embeddedconversion feature has been accounted for as a separate derivative instrumentin accordance with SFAS 133 with a change in fair values reported inearnings.  The change in fair values is determined using a Black-Scholespricing model and fluctuations in our stock price have had the greatest impacton the valuation of outstanding conversion features.

 

On May 21, 2003,we completed a reincorporation by transitioning from a California corporationto a Delaware corporation. The reincorporation was effected through the mergerof the former California entity into a newly created wholly owned Delawaresubsidiary. The reincorporation changed the legal domicile of our company butdid not result in any change to our business, management, employees, fiscalyear, assets or liabilities, or location of facilities. As part of thereincorporation, each share of the California corporation was automaticallyconverted into one share of the Delaware corporation.  In addition, totalauthorized shares decreased from 200,000,000 shares to 100,000,000 shares.

 

On June 26, 2006,we entered into a joint venture agreement with SAGA, SpA in Padova, Italy, (‘SAGA”)a specialist precision parts manufacturer.  The joint venture is namedLiquidmetal SAGA Italy, Srl (“LSI”).  We also entered into an exclusivemanufacturing license agreement for the eyewear industry with LSI.  Underthe joint venture agreement, we have the option to buy ownership interest inLSI, initially, of 19.9% to up to 50%.  In December 2006, we havepurchased 19.9% interest in the joint venture. InJanuary 2007 and June 2007, we contributed additional $0.2 millionand $0.1 million, respectively, into LSI as additional investment.  Thecontribution did not change the Company’s 19.9% interest in LSI. Under thelicensing agreement, at any time following 18 months after the effective dateof the agreement, LSI may exercise its option to sell to the Company certainbusiness assets including manufacturing equipment acquired under the jointventure. During year ended December 31, 2007 and 2006, the Companyrecognized revenues of $0.1 million and $0.7 million, respectively, ofLiquidmetal alloys sold to SAGA for use in the joint venture.

 

In a connection to anequipment purchase agreement entered into with Grace Metal (“GM”), a SouthKorean corporation, effective June 1, 2007, we discontinued ourpost-processing operation in Weihai, China and transferred our manufacturingstaff and equipment in Weihai to GM under an amendment to the equipmentpurchase agreement

 

30

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with GM. Further, wetransferred certain of our manufacturing staff from our South Korean plant toGM. GM was formed by an investor group that includes the former Founder anddirector of our company, James Kang, who is also the brother of John Kang,Chairman of the Board of our company. We have also changed the name of ourSouth Korean subsidiary to Liquidmetal Technologies Korea Co., Ltd, which wasformerly Liquidmetal Korea Co., Ltd. GM will assume the name of LiquidmetalKorea to conduct business in South Korea.

 

On July 24, 2007,we transferred substantially all of the assets of our Liquidmetal alloy industrialcoatings business to a newly formed, newly capitalized subsidiary namedLiquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”), andLMC assumed substantially all of the liabilities of the coatingsbusiness.   The transfer included the thermal spray coatings assetsand liabilities acquired under a purchase agreement with Foster Wheeler EnergyServices in June 2007. We hold a 69.25% ownership interest in LMC. Theresults of operation of LMC are consolidated and comprise our Liquidmetal alloyindustrial coatings segment for financial reporting purposes.

 

***Results of Operations***

 

***Comparison of the years ended December 31,2007 and 2006***

 

*Revenue.* Revenue increased $1.4 million to $29.0 million for the twelve monthsended December 31, 2007 from $27.7 million for the twelve months ended December 31,2006.  The increase included $3.6 million decrease in sales andprototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers as a result of increased reliance on licensees tomanufacture and sell bulk Liquidmetal alloy parts to customers based in SouthKorea, offset by an increase of $5.0 million from sales of our coating productsas a result of increase in demand from oil drilling applications.

 

*Cost of Sales.* Cost of sales increased to $26.5 million, or91% of revenue, for the twelve months ended December 31, 2007 from$22.4 million, or 81% of revenue, for the twelve months ended December 31,2006.  The increases were a result of higher manufacturing costs of newproduction items in our Liquidmetal bulk alloy business during the first threequarters of 2007.  We believe that higher manufacturing volumes andgreater mix of higher-margin products in the future will cause the gross profitto improve over time. The cost to manufacture parts from our bulk Liquidmetalalloys is variable and differs based on the unique design of eachproduct.  However, the cost of sales for the products sold by the coatingsbusiness segment is generally consistent because the Liquidmetal coatingsproducts are produced by third parties and sold wholesale to variousindustries.

 

*Selling, General, and Administrative Expenses*. Selling, general, and administrativeexpenses decreased to $8.9 million, or 31% of revenue, for the twelve monthsended December 31, 2007 from $10.0 million, or 36% of revenue, forthe twelve months ended December 31, 2006. This decrease was primarily aresult of decreases in wages and expenses of $1.2 million and decreases intravel expenses of $0.2 million, offset by increases in professional andconsulting fees of $0.3 million.

 

*Research and Development Expenses*. Research and development expenses increasedto $1.1 million, or 4% of revenue, for the twelve months ended December 31,2007 from $1 million, or 3% of revenue, for the twelve months ended December 31,2006. The increase was primarily due to increase in professional fees. Wecontinue to perform research and development of new Liquidmetal alloys andrelated processing capabilities, develop new manufacturing techniques, andcontract with consultants to advance the development of Liquidmetal alloys.

 

*Loss from Extinguishments of Debts*. Loss from extinguishments of debt increasedto $0.6 million, or 2% of revenue, for the twelve months ended December 31,2007 from $0 for the twelve months ended December 31, 2006. The $0.6million loss was recognized from the extinguishment of certain of ourconvertible and subordinated notes in 2007.

 

*Change in Value of Warrants.*Change in value of warrants increased to a gain of $4.9 million, or 17%of revenue, during the twelve months ended December 31, 2007 from a gainof $0.3 million, or 1% of revenue, during the twelve months ended December 31,2006. The change in value of warrants consisted of warrants issued fromconvertible notes and subordinated notes funded between 2004 and 2007 primarily as a result offluctuations in our stock price.

 

*Change in Value of Conversion Feature*. Change in the value of our conversionfeature liability from our convertible notes funded between 2004 and 2007resulted in gain of $7.0 million, or 24% of revenue, during the twelve monthsended December 31, 2007 from a loss of $0.2 million, or 1% of revenue,during the twelve months ended December 31, 2006 primarily as a result offluctuation in our stock prices.

 

*Other Income.*Other income was$0.2 million, or 1% of revenue, for the twelve months ended December 31,2007, primarily from gain recognized from sale of equipment. Otherincome for the twelve months ended December 31, 2006 was $0.6 million, or2% of revenue, as result of $0.1 million gain recognized from disposal of idleequipment and $0.5 million gain recognized from termination of a distributionagreement with a Japanese sporting goods distributor originally entered into inMarch 1996.

 

31

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*Interest Expense*. Interest expense was $9.4 million, or 32% ofrevenue, for the twelve months ended December 31, 2007 and was $9.5million, or 34% of revenue, for the twelve months ended December 31, 2006.Interest expense consists primarily of debt amortization and interest accruedon outstanding convertible and subordinated notes, borrowings under the April 2005factoring, loan, and security agreement, the Kookmin loan and late registrationand late filing fee penalties.

 

*Interest Income.*Interest income was $0.1 million for thetwelve months ended December 31, 2007 and $23 thousand for the twelvemonths ended December 31, 2006, from interest earned on cash deposits.

 

***Comparison of the years ended December 31,2006 and 2005***

 

*Revenue*. Revenue increased to $27.7 million in the twelve months ended December 31,2006 from $16.4 million in the twelve months ended December 31, 2005.The increase included a $7.3 million increase in sales and prototyping of partsmanufactured from bulk Liquidmetal alloys to consumer electronics customers asa result of increased demand in electronic casings applications, and increaseof $3.5 million in sale of our coatings products as a result of increaseddemand in oil drilling applications, and an increase of $0.5 million inresearch and development services as a result of  increased research anddevelopment services primarily from defense applications.

 

*Costof Sales*. Cost of sales increased to $22.4 million, or81% of revenue, during the twelve months ended December 31, 2006 from$15.1 million, or 92% of revenue, in the twelve months ended December 31,2005. The increase was a result of increases in bulk Liquidmetal alloy businessand coatings business.  Cost of sales as a percentage of revenue hasdecreased as a result of continued maturing of our manufacturing process, whichrepresents our company’s efforts to manage costs and focus on our corebusiness, and an increase in revenues generated from our higher margin coatingsproducts.  We believe that higher manufacturing volumes and greater mix ofhigher-margin products in the future will cause the gross profit to improveover time.  The cost to manufacture parts from our bulk Liquidmetal alloysis variable and differs based on the unique design of each product. However, cost of sales for the products sold by the coatings business segmentis generally consistent because the Liquidmetal coatings products are producedby third parties and sold wholesale to various industries.

 

*Selling,General, and Administrative Expenses*. Selling,general, and administrative expenses increased to $10.0 million, or 36% ofrevenue, in the twelve months ended December 31, 2006 from$8.5 million, or 52% of revenue, in the twelve months ended December 31,2005.  This increase was primarily a result of increase in wages andexpenses of $1.4 million, increase in professional and contracted services of$0.4 million, increase in travel expenses of $0.3 million, and increase inadvertising and promotions expense of $0.2 million, offset by a decrease ininsurance expense of $0.7 million and decrease in rent expense of $0.1million.  The decrease in selling, general and administrative expenses asa percentage of revenue represent our company’s efforts to manage costs andfocus on our core business while continuing to build our corporateinfrastructure required to prepare for and support the anticipated growth ofour bulk Liquidmetal alloy business.

 

*Researchand Development Expenses*. Research anddevelopment expenses decreases to $1.0 million, or 3% of revenue, in the twelvemonths ended December 31, 2006 from $1.1 million, or 7% of revenue,in the twelve months ended December 31, 2005.  The decrease was aresult of our company focusing primarily on our core business associated withour bulk Liquidmetal alloy business while managing our costs.  Our companycontinues to perform research and development efforts on new Liquidmetal alloysand related processing capabilities, develop new manufacturing techniques, andcontract with consultants and provide research grants to various institutionsto advance the development of Liquidmetal alloys.

 

*Impairmentof Long Lived Assets*. Impairment of longlived assets decreased to $0, in the twelve months ended December 31, 2006from $4.5 million, or 27% of revenue, in the twelve months ended December 31,2005.  Impairment expense during 2005 represent primarily write-down of$2.7 million of raw materials considered to be long term inventory and $1.7million of idle equipment which were written down due to our projected capacityfor 2006 as not being significant enough to warrant holding this inventory as along term asset.  Further, while we have actively marketed the idleequipment for ultimate sale since early 2004, we were unable to sell thisequipment.  While the equipment may be used internally to meet futurecapacity requirements we did not anticipate utilizing this equipment internallyin the near future.  As such, we reduced the carrying values of the excessraw material and idle equipment in 2005.  No such reductions were neededin 2006.

 

*Lossfrom Extinguishments of Debt.*  Loss fromextinguishments of debt decreased to $0 in the twelve months ended December 31,2006 from $1.2 million, or 8% of revenue, in the twelve months ended December 31,2005.  The $1.2 million loss from extinguishments of debt was recognizedfrom the exchange of our 6% Convertible Notes due 2006 in August 2005.

 

32

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*Changein Value of Warrants.*Change in value of warrantswas a gain of $0.3 million, or 1% of revenue during the twelve months ended December 31,2006, and $4.0 million, or 24% of revenue, during the twelve months ended December 31,2005, from the change in value of warrants issued primarily as a result offluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in thevalue of our conversion feature liability from our senior convertible debtfunded in March 2004 and exchanged in August 2004 and August 2005resulted in a change in value of conversion feature loss of $0.2 million, or 1%of revenue, in the twelve months ended December 31, 2006, and a gain of$9.1 million, or 56% of revenue, in the twelve months ended December 31,2005, primarily due to fluctuations in our stock price.

 

*OtherIncome.*Other income was $0.6 million, or 2% ofrevenue, in the twelve months ended December 31, 2006 from $0.1 millionof gain recognized from disposal of idle equipment and  $0.5 milliongain recognized from termination of a distribution agreement with a Japanesesporting goods distributor originally entered into in March 1996. There were no amounts recognized as other income in the twelve months ended December 31,2005.

 

*InterestExpense*. Interest expense was $9.5 million, or 34% ofrevenue, in the twelve months ended December 31, 2006 and was $6.0million, or 37% of revenue, in the twelve months ended December 31,2005.  Interest expense consists primarily of interest accrued on theKookmin Bank loan funded in 2003, convertible debt funded in 2004 and 2005,subordinated notes funded in 2006, fees charged from short-term borrowingsunder the 2005 factoring, loan, and security agreement, as well as amortizationof debt issuance costs and discount on the convertible debt.  The increasein interest expense was primarily due to costs accrued for late registrationpenalties of $1.6 million, higher debt balances and increased debt discountamortization during the twelve months ended December 31, 2006.

 

*InterestIncome.* Interest income was $23 thousand and $17thousand for the twelve months ended December 31, 2006 and 2005,respectively, from interest earned on cash deposits.

 

33

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##### **QUARTERLYRESULTS**

 

The followinginformation presents our unaudited quarterly operating results for 2007 and2006. The data has been prepared by Liquidmetal Technologies, Inc. on abasis consistent with the Consolidated Financial Statements included elsewherein this Form10-K, and includes all adjustments, consisting of normal recurring accruals,that we consider necessary for a fair presentation thereof. These operatingresults are not necessarily indicative of our future performance.

 
| ** **                                                                                                    | ** ** | **For the Three Months Ended**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statements of Operations Data:**                                           | ** ** | **12/31/07**                                                       | ** ** | **09/30/07** | ** ** | **06/30/07** | ** ** | **03/31/07** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                    |       | **(Unaudited)**                                                    |       |
| Revenue                                                                                                       |       | $                                                                  | 8,518      |   | $ | 7,106 |   | $ | 8,331 |   | $ | 5,067 |   |
| Cost of sales                                                                                                 |       | 7,138                                                              |       | 5,194 |   | 7,686 |   | 6,441 |   |
| Gross profit (loss)                                                                                           |       | 1,380                                                              |       | 1,912 |   | 645 |   | (1,374 | ) |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Operating expenses                                                                                            |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                          |       | 2,041                                                              |       | 1,853 |   | 2,495 |   | 2,532 |   |
| Research and development                                                                                      |       | 236                                                                |       | 331 |   | 293 |   | 263 |   |
| Total operating expenses                                                                                      |       | 2,277                                                              |       | 2,184 |   | 2,788 |   | 2,795 |   |
| Loss from operations                                                                                          |       | (897                                                               | )          | (272 | ) | (2,143 | ) | (4,169 | ) |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Loss from extinguishments of debt                                                                             |       | —                                                             |       | — |   | — |   | (648 | ) |
| Change in value of warrants, gain                                                                             |       | 447                                                                |       | 220 |   | 564 |   | 3,692 |   |
| Change in value of conversion feature, gain                                                                   |       | 828                                                                |       | 625 |   | 1,168 |   | 4,344 |   |
| Other income                                                                                                  |       | 177                                                                |       | — |   | 49 |   | — |   |
| Interest expense                                                                                              |       | (1,910                                                             | )          | (1,991 | ) | (2,700 | ) | (2,763 | ) |
| Interest income                                                                                               |       | 2                                                                  |       | 14 |   | 46 |   | 61 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income before minority interests                                                                       |       | (1,353                                                             | )          | (1,404 | ) | (3,016 | ) | 517 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Minority interests                                                                                            |       | (318                                                               | )          | (66 | ) | — |   | — |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income from operations before income  taxes                                                            |       | (1,671                                                             | )          | (1,470 | ) | (3,016 | ) | 517 |   |
| Income taxes                                                                                                  |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income                                                                                             |       | (1,671                                                             | )          | (1,470 | ) | (3,016 | ) | 517 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income per share from continuing  operations - basic and diluted                                   |       | $                                                                  | (0.04      | ) | $ | (0.03 | ) | $ | (0.07 | ) | $ | 0.01 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common shares used to  compute loss per share from continuing operations - basic and diluted |       | 44,711                                                             |       | 44,652 |   | 44,632 |   | 44,925 |   |

 

34

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| ** **                                                                                                    | ** ** | **For the Three Months Ended**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statements of Operations Data:**                                           | ** ** | **12/31/06**                                                       | ** ** | **09/30/06** | ** ** | **06/30/06** | ** ** | **03/31/06** | ** ** |
| ** **                                                                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                    | ** ** | **(Unaudited)**                                                    | ** ** |
| Revenue                                                                                                       |       | $                                                                  | 5,984      |   | $ | 8,040 |   | $ | 7,090 |   | $ | 6,555 |   |
| Cost of sales                                                                                                 |       | 5,081                                                              |       | 6,449 |   | 5,564 |   | 5,324 |   |
| Gross profit                                                                                                  |       | 903                                                                |       | 1,591 |   | 1,526 |   | 1,231 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Operating expenses                                                                                            |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                          |       | 2,599                                                              |       | 2,290 |   | 2,368 |   | 2,705 |   |
| Research and development                                                                                      |       | 197                                                                |       | 269 |   | 281 |   | 203 |   |
| Total operating expenses                                                                                      |       | 2,796                                                              |       | 2,559 |   | 2,649 |   | 2,908 |   |
| Loss from operations                                                                                          |       | (1,893                                                             | )          | (968 | ) | (1,123 | ) | (1,677 | ) |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Loss from extinguishments of debt                                                                             |       | —                                                             |       | — |   | — |   | — |   |
| Change in value of warrants, gain (loss)                                                                      |       | 1,633                                                              |       | 1,361 |   | (1,426 | ) | (1,289 | ) |
| Change in value of conversion feature, gain  (loss)                                                           |       | 1,707                                                              |       | 1,987 |   | (2,137 | ) | (1,783 | ) |
| Other income                                                                                                  |       | —                                                             |       | — |   | 92 |   | 480 |   |
| Interest expense                                                                                              |       | (2,148                                                             | )          | (2,302 | ) | (3,277 | ) | (1,782 | ) |
| Interest income                                                                                               |       | 6                                                                  |       | 8 |   | 7 |   | 2 |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Income (loss) from operations before income  taxes and discontinued operations                                |       | (695                                                               | )          | 86 |   | (7,864 | ) | (6,049 | ) |
| Income taxes                                                                                                  |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Net income (loss)                                                                                             |       | (695                                                               | )          | 86 |   | (7,864 | ) | (6,049 | ) |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Net income (loss) per share from continuing  operations - basic and diluted                                   |       | $                                                                  | (0.02      | ) | $ | 0.00 |   | $ | (0.18 | ) | $ | (0.14 | ) |
|                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common shares used to  compute loss per share from continuing operations - basic and diluted |       | 44,245                                                             |       | 44,100 |   | 44,075 |   | 42,817 |   |

 

35

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**LIQUIDITYAND CAPITAL RESOURCES**

 

Since our inception, wehave funded our operations through the sale of equity securities in privateplacements and our initial public offering, the sale of convertible notes andwarrants in private placements, debt financing, and cash generated fromoperations.

 

Our cash used foroperating activities was $10.2 million and $5.3 million for the years ended December 31,2007 and 2006, respectively.  Our working capital deficit decreased from$23.2 million at December 31, 2006 to $12.3 million at December 31,2007.  Our working capital deficit decrease of $10.9 million was primarilyattributable to increase in cash and cash equivalent of $1.0 million, increasein trade accounts receivables of $1.2 million, decrease in accounts payable andaccrued expenses of $1.7 million, decrease in short term debt of $0.5 million,decrease in current portion of long term debt of $8.4 million, offset by decreasein inventories of $1.5 million, increase in warrant liabilities of $0.2million, and increase in conversion feature liabilities of $0.2 million.

 

Our cash used ininvesting activities was $1.2 million for the year ended December 31, 2007primarily for purchase of property and equipment.

 

Our cash provided byfinancing activities was $12.7 million for the year ended December 31,2007.  We received net $1.4 million in borrowings from factoring agreementexecuted in April 2005. The proceeds from borrowings have been used tomeet working capital requirements.   We have $4.0 million availablefor future borrowings under the factoring agreement, which is contingent onapproval of eligible receivables by the financing company.  As of December 31,2007, we had cash of $1.2 million.

 

Our capitalrequirements during the next twelve months will depend on numerousfactors, including the success of existing products either in manufacturing ordevelopment, the development of new applications for Liquidmetal alloys, andthe resources we devote to develop and support our Liquidmetal alloy products,the success of pursuing strategic licensing and funded product developmentrelationships with external partners.

 

We have experiencedsignificant operating losses since our inception. Our net loss for the fiscalyears ended December 31, 2007 and 2006 was $5.6 million and $14.5 million,respectively.  In the audit report on our financial statements for ourfiscal years ended December 31, 2007 and 2006, our auditors included a going-concernqualification indicating that our significant operating losses and workingcapital deficit cause substantial doubt about our ability to continue as agoing concern. By issuing an opinion stating that there is substantial doubtabout our ability to continue as a going concern, our auditors have indicatedthat they are uncertain as to whether we have the capability to continue ouroperations without additional funding.  On February 22,2008, we received $1.7 million distribution from our majority owned subsidiary,Liquidmetal Coatings, LLC (“LMC”) from which it issued and sold $2.5 million inpreferred membership units to two existing holders ofLMC common membership units.  The preferred units issued byLMC have an accruing priority return of 14% per year and are redeemable bythe preferred holders on the fourth anniversary of the issue date.

 

We anticipate that the$1.7 million distribution received will be sufficient to pursue ourcurrent operating plan only through the second quarter of 2008, and we willtherefore require additional funding at or prior to that time.  We are actively seekingadditional sources of capital and seeking to restructure and/or modify existingindebtedness.  The amount of funding that we seek and the timing of suchfundraising efforts will depend on the extent to which we are able to increaserevenues through obtaining additional purchase orders for our products and/orthe extent to which we can restructure or modify our debt.  Because wecannot be certain that we will be able to obtain adequate funding from debt,equity, or other traditional financing sources, we are also actively exploringseveral strategic financing options, including the possible sale of ourmanufacturing plant in South Korea (which would then be replaced with a smallerfacility) and additional licensing and outsourcing of our manufacturingoperations.  We cannot guarantee that adequate funds will be available when needed, andif we do not receive sufficient capital, we may be required to alter or reducethe scope of our operations.

 

Additionally, we haveapproximately $3.0 million of principal and accrued interest outstanding as of December 31,2007, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007.  Subsequent to December 31, 2007 and as of thefiling of this report, we repaid $1.9 million of principal and accrued interestdue under the Bridge Notes and have approximately $1.1 million of principal andaccrued interest outstanding.  We intend tofully repay the amounts due under the Bridge Notes.  However, as of thefiling of this report we do not have sufficient funds to repay the BridgeNotes.  As a result, we are currently in default under the BridgeNotes.   Such a default may have material adverse effect on ouroperations, financial condition, and results of operations. We have notreceived a formal notice of default and we are currently working to resolvethis matter with the investors holding our Bridge Notes.

 

We were required under our amendedSecurity Purchase Agreement, dated April 23, 2007, between our company andholders of our 8% convertible subordinated notes due January 2010 (the “January 2010Notes”), to repay outstanding debt under previously issued promissory notes,including the Bridge Notes (“Debt Satisfaction Covenant”) by October 1,2007.  As we have not yet fully repaid our Bridge Notes, we are not incompliance with this covenant and are subject to default under the January 2010Notes.  Such a default may have material adverse effect on our operations,financial condition, and results of operations. We have not received a formalnotice of default under this covenant and we are currently working to resolvethis matter.

 

36

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##### **InitialPublic Offering Proceeds**

##### ** **

Pursuantto our Registration Statement on Form S-1 (Registration No. 333-73716),as amended, initially filed with the Securities and Exchange Commission on November 20,2001 and declared effective May 21, 2002, we closed an initial public offeringof 5,000,000 shares of common stock on May 28, 2002, plus an additional229,000 shares on June 10, 2002 pursuant to an over allotment option, at aprice of $15.00 per share (which sale is referred to herein as the “Offering”).The Offering generated aggregate cash proceeds during the second quarter 2002of $78.4 million. The net proceeds were $70.7 million after deductingunderwriting commissions of $5.5 million and other transaction fees of$2.2 million. As of December 31, 2003, we used $70.7 million ofnet proceeds from the Offering.

 

**Private Placements of Convertible Notes and BridgeNotes**

** **

The following privateplacement of convertible notes and bridge notes are outstanding as of December 31,2007.

 

On May 17, 2006, September 21,2006, and December 1, 2006, we completed a private placement of 8%Unsecured Subordinated Notes in the aggregate principal amount of $4.6 million(the “Bridge Notes”), together with warrants to purchase up to an aggregate of973,064 shares of our common stock.  The Bridge Notes were unsecured andwere scheduled to become due on the earlier of August 17, 2007 or theconsummation of a follow-on equity or debt offering pursuant to which wereceive gross proceeds of at least $6.0 million, but in no event will theBridge Notes become due any earlier than the payment in full of the previouslyissued promissory notes, including 7% Senior Secured Notes Due August 2007(the “August 2007 Notes”) and 6% Senior Secured Notes Due July 2007(the “July 2007 Notes”).  As a part of the private placement of theBridge Notes, we issued warrants to the purchasers of the Bridge Notes givingthem the right to purchase up to an aggregate of 890,990 shares of our commonstock, and warrants to purchase 82,074 shares of our common stock were issued tothe placement agent in the transaction. The warrants have an exercise price of$2.58 per share and will expire on May 17, 2011.

 

On January 3,2007, we completed a private placement of new 8% Convertible Subordinated Notesdue January 2010 (the “January 2010 Notes”).  As a result of an April 2007amendment to this transaction, we ultimately issued $16.3 million in principalamount of January 2010 Notes, which supersedes the aggregate note amountindicated in our prior announcements regarding the private placement. Under the amended transaction, the January 2010 Notes were issued foraggregate cash in the amount of $12.9 million and in payment of a total of $3.4million in principal and accrued but unpaid interest under the August 2007Notes and Bridge Notes.  The January 2010 Notes have a maturity dateof January 3, 2010.

 

The January 2010Notes were issued pursuant to a Securities Purchase Agreement, dated January 3,2007, between our company and the purchasers of the January 2010 Notes(the “January Purchase Agreement”).  Under the terms of the original January PurchaseAgreement, we agreed to repay or otherwise satisfy, within 5 days after theclosing of the private placement, approximately $15.5 million of ouroutstanding debt under previously issued promissory notes, including the August 2007Notes, 10% Subordinated Promissory Note due October 2006 (the “October 2006Note”), and Bridge Notes (the “Debt Satisfaction Covenant”).  Weoriginally agreed to this covenant based on assurances that a substantial numberof holders of the August 2007 Notes would elect to convert their August 2007Notes at a reduced conversion price following the private placement under anote conversion agreement proposed by us, but most of such holders ultimatelyelected not to proceed with such conversion.  Accordingly, in an effort topreserve funds, we have not yet repaid the indebtedness as required by theoriginal January Purchase Agreement, and in April 2007, we enteredinto an amendment to the January Purchase Agreement providing that we willhave until October 1, 2007 (or such earlier date on which the indebtednessto be repaid is due) to comply with the Debt Satisfaction Covenant.  Inaddition, the April 2007 amendment provides that the purchasers of the January 2010Notes have the right to require us to redeem such notes prior to maturity inthe event that we sell our Liquidmetal Coatings business unit, sell ourmanufacturing facility in South Korea, and/or engage in any debt or equityfinancing, provided that the foregoing transactions result in aggregatecumulative proceeds of $25,000, and it also provides that we will be obligatedto grant to the purchasers of such notes a *parpassu* security interest in any collateral (if any) that is used tosecure our next private placement of convertible notes.  As required bythe January Purchase Agreement, the April 2007 amendment was executedby the holders of more than fifty percent (50%) of the outstanding principalamount of the Notes.

 

The January 2010Notes, as amended by the April 2007 amendment, are convertible at any timeat the option of the holder into shares of our common stock at a conversionprice of $1.10 per share (compared to an original conversion price of $1.55 pershare), subject to adjustment for anti-dilution. The January 2010 Notesbear interest at 8% per annum with interest payable quarterly in arrears incash, or, at our option, in the form of additional January 2010 Notes (inwhich case the interest rate will be 10% per annum). Our ability to payinterest with additional January 2010 Notes is subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of interest and certainminimum trading volumes in the stock to be issued. From and after an event ofdefault under the January 2010 Notes and for so long as the event ofdefault is continuing, the January 2010 Notes will bear default interestat a rate of 12% per annum (or 15% per annum if we elect to pay interest withadditional January 2010 Notes).

 

37

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Beginning July 31,2008 and at the end of each month thereafter, we will be required to redeem1/36th of the principal amount of the January 2010 Notes in cash or, atour election, with shares of our common stock. Our ability to pay theredemption amounts with shares of our common stock will be subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of the redemption amountand certain minimum trading volumes in the stock to be issued. Any unconverted January 2010Notes will become due on December 31, 2009, although we will have theright at any time after 18 months following the issuance of the January 2010Notes to redeem the January 2010 Notes in whole or in part for a cashredemption price of 105% of the portion of the principal amount being redeemedplus all accrued and unpaid interest thereon. The January 2010 Notes areunsecured and are subordinate to our July 2007 Notes and to certainsecured financing from commercial lenders incurred by us in the future. The terms of the 2010 Notes also provide that we will be required to maintain asufficient bank balance to provide for the timely repayment of our July 2007Notes.

 

As a part of the January 2007private placement, we issued warrants to the purchasers of the January 2010Notes giving them the right following the April 2007 amendment to purchaseup to an aggregate of 7,408,881 shares of our common stock at an exercise priceof $1.55 per share. In connection with the private placement, we also issued tothe placement agent for the transaction warrants to purchase an aggregate of248,710 shares of our common stock at an exercise price of $1.55 pershare.  All of the warrants (including the warrants granted to theplacement agent in the transaction) are immediately exercisable and will expirein January 2012.

 

In connection with the January 2007private placement, we entered into a Registration Rights Agreement with thepurchasers of the January 2010 Notes under which we are required, on orbefore 45 days after the closing of the private placement, to use ourcommercially reasonable efforts to file a registration statement with the SECcovering the resale of the shares of our common stock issuable pursuant to the January 2010Notes and warrants and to use our commercially reasonable efforts to have theregistration declared effective at the earliest date (but in no event laterthan 90 days after filing if there is no SEC review of the registrationstatement, or 120 days if there is an SEC review).  We will besubject to certain monetary penalties, as set forth in the Registration RightsAgreement, up to a maximum amount of 18% of the aggregate amount of Notes soldin the Private Placement if the registration statement is not filed or does notbecome effective on a timely basis. The monetary penalties will accrue at therate of 1% per month of the then-outstanding principal amount of the January 2010Notes. In the event that we are unable to include in the registration statementall shares of our common stock issuable pursuant to the January 2010 Notesand warrants, then we will be required to file up to two additionalregistration statements to register the resale of any shares excluded from theoriginally filed registration statement and to pay the foregoing monetarypenalties on the January 2010 Notes convertible into the excluded sharesuntil the resale of such excluded shares is covered by an effectiveregistration statement or until such shares can be sold under SEC Rule 144. As of December 31, 2007, an aggregate of $0.7 million in monetarypenalties under the Registration Rights Agreement had already been paid toinvestors, while an additional $0.2 million in such penalties were accrued butunpaid.

 

On October 1, 2007, the Company issued $1.0million of additional January 2010 Notes for accrued interest and lateregistration fees.

 

OnDecember 28, 2007, the Company issued $1.0 million of January 2010Notes, together with warrants to purchase up to an aggregate of 681,818 and200,000 of the Company’s common stock to purchasers of the notes and placementagents.  The warrants will expire on December 28,2012 and are exercisable at $1.55 per share.

 

As of December 31,2007, $17.8 million in aggregate principal amount of January 2010 Noteswere still outstanding with accrued but unpaid interest and late registrationfees in the amount of approximately $0.6 million, and $2.8 million in aggregateprincipal amount of Bridge Notes were also outstanding with accrued but unpaidinterest in the amount of approximately $0.3 million.

 

**Loan from Kookmin Bank**

** **

Our Liquidmetal Korea Co., Ltd. subsidiary has an outstanding loan fromKookmin Bank in the Republic of Korea. As of December 31, 2007, the outstanding balance under this loanwas $0.5 million.  The loan is payable inmonthly installments of $0.11 million per month through February 2008.

 

38

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**OFF-BALANCE SHEET ARRANGEMENTS**

 

An off-balance sheetarrangement is any transaction, agreement or other contractual arrangementinvolving an unconsolidated entity under which a company has (1) madeguarantees, (2) a retained or a contingent interest in transferred assets,(3) an obligation under derivative instruments classified as equity, or (4) anyobligation arising out of a material variable interest in an unconsolidatedentity that provides financing, liquidity, market risk or credit risk supportto our company, or that engages in leasing, hedging, or research anddevelopment arrangements with our company.

 

On June 26, 2006,we entered into a joint venture agreement with SAGA, SpA in Padova, Italy, (‘SAGA”)a specialist precision parts manufacturer.  The joint venture is namedLiquidmetal SAGA Italy, Srl (“LSI”).  We also entered into an exclusivemanufacturing license agreement for the eyewear industry with LSI.  Underthe joint venture agreement, we have the option to buy ownership interest inLSI, initially, of 19.9% to up to 50%.  In December 2006, we havepurchased 19.9% interest in the joint venture.  Under the licensingagreement, at any time following 18 months after the effective date of theagreement, LSI may exercise its option to sell us certain business assetsincluding manufacturing equipment acquired under the joint venture. During the years ended December 31, 2007 and 2006, we recognized revenuesof $0.1 million and $0.7 million, respectively, of Liquidmetal alloys sold toSAGA for use in the joint venture.  We anticipate the alloys to be fullyutilized by the joint venture prior to the 18 month period.

 

##### **CONTRACTUALOBLIGATIONS**

##### ** **

The followingtable summarizes our company’s obligations and commitments as of December 31,2007:

 
| ** **                                          | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations (1)** | ** ** | **Total**                                                          | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt (2)                                  |       | $                                                                  | 20,906     |   | $ | 6,075 |   | $ | 14,831 |   | $ | — |   | $ | — |   |
| Long-term debt of consolidated subsidiary  (2)      |       | 10,245                                                             |       | $ | 854 |   | $ | 9,391 |   | $ | — |   | $ | — |   |
| Short-term debt (3)                                 |       | 1,008                                                              |       | 1,008 |   | — |   | — |   | — |   |
| Short-term debt of consolidated subisidiary  (3)    |       | 1,174                                                              |       | 1,174 |   | — |   | — |   | — |   |
| Operating leases and rents                          |       | 1,048                                                              |       | 269 |   | 692 |   | 87 |   | — |   |
| Consulting services payable                         |       | 240                                                                |       | 204 |   | 36 |   | — |   | — |   |
| Foster Wheeler                                      |       | —                                                             |       |   |   |   |   |   |   |   |   |
| Dongyang                                            |       | 12                                                                 |       | 12 |   | — |   | — |   | — |   |
| Nichimen                                            |       | 315                                                                |       | 315 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 34,948     |   | $ | 9,911 |   | $ | 24,950 |   | $ | 87 |   | $ | — |   |

 

----

(1) Contractual cash obligations includeLong-Term Debt comprised of $2,658 of Unsecured Subordinated Notes issued in2006, $17,797 of Convertible Unsecured Notes issued in 2007, $451 of KookminBank Loan, and $3,688 of Bank Midwest term loan, and $6,557 of C3 CapitalPartners Subordinated Notes, Short-Term Debt comprised of $1,008 outstandingadvances received under factoring, loan, and security agreement, $1,174 of BankMidwest revolving loan, and future minimum lease payments under capital andoperating leases, and purchase commitments from consultants, payments due fromassets purchased from Foster Wheeler thermal spray coatings business, paymentsdue from our discontinued equipment manufacturing business, and minimumpayments due under a distribution agreement.

(2) Does not include interest paymentsof $7,397; and un-amortized cash discount and discounts for conversion featureand warrants of $10,471 of our convertible notes.

(3) Does not include minimum interestand fee payments of $30.

 

##### **CRITICALACCOUNTING POLICIES AND ESTIMATES**

##### ** **

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates and assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

39

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Webelieve that the following accounting policies are the most critical to ourconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and operating results:

 
|   | · |   | Our earnings and cash flows are subject to fluctuations  due to changes in non-U.S. currency exchange rates. We are exposed to  non-U.S. exchange rate fluctuations as the financial results of non-U.S.  subsidiaries, Korea and China, are translated into U.S. dollars. As exchange  rates vary, those results, when translated, may vary from expectations and adversely  impact overall expected profitability. The cumulative translation effects for  subsidiaries using functional currencies other than the U.S. dollar are  included in accumulated foreign exchange translation in stockholders’ equity.  Movements in non-U.S. currency exchange rates may affect our competitive  position, as exchange rate changes may affect business practices and/or  pricing strategies of non-U.S. based competitors. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We record an accrual for potential product warranty  costs. Due to the lack of historical information for warranty expense related  to bulk alloy products, management estimates product warranties as a  percentage of bulk alloy product sales earned during the period. In the event  in future periods the actual product warranty costs consistently exceed the  estimate for product warranty costs, an adjustment would be made and income  would decrease in the period of such determination. Likewise, in the event we  determine that actual product warranty costs are consistently lower than the  estimate for product warranty costs, an adjustment would be made and income  would increase in the period of such determination.                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We record an allowance for doubtful accounts as a  contra-asset to our trade receivables for estimated uncollectible accounts.  Management estimates the amount of potentially uncollectible accounts by  reviewing significantly past due customer balances relative to historical  information available for those customers. In the event, in future periods,  actual uncollectible accounts exceed the estimate for uncollectible accounts,  an adjustment would be made and income would decrease in the period of such  determination. Likewise, in the event, in future periods, actual  uncollectible accounts are lower than the estimate for uncollectible  accounts, an adjustment would be made and income would increase in the period  of such determination.                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We value inventories at lower of cost or net realizable  value. Management has determined net realizable value to be equal to the  selling price of the products to be produced and sold less the cost of  disposal. In the event, in future periods, the actual selling prices exceed  the estimate for selling prices less cost to sell, an adjustment would be  made and income would increase in the period of such determination. Likewise,  in the event, in future periods, actual selling prices are lower than the  estimate for selling prices, an adjustment would be made and income would  decrease in the period of such determination.                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We value our assets at lower of cost or fair market  value. Management has determined fair market to be equal to the selling price  of the assets to be sold less the cost of disposal. In the event, in future  periods, actual selling prices are lower than the estimate for selling  prices, an adjustment would be made and income would decrease in the period  of such determination.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We record valuation allowances to reduce the deferred  tax assets to the amounts estimated to be realized. While we consider taxable  income in assessing the need for a valuation allowance, in the event we  determine we would be able to realize our deferred tax assets in the future  in excess of the net recorded amount, an adjustment would be made and income  increased in the period of such determination. Likewise, in the event we  determine we would not be able to realize all or part of our deferred tax  assets in the future, an adjustment would be made and charged to income in  the period of such determination.                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We account for the warrants and the embedded conversion  feature of our senior convertible notes as derivatives in accordance with  Statement of Financial Accounting Standards No. 133, Accounting for  Derivative Instruments and Hedging Activities, and Emerging Issues Task Force  Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed  to, and Potentially Settled in, a Company’s Own Stock. Fair values of  warrants and embedded conversion features are measured at each period end  using Black-Scholes pricing models and changes in fair value during the  period are reported in our earnings                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | · |   | We adopted Statement of Financial Accounting  Standards No. 123, Share-Based Payment (“SFAS 123R”), on January 1,  2006. This new standard requires companies to expense the fair value of employee  stock options and similar awards. We adopted SFAS 123R using the modified  prospective transition method. Therefore, stock based compensation expense  measured in accordance with SFAS 123R was recorded starting with the first  quarter of 2006, but the prior year consolidated statement of income was not  restated. The adoption of SFAS 123R resulted in incremental expense of $0.6  million and $1.1 million for the years ended December 31, 2007 and 2006.                                                                                                                      |

 

40

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##### **RECENTACCOUNTING PRONOUNCEMENTS**

##### ** **

In February 2007, the FASBissued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities Including an amendment of FASB Statement No. 115 (SFAS 159),”which permits entities to choose to measure many financial instruments andcertain other items at fair value. The effective date of SFAS 159 will be thefirst quarter of 2008.  We are currentlyevaluating the provisions of SFAS 159 and do not expect the adoption of thisnew standard to have a material impact on our consolidated financialstatements.

 

In December 2007, the FASBissued SFAS 141R, “Business Combinations” (SFAS 141R). SFAS 141R amends therequirements for accounting for business combinations.  SFAS 141R will beeffective for financial statements issued for fiscal years beginning after December 15,2008.  We are currently evaluating the impact of adopting SFAS 141R andSFAS 160 on our financial statements.

 

Other recent accounting pronouncementsissued by the FASB (including its Emerging Issues  Task Force), the AICPA and the SEC did not orare not believed by management to have a material impact on our company’spresent or future consolidated financial statements.

 

**Item 7A.Quantitative and Qualitative Disclosures About Market Risks**

 

We are exposed to various market risks inconducting the business of the company, and we anticipate that this exposurewill increase as a result of our planned growth. In an effort to mitigatelosses associated with these risks, we may at times enter into derivativefinancial instruments, although we have not historically done so. These maytake the form of forward sales contracts, option contracts, foreign currencyexchange contracts, and interest rate swaps. We have not, and do not intend to,engage in the practice of trading derivative securities for profit.

 

*Interest Rates.*Weare exposed to market risks relating to changes in interest rates.  Although we do not currently have anyborrowings with variable interest rates, fluctuations in interest rates mayhave a negative impact to any future borrowings.

 

*Commodity Prices.*Weare exposed to price risk related to anticipated purchases of certaincommodities used as raw materials by our businesses, including titanium andzirconium. Although we do not currently enter into commodity future, forward,and option contracts to manage the fluctuations in prices of anticipatedpurchases, we may enter into such contacts in the future as our business growsand as our purchases of these raw materials increases.

 

*Foreign Exchange Rates.*Asa result of our manufacturing presence in South Korea, a substantial portion ofour costs will be denominated in South Korean won. Consequently, fluctuationsin the exchange rates of the South Korean won to the U.S. dollar will affectour costs of goods sold and operating margins and could result in exchangelosses. Although we do not currently enter into foreign exchange hedgetransactions, we may do so in the future as our business grows. Fluctuationsin exchange rates resulted in foreign currency translation gains of $0.2million, $0.3 million, and $0.3 million for the years ended December 31,2007, 2006, and 2005, respectively.

 

**Item 8.Financial Statements and Supplementary Data**

 

The financial statements required by this itemare located in Consolidated Financial Statements in Item 15 of this report. Thesupplementary financial information required by this item is located under thecaption “QUARTERLY RESULTS” in Item 7 of this report.

 

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosures**

 

None.

 

**Item9A. Controls and Procedures**

 

Evaluation of Disclosure Controls andProcedures.  Basedon an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) as of December 31, 2007, the end of the period coveredby this report, our Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures were effective.

 

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Changes in Internal Controls.  Duringthe quarter ended December 31, 2007, there was no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

Management’s Report on InternalControl over Financial Reporting.  The company’smanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Internal control over financial reporting isa process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements in accordancewith generally accepted accounting principles and includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the company’s assets, (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat the company’s receipts and expenditures are being made only in accordancewith authorizations of the company’s management and directors, and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

As required by Section 404 ofthe Sarbanes-Oxley Act of 2002 and the related rule of the SEC, managementassessed the effectiveness of the company’s internal control over financialreporting using the Internal Control-Integrated Framework developed by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

Based on this assessment,management concluded that the company’s internal control over financialreporting was effective as of December 31, 2007. Management has notidentified any material weaknesses in the company’s internal control overfinancial reporting as of December 31, 2007.

 

Our independent auditors, Choi, Kim &Park, LLP (“CKP”), who have audited and reported on our financial statements,issued an attestation report on our management’s assessment of the company’sinternal control over financial reporting. CKP’s reports are included in thisannual report on Form 10-K.

 

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Shareholders of Liquidmetal TechnologiesInc.

 

We have audited management’s assessment, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting, thatLiquidmetal Technologies Inc. and subsidiaries (the “Company”) maintained effectiveinternal control over financial reporting as of December 31, 2007, based oncriteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit. 

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions. 

 

A company’s internal control over financial reporting is a processdesigned by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements. 

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis. Also, projections of any evaluation ofthe effectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. 

 

In our opinion, Liquidmetal Technologies, Inc. maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 30, 2007, based on the criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. 

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2007 of the Company andour report dated March 28, 2008 expresses an unqualified opinion on thosefinancial statements and includes explanatory paragraphs referring to theCompany’s ability to continue as a going concern.

 

 
| /s/ Choi, Kim & Park LLP |   |
|------------------------------|--------|
|                         |   |
| Los Angeles, California      |   |
| Certified Public Accountants |   |
|                         |   |
| March 28, 2008               |   |
|                         |

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****Item 9B. Other Information****

 

On October 31 2007, we reduced theexercise price of previously issued warrants to purchase our common stock to$1.75 and increased the outstanding warrants with certain holders of the 8%unsecured subordinated notes Due August 2007 (the “August 2007Subordinated Notes”) by 30% for an extension of the maturity of the August 2007Subordinated Notes.   The August 2007Subordinated Notes became due August 17, 2007 and were issued a privateplacement in May 2006.

 

On December 1, 2007, we issued $1.0 million of 8%Convertible Subordinated Notes Due January 2010 (the “January 2010Notes”) as payment for accrued interest and late registration fees due underthe notes.  The January 2010 Noteswere issued pursuant to a Securities Purchase Agreement, as amended in April 2007,between our company and the purchasers of the January 2010 Notes (the “PurchaseAgreement”) and are convertible at any time at the option of the holder intoshares of our common stock at a conversion price of $1.10 per share.  The January 2010 Notes bear interest at8% per annum with interest payable quarterly in arrears in cash, or, at ouroption, in the form of additional January 2010 Notes (in which case theinterest rate will be 10% per annum). Our ability to pay interest withadditional January 2010 Notes is subject to specified conditions,including the existence of an effective registration statement covering theresale of the shares issued in payment of interest and certain minimum tradingvolumes in the stock to be issued. The January 2010 Notes are unsecuredand are subordinate to our July 2007 Notes and to certain securedfinancing from commercial lenders incurred by us in the future.

 

OnDecember 28, 2007, we issued $1.0 million of January 2010 Notes,together with warrants to purchase up to an aggregate of 681,818 and 200,000 ofthe Company’s common stock to purchasers of the notes and placementagents.  The warrants will expire on December 28,2012 and are exercisable at $1.55 per share.

 

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**PART III**

 

**Item 10. Directors andExecutive Officers of the Registrant**

 

Setforth below is a table identifying our directors and executive officers as of March 17,2008:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                           | ** ** |
|------------------------|------------|---------|------------|----------------------------------------|------------|
|                   |       |    |       |                                   |       |
| Larry Buffington       |       | 60      |       | President and Chief  Executive Officer |       |
|                   |       |    |       |                                   |       |
| Gerald Morrow          |       | 57      |       | Chief Financial Officer                |       |
|                   |       |    |       |                                   |       |
| John Kang              |       | 44      |       | Chairman of the Board                  |       |
|                   |       |    |       |                                   |       |
| Dean Tanella           |       | 46      |       | Director                               |       |
|                   |       |    |       |                                   |       |
| William Johnson, Ph.D. |       | 57      |       | Director                               |       |
|                   |       |    |       |                                   |       |
| Robert Biehl           |       | 65      |       | Director                               |       |
|                   |       |    |       |                                   |       |
| CK Cho                 |       | 51      |       | Director                               |       |
|                   |       |    |       |                                   |       |
| Patrick Caruana        |       | 67      |       | Director                               |       |

 

*LarryBuffington* was elected by our Board of Directors to serve asthe President and Chief Executive Officer in October 2006.  Mr. Buffington has been serving asfull-time consultant to the Company since July 2006.  He is also the president of BuffingtonConsulting, a consulting firm that Mr. Buffington started in 1997 focusingon the assessment and turnaround of manufacturing operations.  Prior to starting Buffington Consulting, Mr. Buffingtonwas the General Manager of the Communications Products Business Unit of Augat, Inc.,a public company with worldwide manufacturing operations in communication,automotive and electronic products.  Mr. Buffingtonreceived a bachelor’s degree in Industrial Engineering from Pennsylvania StateUniversity in 1969.

 

*GeraldMorrow*was elected byour Board of Directors to serve as the Chief Financial Officer in January 2008.  Mr. Morrow most recently served as VicePresident of Finance at Performance Team Freight Systems, Inc., anationwide third party logistics company.  He served in this capacity from2000 until 2007, where he oversaw all finance, budgeting and human resourceresponsibilities.  From 1999 to 2000, Mr. Morrow was the Controllerfor Ace Clearwater Enterprises, a privately held aerospace manufacturingcompany.  From 1996 to 1998, he was the Controller of Gerald Metals, Inc.’sPGP Industries, a precious metals trading and refining company.  From 1993to 1995, Mr. Morrow served as the Division Controller of the VerticalProducts Division of Goulds Pumps, Incorporated, which manufactured verticalturbine pumps.  From 1987 through 1993, Mr. Morrow served asController of Dun & Bradstreet Corporation’s Donnelly InformationPublishing.  Mr. Morrow received a B.S. in Business Administrationfrom the California State University at Long Beach in 1975.

 

*JohnKang* was re-elected as Chairman of our Board of Directors in November 2007.   Mr. Kang**has served as a director of our company since 1994.  From December 1994 to June 2001, heserved as Chairman of our Board of Directors in various capacities.  From June 2001 until December 30,2005, Mr. Kang had served variously as our Chief Executive Officer andPresident.  From July 1996 to September 2000,Mr. Kang served variously as Chief Executive Officer, President, and adirector of Medical Manager Corporation, a public company traded on the NasdaqNational Market until its sale in September 2000 to WebMD Corporation.From 1988 to 1995, he was Chairman of the board of directors of Clayton Group, Inc.,a private company engaged in the distribution of waterworks equipment.  Mr. Kang received a B.A. degree inEconomics from Harvard College in 1985. On December 15, 2005, anindictment naming as defendants ten former officers and directs of MedicalManager Corporation, including Mr. Kang, was filed in the United StatesDistrict Court for the District of South Carolina (Beaufort Division). Theindictment includes counts for conspiracy, conspiracy to launder moneyinstruments, and money laundering relating to a series of acquisitions thatwere made by Medical Manager during the years the years 1996 through 2003, theaccounting practices of Medical Manager during that time frame, and the filingof various financial statements during that time frame.  The indictment is unrelated to Mr. Kang’sservice as a director and officer of our company.  Mr. Kang resigned as our President andChief Executive Officer on December 30, 2005, although he continues toserves as Chairman of the Board of our company and continues to work for ourcompany on a full-time basis.

 

*Dean Tanella* was re-elected as adirector in November 2007. Mr. Tanella has served as a director ofour company since 2004.  Mr. Tanellais a 20-year veteran of the institutional investment business and has workedfor such leading firms as Raymond James & Associates, CS First BostonCorp., Adams Harkness & Hill, Drexel Burnham Lanbert, Inc.,Kidder Peabody & Co. and 

 

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theVanguard Group.  Since 1999, Mr. Tanellahas served as President of Safe Harbor Capital, LLC and, since 2003, asPresident of HarborLight Capital, LLC, both of which are private investmentfirms.  Mr. Tanella received hisbachelors degree from Princeton University and his MBA from the HarvardGraduate School of Business Administration. In December 2004, Mr. Tanella was also named Executive VicePresident – Capital Markets Group and a member of the Board of Directors atGunnAllen Financial Inc., a leading independent brokerage firm headquartered inTampa, Florida.

 

*William Johnson, Ph.D*.*,*wasre-elected as a director in November 2007. Mr. Johnson has served asa director of our company since June 2000. From October 2001 to September 2003, he was employed as ourexecutive Vice Chairman of Technology. Since 1997, Professor Johnson has been the Mettler Professor ofEngineering and Applied Physics at Caltech. He held a Visiting Professor appointment at the Metal Physics Institute inGottingen, Germany (1983) and received a Von Humbolt Distinguished ScientistFellowship in Gottingen (1988).  He isthe 1995 recipient of the TMS/AIME Hume Rothery Award for his experimentalwork.  He received a B.A. degree inPhysics from Hamilton College and a Ph.D. degree in Applied Physics fromCaltech.  He spent two years at IBM’sResearch Center (1975-1977).  At Caltech,Professor Johnson directed the research that led to the discovery of our bulkLiquidmetal alloy.  Professor Johnson iscurrently a consultant to the Company.

 

*Robert Biehl* was re-elected as adirector in November 2007. Mr. Biehl has served as a director since2005.  Mr. Biehl founded theMasterplanning Group International and as President, personally consulted over400 clients and mentored over 2,500 executives and world leaders.  Prior to starting Masterplanning Group, Mr. Biehlwas an executive staff of World Vision International where he designed anddeveloped the Love Loaf Program, which has raised millions of dollarsworldwide.  He has also published manybooks in the area of personal and organizational development.  Mr. Biehl received his B.A. degree inPsychology and a Masters Degree in Counseling from Michigan State University.

 

*CK Cho* was re-elected as a director in November 2007.Mr. Cho has served as a director since 2005.  Mr. Cho has over 18 years of experiencewith Samsung Electronics and managed over $700 million annual procurementbudget responsible for semi-conductor and telecommunication equipment and otherelectronic components.  He also served asCEO and President of Winvest Venture Partners Inc. and is currently serving asPresident and CEO of ATIC, an IT Venture Capital Company based in Korea.  Mr. Cho received his bachelor’s degreemajoring in Business Administration and Material Sciences from the KoreaUniversity of Seoul.

 

*PatrickCaruana*was re-elected as a director in November 2007.  Mr. Caruana served as a director since2006.  Mr. Caruana is a retiredUnited States Air Force General and a recently retired vice president forNorthrop Grumman Space Technology.  From2002 through February 2005, he had served as Vice President of NorthropGrumman Space Technology and was the Corporate lead for Missile and Defensebusiness development in the Asia market. Mr. Caruana served as Vice President and Program Manager for TRWSpace & Electronics from August 1999 until the Company wasacquired by Northrup Grumman in 2002. Prior to joining TRW, Mr. Caruana served 36 years in the U.S. AirForce, retiring the grade of Lieutenant General.  Mr. Caruana is a graduate of the U.S.Air Force Academy, where he earned a bachelor’s degree in engineering.  In 1972, Mr. Caruana received a Masterof Science degree in Mathematics from Texas A&M University.

 

**Change in Principal FinancialOfficer**

 

OnJanuary 13, 2008 Won Chung ceased to be our company’s principal financialand accounting officer upon appointment of Gerald Morrow as our Chief FinancialOfficer by our Board of Directors.  Mr. Chungwas previously elected to serve as our principal financial and accountingofficer on May 1, 2007 by our Board of Directors.  Mr. Chung continues to serve as VicePresident of Finance of our company. Additional information regarding Mr. Morrow is set forth above inthis Item 10.

 

###### **BOARD OF DIRECTORS**

###### ** **

**Terms of Directors**

 

**Ourboard of directors is divided into three classes (designated “CLASS I,” “CLASS II,”and “CLASS III”), as nearly equal in number as possible, with each classserving three-year terms expiring at the third annual meeting of stockholdersafter their elections or until their respective successors have been electedand qualified.  CLASS I currentlyconsist of the following directors whose term is scheduled to expire at the2009 annual meeting of stockholders or the first annual meeting thereafter:Robert Biehl and John Kang.  CLASS IIcurrently consists of the following directors whose term is scheduled to expireat the 2010 annual meeting of stockholders: Dean Tanella and CK Cho.  CLASS IIIcurrently consists of the following directors whose term will expire at the2008 annual meeting of stockholders: William Johnson and Patrick Caruana.**

** **

**46**

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** **

**AuditCommittee**

 

Ourboard of directors has an Audit Committee that is currently comprised of Mr. Tanella,and Mr. Biehl.  The Audit Committee is responsible for reviewing theindependence, qualifications, and activities of our independent certifiedaccountants and our financial policies, control procedures, and accountingstaff.  The Audit Committee is also responsible for the review oftransactions between us and any officer, director, or entity in which anofficer or director of our company has a material interest.  Our board ofdirectors has determined that Mr. Tanella qualifies as “audit committee financialexpert” as defined by the regulations of the Securities and ExchangeCommission.   In addition, our boardof directors has determined that Mr. Tanella is an “independent” directorwithin the meaning of Rule 10A-3(b)(i) under the Securities ExchangeAct of 1934.  The Audit Committee isgoverned by a written charter approved by the board of directors.

 

**Compensation Committee**

** **

TheCompensation Committee is comprised of Mr. Cho and Mr. Biehl. All ofthe members of the Compensation Committee are “independent directors,” asdefined by the rules applicable to members of the Compensation Committee.The Compensation Committee is responsible for establishing the compensation ofour senior management, including salaries, bonuses, termination arrangements,and other executive officer benefits. The Compensation Committee alsoadministers our equity incentive plans.

 

**CorporateGovernance and Nominating Committee**

** **

ACorporate Governance and Nominating Committee (“the Committee”) was formed on February 18,2003, and is comprised of Mr. Tanella and Mr. Biehl.  Allmembers of the Committee are “independent directors,” as defined by the rules applicableto members of the Committee. The Committee is generally responsible foradopting policies, procedures, and practices designed to help ensure that ourcorporate governance policies, procedures, and practices continue to assist theboard and our management in effectively and efficiently promoting the bestinterests of our stockholders. The Committee is also responsible for selectingand recommending for approval by the Board and the Company’s stockholders aslate of director nominees for election at each of the Company’s annualmeetings of stockholders, and otherwise for determining the Board committeemembers and chairmen, subject to Board ratification, as well as recommending tothe Board director nominees to fill vacancies or new positions on the Board orits committees that may occur or be created from time to time, all inaccordance with the Company’s Bylaws and applicable law.

 

TheCorporate Governance Committee’s principal functions include:

 

·      developing and maintainingour corporate governance policy guidelines;

 

·      developing and maintainingour codes of conduct and ethics;

 

·      overseeing theinterpretation and enforcement of our Code of Conduct and our Code of Ethicsfor  Chief Executive Officer and SeniorFinancial and Accounting Officers; and

 

·      evaluating theperformance of our board, its committees, and committee chairmen and ourdirectors.

 

·      selecting andrecommending a slate of director nominees for election at each of the Company’sannual meeting of the shareholders and recommending to the Board directornominees to fill vacancies or new positions on the Board or its committees thatmay occur from time to time.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Noneof the members of our compensation committee serves, or has at any time served,as an officer or employee of us or any of our subsidiaries. None of ourexecutive officers has served as a member of the compensation committee, orother committee serving an equivalent function, of any other entity, one ofwhose executive officers served as a member of our compensation committee.

 

**Limitationof Liability and Indemnification of Officers and Directors**

 

Ourby-laws provide that our directors, officers and employees shall be indemnifiedby us to the fullest extent authorized by Delaware law, as it now exists or mayin the future be amended, against all expense, liability and loss reasonablyincurred or suffered by them in connection with their service for or on behalfof us.  In addition, we have entered into separate indemnificationagreements with our directors and executive officers. We believe that theseprovisions and agreements are necessary to attract and retain qualified personsas directors and executive officers. These indemnification agreements mayrequire us to indemnify our directors and executive officers for relatedexpenses, including attorneys’ fees, judgments, fines and amounts paid insettlement that were actually and reasonably incurred or suffered by a directoror executive officer in an action or proceeding arising out of his or herservice as one of our directors or executive officers.  In order to coverthe foregoing potential expenses and liability, we have obtained insurance thatinsures our directors and officers against specified losses.

 

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**Code of Ethics**

 

Our board ofdirectors has adopted a Code of Ethics that is applicable to its principalexecutive officer, principal financial officer, principal accounting officer orcontroller, and persons performing similar functions.  The Code of Ethics is attached as Exhibit 14to our Annual Report on Form 10-K filed on November 10, 2004.  In addition, we intend to promptly disclose (1) thenature of any amendment to our Code that applies to our principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions and (2) the nature ofany waiver, including an implicit waiver, from a provision of our Code that isgranted to one of these specified officers, the name of such person who isgranted the waiver and the date of the waiver on our website in the future. Youmay also request a copy of the Code by sending the request to information@liquidmetal.com.

 

**Item 11. Executive Compensation**

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

Thiscompensation discussion describes the material elements of compensation awardedto, earned by, or paid to each of our executive officers who served as namedexecutive officers during the last completed fiscal year. This compensationdiscussion focuses on the information contained in the following tables andrelated footnotes and narrative for primarily the last completed fiscal year,but we also describe compensation actions taken before or after the lastcompleted fiscal year to the extent it enhances the understanding of ourexecutive compensation disclosure.

 

Thecompensation committee currently oversees the design and administration of ourexecutive compensation program.

 

Theprincipal elements of our executive compensation program are base salary,annual cash incentives, long-term equity incentives in the form of stockoptions, other benefits and perquisites, post-termination severance andacceleration of stock option vesting for certain named executive officers upontermination and/or a change in control. Our other benefits and perquisitesconsist of reimbursement for certain automobile payments and health insurancebenefits. Our philosophy is to position the aggregate of these elements at alevel that is commensurate with our size and sustained performance.

 

**Compensation Program Objectives and Philosophy**

 

Theobjectives of our compensation programs are to:

 

·                  attract, motivate and retaintalented and dedicated executive officers;

 

·                  provide our executive officerswith both cash and equity incentives to further the interests of us and ourstockholders; and

 

·                  provide employees with long-termincentives so we can retain them and provide stability during our growth stage

 

Generally,the compensation of our executive officers is composed of a base salary, anannual incentive compensation award and equity awards in the form of stockoptions. In setting base salaries, the compensation committee reviewed theindividual contributions of the particular executive. The management incentiveprogram for 2007 is a discretionary award determined by the compensationcommittee based on company performance. In addition, stock options are grantedto provide the opportunity for long-term compensation based upon theperformance of our common stock over time.

 

Foreach of our named executive officers, the compensation committee reviews andapproves all elements of compensation taking into consideration recommendationsfrom our principal executive officer (for compensation other than his own), aswell as competitive market guidance provided at the request of the compensationcommittee.

 

Wehave designed our management incentive program so that bonuses paid thereunderwill qualify as performance-based compensation under Section 162(m) ofthe Internal Revenue Code of 1986, as amended (the Code). Given thecompensation cost to us of awarding stock options under recent accountingpronouncements, we will consider the size and frequency of any future stockoption awards under our long-term equity incentive program.

 

**Base Salaries**

 

Weprovide the opportunity for our named executive officers and other executivesto earn a competitive annual base salary. We provide this opportunity toattract and retain an appropriate caliber of talent for the position, and toprovide a base wage that is not subject to our performance risk. We review basesalaries for our named executive officers annually in January andincreases are based on our performance and individual performance. The salaryof our principal executive officer is set by our compensation committee.

 

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**Cash Incentives**

 

Weprovide the opportunity for our named executive officers and other executivesto earn cash incentive award. We provide this opportunity to attract and retainan appropriate caliber of talent for the position and to motivate executives toachieve our annual business goals. We plan to review cash incentive awards forour named executive officers and other executives annually in March todetermine award payments for the last completed fiscal year, as well as toestablish award opportunities for the current fiscal year.

 

Awardsare subject to the compensation committee’s discretion and may take intoaccount corporate performance measures, including, but not limited to,revenues, EBITDA and net income. The compensation committee establishes awardcriteria, generally, as a percentage of annual growth.

 

Forthe year ended December 31, 2007, John Kang, our chairman of the board iseligible to receive cash awards under the 2007 management incentive programbased on revenue and profit growth.  Theawards are subject to final approval by the compensation committee based onoverall performance of the company.  There were no such awards declared or paid to our named executiveofficers during 2007.

 

Insetting the target bonus amounts, our Board took into consideration that ournamed executive officers have significant equity interests in us through directownership of shares or prior option grants, which already provide them withperformance incentives.

 

**Equity-Based Compensation***.*

 

Ourequity-based awards to our executive officers consist principally of stockoptions granted from time to time under our 2002 Equity Incentive Plan and our1996 Stock Option Plan.  Stock option grants are based on various factors,including the executive officer’s position, responsibility and tenure, eachexecutive officer’s ability to contribute to our future success, and the otherelements of such executive officer’s compensation. Generally, we useequity-based compensation to better align the interests of our executiveofficers with those of our stockholders.

 

Forour named executive officers, our stock option program is based on grants thatare individually negotiated in connection with employment agreements and othergrants to our executives. We have traditionally used stock options as its formof equity compensation because stock options provide a relatively straightforwardincentive for our executives, result in less immediate dilution of existingshareholders’ interests and, prior to our adoption of FAS 123(R), resulted inless compensation expense for us relative to other types of equity awards.During 2007, all grants of stock options to our employees were granted withexercise prices equal to or greater than the fair market value of our commonstock on the respective grant dates. For a discussion of the determination ofthe fair market value of these grants, see Item 7 “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Critical AccountingPolicies”.

 

Wedo not time stock option grants to executives in coordination with the releaseof material non-public information. Our stock options have a 10-yearcontractual exercise term or 5-year contractual term if the optionee owns morethan 10% of voting power of the company. In general, the option grants are alsosubject to the following post-termination and change in control provisions:

 
| **Event**                                                       | ** ** | **Award Vesting**       | ** ** | **Exercise Term**                 | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| Termination by Us Reason  Other than Cause, Disability or Death |       | Forfeit  Unvested (1)        |       | 3  months from Date of Termination (1) |       |
|                                                            |       |                         |       |                                   |       |
| Disability or Death                                             |       | Forfeit  Unvested            |       | 12  months from Date of Termination    |       |
|                                                            |       |                         |       |                                   |       |
| Termination for Cause                                           |       | Forfeit  Vested and Unvested |       | —                                 |       |
|                                                            |       |                         |       |                                   |       |
| Other Termination                                               |       | Forfeit  Unvested            |       | 90  days from Date of Termination      |       |
|                                                            |       |                         |       |                                   |       |
| Change in Control                                               |       | Accelerated  (2)             |       | Accelerated  (2)                       |       |

 

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(1) Optionsgranted under the 2002 Non-employee Director Option Plan will continue to vestand be exercisable for 12 months following the termination.

 

(2) TheBoard of Directors may, at its discretion, amend vesting rights includingadditional grant additional shares in case of mergers or reorganizations foranti-dilution purposes.

 

Thevesting of certain of our named executive officers’ stock options may beaccelerated pursuant to the terms of their employment agreements in certaintermination and/or change in control events. These terms are more fullydescribed in “—Employment Agreements” and “—Potential Payments upon Terminationor Change in Control.”

 

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**Executive Benefits and Perquisites**

 

Weprovide the opportunity for our named executive officers and other executivesto receive certain perquisites and general health and welfare benefits. We alsooffer participation in our defined contribution 401(k) savings plan. We donot match employee contributions under our 401(k) plan. Participation ingeneral health and welfare benefits and the 401(k) plan are voluntary andare available to all eligible employees of the company.  We provide these benefits to provide anadditional incentive for our executives and to remain competitive in thegeneral marketplace for executive talent. For the last completed fiscal year,perquisites other than general health and welfare benefits consisted of carpayment reimbursements provided to John Kang, our chairman of the board, and CKCho, our director.

 

Setforth below is information regarding compensation earned by or paid or awardedto the following executive officers of the company during the year ended December 31,2007: (i) Larry Buffington, our president and chief executive officer; (ii) WonChung, our former principal financial officer; and (iii) John Kang, ourchairman of the board, which persons are our principal executive officer,principal financial officer, and our most highly compensated executive whosetotal compensation exceeded $200,000 other than our principal executiveofficer, who were serving as executive officers at December 31, 2007.  These persons are hereafter referred to asour “named executive officers.”  Theidentification of such named executive officers is determined based on theindividual’s total compensation for the year ended December 31, 2007, asreported below in the Summary Compensation Table.

 

**Summary Compensation Table**

 

Thefollowing table sets forth for each of the named executive officers: (i) thedollar value of base salary and bonus earned during the year ended December 31,2007; (ii) the aggregate grant date fair value of stock and option awardsgranted during the year, computed in accordance with SFAS 123 (R); (iii) thedollar value of earnings for services pursuant to awards granted during theyear under non-equity incentive plans; (iv) the change in pension valueand non-qualified deferred compensation earnings during the year; (v) allother compensation for the year; and, finally, (vi) the dollar value oftotal compensation for the year.

 
| **Name and  Principal  Position** | ** ** | **Year** |   | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|----------|--------|------------|------------|-----------|------------|-------------------|------------|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Larry Buffington                       |       | 2007     |   | $          | 250,000    |      | —     |              | —     |                    | $          | 161,171                                           |       | —                                                                                      |       | —                           |       | —    |       | $ | 411,171 |   |
| Won Chung                              |       | 2007     |   | $          | 115,804    |      | $          | 12,750            |       | —                  |       | $                                                 | 6,439      |                                                                                        | —     |                             | —     |      | —     |   | $ | 134,993 |   |
| John Kang                              |       | 2007     |   | $          | 300,000    |      | —     |              | —     |                    | $          | 161,171                                           |       | —                                                                                      |       | —                           |       | $         | 13,110     | (2) | $ | 474,281 |   |
|                                        |            |          |        |            |            |           |            |                   |            |                         |            |                                                   |            |                                                                                             |            |                                  |            |           |            |  |  |  |  |  |

 

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(1) Amount represent the fair value of stock optionsgranted in 2007 under SFAS 123(R) as discussed in Note 13, “StockCompensation Plan” to our financial statement included elsewhere in this annualreport on Form 10-K.

 

(2) Amount represents automobile lease payments.

 

Fora description of the material terms of employment agreements with our namedexecutive officers, see “—Employment Agreements.”

 

50

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**Grants of Plan-based Awards**

 

Thefollowing table sets forth information regarding all incentive plan awards thatwere made to the named executive officers during 2007, including incentive planawards (equity-based and non-equity based) and other planned-based awards.  Disclosure on a separate line item isprovided for each grant of an award made to a named executive officer duringthe year.  The information supplementsthe dollar value disclosure of stock, option and non-stock awards in theSummary Compensation Table by providing additional details about such awards.  Equity incentive-based awards are subject toa performance condition or a market condition as those terms are defined bySFAS 123(R).  Non-equity incentive planawards are awards that are not subject to SFAS 123(R) and are intended toserve as an incentive for performance to occur over a specified period.

 
| ** **       | ** ** | **Grant**  | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan  Awards** | ** ** | **Estimated Future Payouts Under  Equity Incentive Plan Awards** | ** ** | **All  Other  Stock  Awards:  Number  of  Shares  of Stock** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise  or Base  Price of  Option** | ** ** |
|------------------|------------|------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Name**         | ** ** | **Date**   | ** ** | **Threshold**                                                                                  | ** ** | **Target**                                                                                     | ** ** | **Maximum**                                                       | ** ** | **Threshold**                                                               | ** ** | **Target**                                        | ** ** | **Maximum** | ** ** | **or Units** | ** ** | **Options** | ** ** | **Awards** | ** ** |
| ** **       | ** ** | ** ** | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** | ** **                                                        | ** ** | ** **                                                                  | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Larry Buffington |       | 09/20/07   |       | —                                                                                         |       | —                                                                                         |       | —                                                            |       | —                                                                      |       | —                                            |       | — |   | — |   | 500,000 |   | $ | 0.772 |   |
| Won Chung        |       | 09/20/07   |       | —                                                                                         |       | —                                                                                         |       | —                                                            |       | —                                                                      |       | —                                            |       | — |   | — |   | 20,000 |   | $ | 0.772 |   |
| John Kang        |       | 09/20/07   |       | —                                                                                         |       | —                                                                                         |       | —                                                            |       | —                                                                      |       | —                                            |       | — |   | — |   | 500,000 |   | $ | 0.772 |   |

 

51

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** **

**Outstanding EquityAwards at Fiscal Year-End**

** **

The following table sets forth information on outstanding option and stockawards held by the named executive officers at December 31, 2007,including the number of shares underlying both exercisable and unexercisableportions of each stock option as well as the exercise price and expiration dateof each outstanding option.

 
| ** **        | ** ** | **Option Awards**                                                              | ** ** | **Stock Awards**                                                              | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Number of  Securities  Underlying  Unexer-  cised  Options  Exercis-  able** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexer-  cisable** | ** ** | **Equity  Incentive  Plan  Awards  Number of  Securities  Underlying  Unexer-  cised  Unearned  Options** | ** ** | **Option  Exer-  cise  Price** | ** ** | **Option  Expiration  Date** | ** ** | **Vesting  Commence-  ment Date** | ** ** | **Number   of Shares  or Units   of Stock   That  Have Not  Vested** | ** ** | **Market  Value of   Shares or  Units of  Stock  That  Have Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or   Other  Rights  That Have  Not Vested** | ** ** |
| Larry  Buffington |       | —                                                                              |       | 500,000                                                                            |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008 | (1) | — |   | — |   | — |   | — |   |
|              |       |                                                                                |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Won Chung         |       | 4,500                                                                               |       | 3,000                                                                              |       | — |   | $ | 2.15 |   | 10/10/2014 |   | 10/11/2005 |   |   |   |   |   |   |   |   |   |
|              |       | 8,000                                                                               |       | 12,000                                                                             |       | — |   | $ | 2.33 |   | 12/31/2014 |   | 01/01/2006 |   |   |   |   |   |   |   |   |   |
|              |       | 2,000                                                                               |       | 3,000                                                                              |       | — |   | $ | 1.56 |   | 01/31/2015 |   | 02/01/2006 |   | — |   | — |   | — |   | — |   |
|              |       | 2,000                                                                               |       | 8,000                                                                              |       | — |   | $ | 1.44 |   | 03/31/2016 |   | 04/01/2006 |   |   |   |   |   |   |   |   |   |
|              |       | —                                                                              |       | 20,000                                                                             |       | — |   | $ | 0.77 |   | 09/19/2017 |   | 09/20/2007 |   |   |   |   |   |   |   |   |   |
|              |       |                                                                                |       |                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John  Kang        |       | 21,505                                                                              |       | —                                                                             |       | — |   | $ | 4.650 |   | 12/30/2010 |   | 12/31/2000 | (2) |   |   |   |   |   |   |   |   |
|              |       | 1,591,399                                                                           |       | —                                                                             |       | — |   | $ | 4.650 |   | 12/30/2010 |   | 12/31/2000 | (2) |   |   |   |   |   |   |   |   |
|              |       | 20,000                                                                              |       | 30,000                                                                             |       | — |   | $ | 2.326 |   | 12/31/2014 |   | 01/01/2006 | (1) |   |   |   |   |   |   |   |   |
|              |       | 1,788                                                                               |       | 1,788                                                                              |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008 | (1) |   |   |   |   |   |   |   |   |
|              |       | 498,212                                                                             |       | 498,212                                                                            |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008 | (1) | — |   | — |   | — |   | — |   |

 

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(1)                                  The shares underlying thisoption vest 20% per year starting with the vesting commencement date andthereafter.

 

(2)                                  The shares underlying thisoption vest 100% immediately on grant date.

 

52

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** **

**OptionExercises and Stock Vested**

 

Therewere no exercise of stock options and vesting of restricted stock during 2007.

 

**EmploymentAgreements**

** **

We have entered into the following employment agreements with theexecutive officers identified above.

 

***Larry Buffington***. On October 8, 2006 we elected Larry Buffington as our President andChief Executive Officer who received an initial base salary of $200,000 forserving as President and Chief Executive Officer of our company. Effective January 1,2007, the Compensation Committee approved an increase in the base salary to$250,000. On July 24, 2007, we transferred substantially all of the assetsof its Liquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the coatings business, in which we hold a 69.25% ownership interest. Inconjunction to the transfer, LMC entered into an employment agreement with Mr. Buffingtonas its President and Chief Executive Officer. The employment agreement has aninitial 5-year term (“Initial Term”), provides for an annual base salary of$250,000 per year with an opportunity for an annual performance bonus of up to50% of his salary based on meeting certain target goals. In addition, Mr. Buffingtonhas a 10% ownership in LMC which vests evenly over five years. Mr. Buffington’semployment will terminate upon the earlier of his death, resignation,disability, or termination by the board of directors for any reason, providedthat if his employment is terminated without cause, he will continue to receivethe Employee’s base salary (as then in effect) through the later of one yearafter the date of the termination or the end of the Initial Term. He will alsoforfeit the unvested portion of his interest in LMC if he terminates prior tothe completion of his five years of employment with LMC.

 

***John Kang.*** On December 31, 2000, we entered into an employmentagreement with John Kang that, as amended, provides for his employment as ourChief Executive Officer and President, and on August 22, 2003, Mr. Kangwas named Chairman of our Board of Directors. On December 30, 2005, Mr. Kangceased to serve as our President and Chief Executive Officer, and Mr. Kang’semployment agreement has an expiration date of December 31, 2005, althoughthe agreement automatically renews on a year-to-year basis until Mr. Kangresigns or his employment is terminated by us with or without cause. Mr. Kangreceives an annual base salary equal to $300,000 per year, and his employmentwill terminate upon the earlier of his death, resignation, disability, ortermination by the board of directors for any reason. If we terminate Mr. Kang’semployment without cause, or if Mr. Kang terminates his own employmentupon a change of control of our company or for other good reason, as defined inthe agreement, we are responsible for paying Mr. Kang a lump-sum cashpayment equal to 200% of Mr. Kang’s annual base salary plus the averagecash bonus during the two full fiscal years immediately preceding thetermination. Pursuant to the agreement, Mr. Kang was issued options topurchase 1,612,904 shares of our common stock at an exercise price of $4.65 pershare. The options expire on December 31, 2010 and vested immediately upongrant. In addition, Mr. Kang is prohibited, during his employment with usand for one year after he is no longer employed by us, from soliciting any ofour employees or competing with us in any manner.

 

***Gerald Morrow.***OnJanuary 13, 2008, we entered into an employment agreement with GeraldMorrow to serve as our Chief Financial Officer for a term of three years endingon January 12, 2011. The employment agreement provides for an annual basesalary of $175,000 plus bonuses at the discretion of the Company’s Board ofDirectors. The Company can terminate Mr. Morrow’s employment at any time,provided that if his employment is terminated without cause, then he willcontinue to be entitled to his base salary and health benefits for a period ofsix months after termination. In connection with the commencement of hisemployment, Mr. Morrow was granted an option to purchase up to 200,000shares of Company common stock under the Company’s 2002 Equity Incentive Plan. Theoption was granted at an exercise price equal to $0.64 per share, which was thefair market value of the Company’s common stock on the option grant date, andthe option vests to the extent of 40,000 shares on each anniversary of theoption grant date beginning in 2009.

 

***Won Chung***, who waselected as our Vice President on May 1, 2007, receives an initial basesalary of $125,000 for serving as principal financial and accounting officer ofour company. We and Mr. Chung have not entered into an employmentagreement relating to Mr. Chung’s employment with us, but we may determineto do so in the future. On January 13, 2008, Mr. Chung ceased to beour principal financial officer upon appointment of Gerald Morrow as our ChiefFinancial Officer by our Board of Directors. Mr. Chung continues to serve as Vice President ofFinance of our company.

 

53

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**401(k) SavingsPlan**

 

We have adopted a tax-qualified employee savings and retirement plan, or401(k) plan, that covers all of our employees. Pursuant to our 401(k) plan,participants may elect to reduce their current compensation, on a pre-taxbasis, by up to 15% of their taxable compensation or of the statutorilyprescribed annual limit, whichever is lower, and have the amount of thereduction contributed to the 401(k) plan. The 401(k) plan permits us,in our sole discretion, to make additional employer contributions to the 401(k) plan.However, we do not currently make employer contributions to the 401(k) planand may not do so in the future. As such, contributions by employees or byus to the 401(k) plan, and the income earned on plan contributions, arenot taxable to employees until withdrawn from the 401(k) plan, and we candeduct our contributions, if any, at the time they are made.

 

**PensionBenefits**

 

Wedo not sponsor any qualified or non-qualified defined benefit plans.

 

**NonqualifiedDeferred Compensation**

** **

Wedo not maintain any non-qualified defined contribution or deferred compensationplans. The compensation committee, which is comprised solely of “outsidedirectors” as defined for purposes of Section 162(m) of the Code, may electto provide our officers and other employees with non-qualified definedcontribution or deferred compensation benefits if the compensation committeedetermines that doing so is in our best interests. We sponsor a tax qualifieddefined contribution 401(k) savings plan.

 

**Potential Paymentsupon Termination or Change in Control**

** **

Potentialpayments payable to our executive officers upon termination of employmentfollowing a change in control of us is discussed under “—Employment Agreements”.The compensation committee of our board of directors may, at their discretion,amend or add benefits to these arrangements as they deem advisable.

 

The table belowpresents estimate presents estimates of the amounts of compensation payable toeach named executive officer upon a change in control and termination of theexecutive. The amounts shown assume that such a change in control andtermination were both effective as of December 31, 2007. The actualamounts to be paid can only be determined at the time of a change in control orexecutive’s termination.

 
| ** **                                                | ** ** | **Larry Buffington**   | ** ** | **John Kang** | ** **    | **Gerald Morrow**      | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|--------------------|---------------|-----------------------------|------------|
| **Benefit**                                               | ** ** | **Change in  Control** | ** ** | **Termination**    | ** **    | **Change in  Control** | ** ** | **Termination** | ** ** | **Change in  Control** | ** ** | **Termination** | ** ** |
| UNEARNED COMPENSATION (payment contingent on termination) |       |                        |       |               |          |                        |       |   |   |   |   |   |   |
| Cash Severance (a)                                        |       | —                      |       | $                  | 1,146,000     |                        | $          | 600,000 |   | $ | 600,000 |   | — |   | $ | 87,500 |   |
| Equity                                                    |       |                        |       |               |          |                        |       |   |   |   |   |   |   |
| Unexercisable Options                                     |       | —                      |       | —             |          | —                      |       | — |   | — |   | — |   |
| Benefits                                                  |       |                        |       |               |          |                        |       |   |   |   |   |   |   |
| Health                                                    |       | —                      |       | $                  | 11,593        |                        | —     |   | — |   | — |   | $ | 6,000 |   |
| **Total**                                                 | ** ** | **—**                  | ** ** | **$**              | **1,157,593** | ** **                  | **$**      | **600,000** | ** ** | **$** | **600,000** | ** ** | **—** | ** ** | **$** | **93,500** | ** ** |

 

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(a)          For Mr. Buffington, reflects five timeshis annual base pay for a termination. Mr. Buffington will receive annualbase salary through the later of one year or his initial 5 year term. For Mr. Kang,reflects two times his annual base pay for a change of control or termination.For Mr. Morrow, reflects six times his monthly base pay for a termination.

 

54

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**DirectorCompensation**

 

Thefollowing table sets forth information regarding the compensation received byeach of our directors during the year ended December 31, 2007;

 
| **Name**        | ** ** | **Fees  Earned  or Paid  in Cash** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in   Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other   Compensation** | ** ** | **Total** | ** ** |
|-----------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------|------------|
| John Kang       |       | —                                       |       | —            |       | —                  | (2)        | —                                            |       | —                                                                                            |       | —                                 |       | —    |       |
| William Johnson |       | $                                            | 1,000      |              | —     |                    | $          | 8,358                                             | (3)        | —                                                                                            |       | —                                 |       | $         | 60,000     | (8) | $ | 69,358 |   |
| Dean Tanella    |       | $                                            | 76,000     |              | —     |                    | $          | 25,073                                            | (4)        | —                                                                                            |       | —                                 |       | —    |       | $ | 101,073 |   |
| Robert Biehl    |       | $                                            | 12,875     |              | —     |                    | $          | 16,205                                            | (5)        | —                                                                                            |       | —                                 |       | $         | 43,472     | (9) | $ | 64,705 |   |
| CK Cho          |       | $                                            | 41,000     |              | —     |                    | $          | 8,358                                             | (6)        | —                                                                                            |       | —                                 |       | $         | 30,930     | (10) | $ | 80,288 |   |
| Patrick Caruana |       | $                                            | 3,500      |              | —     |                    | $          | 60,867                                            | (7)        | —                                                                                            |       | —                                 |       | $         | 6,667      | (11) | $ | 71,034 |   |
|                 |            |                                              |            |                   |            |                         |            |                                                   |            |                                                                                                   |            |                                        |            |           |            |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Amounts represent the fair value of stockoptions granted in 2007 under SFAS 123(R) as discussed in Note 13, “StockCompensation Plan”, to our consolidated financial statements included elsewherein this report on Form 10K.

 

(2)                                  2,162,904 shares of options were outstandingas of December 31, 2007.

 

(3)                                  80,000 shares of options were outstanding asof December 31, 2007.

 

(4)                                  120,000 shares of options were outstanding asof December 31, 2007.

 

(5)                                  94,065 shares of options were outstanding asof December 31, 2007. Amount includes $7,847 paid for consulting servicesprovided during 2007.

 

(6)                                  70,000 shares of options were outstanding asof December 31, 2007.

 

(7)                                  60,000 shares of options were outstanding asof December 31, 2007.

 

(8)                                  Amount represents amount paid for consultingservices provided during 2007.

 

(9)                                  Amount represents $35,625 of shares of stockissued in lieu of cash payment and $7,847.

 

(10)                            Amount represents $21,367 of automobile lease payments and $9,563 ofpurchases made using company credit card.

 

(11)                            Amount represents shares of stock issued in lieu of cash payment

 

Our non-employee directors receive an annual fee of $10,000 for theirservice to our board and are reimbursed for expenses incurred in attendingboard and committee meetings. Non-employee directors are also entitled toreceive a $10,000 annual cash stipend for each standing board committee (excludingthe Audit Committee) on which the director serves. For Audit Committee service,the Audit Committee chairman is entitled to a $35,000 annual stipend, and theother members of the Audit Committee are entitled to a $27,500 annual stipend. Inaddition to the annual stipends, each non-employee director is entitled toreceive a per-meeting fee of $1,000 for each meeting of the board of directorsor any board committee attended in person. Effective December 30, 2005,Dean Tanella was elected as the lead independent director of our company. Thelead independent director is entitled to a $30,000 annual stipend.

 

Wealso have a 2002 Non-employee Director Stock Option Plan pursuant to which ournon-employee directors are entitled to receive stock options. Under this plan,when a director is first elected or appointed to our board of directors, thenon-employee director is entitled to receive an initial stock option grant topurchase 50,000 shares of our common stock. Thereafter, on the first businessday of January of each year in which the director continues to serve as amember of our board, the director is entitled to an annual stock option grantto purchase 10,000 shares of our common stock. All options granted under theplan have an exercise price equal to the fair market value of our common stockon the date of the grant. These stock options have a 10-year term, vest, andare exercisable pursuant to an equal 5-year vesting schedule, and remainexercisable for certain periods of time after a person is no longer a director.

 

No director who is an employee will receive separate compensation forservices rendered as a director. However, our employee directors are eligibleto participate in our 2002 Equity Incentive Plan.

 

55

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**Compensation Committee Report**

 

The compensation committee of the board of directors has reviewed anddiscussed the above Compensation Discussion & Analysis with managementand, based on such review and discussion, has recommended to the board of directorsthat the Compensation Discussion & Analysis be included in the company’sAnnual Report on Form 10-K statement.

 

CKCho

RobertBiehl

 

December 31,2007

 

CompensationCommittee of the Board of Directors

 

The report of the Compensation Committee shall not bedeemed incorporated by reference by any general statement incorporating byreference this Annual Report on Form 10-K into any filing under theSecurities Act of 1993 or under the Securities Exchange Act of 1934, except tothe extent that we specifically incorporate this information by reference, andshall not otherwise be deemed filed under such acts.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

The following table sets forth certain information regarding thebeneficial ownership of our common stock as of March 17, 2008 by:

 

**•**                  each person known by us to be abeneficial owner of more than 5.0% of our outstanding common stock;

** **

**•**                  each of our directors;

** **

**•**                  each of our named executive officers;and

** **

**•**                  all directors and executive officers asa group.

** **

Thenumber and percentage of shares beneficially owned is determined under rules ofthe SEC and the information is not necessarily indicative of beneficialownership for any other purpose. Under such rules, beneficial ownershipincludes any shares as to which the individual has sole or shared voting poweror investment power and also any shares which the individual has the right toacquire beneficial ownership of within 60 days of March 17, 2008 throughthe exercise of any stock option or other right. Unless otherwise indicated inthe footnotes, each person has sole voting and investment power with respect tothe shares shown as beneficially owned. A total of 44,311,768 shares of ourcommon stock were issued and outstanding as of March 17, 2008. Unlessotherwise indicated, the address of all directors and named executive officersis 30452 Esperanza, Rancho Santa Margarita, CA 92688.

 

56

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| **Name of Beneficial Owner**                                          | ** ** | **Shares** | ** ** | **Percent of Class** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|
|                                                                                 |       |       |       |                           |       |
| **5%  Stockholders**                                                                 |       |       |       |                           |       |
|                                                                                 |       |       |       |                           |       |
| Tjoa Thian Song(1)  16 Raffles Quay #B1-14A  Hong Leong Building  Singapore 0101     |       | 4,008,523  |       | 9                              | %          |
|                                                                                 |       |       |       |                           |       |
| Jack Chitayat(2)  1133 Park Avenue, Suite 1W  New York, NY 10128                |       | 5,780,207  |       | 13                             | %          |
|                                                                                 |       |       |       |                           |       |
| James Kang(3)  Hyundai Hyperion Apt. 101-403  Youngsan-Gu, Hannam-Dong  Seoul, Korea |       | 6,121,304  |       | 14                             | %          |
|                                                                                 |       |       |       |                           |       |
| **Directors  and Named Executive Officers**                                          |       |       |       |                           |       |
|                                                                                 |       |       |       |                           |       |
| John Kang(4)                                                                         |       | 5,024,973  |       | 11                             | %          |
|                                                                                 |       |       |       |                           |       |
| William Johnson(5)                                                                   |       | 1,192,650  |       | 3                              | %          |
|                                                                                 |       |       |       |                           |       |
| Dean Tanella(6)                                                                      |       | 91,620     |       |                           | *          |
|                                                                                 |       |       |       |                           |       |
| Robert Biehl(7)                                                                      |       | 195,721    |       |                           | *          |
|                                                                                 |       |       |       |                           |       |
| CK Cho(8)                                                                            |       | 1,007,878  |       | 2                              | %          |
|                                                                                 |       |       |       |                           |       |
| Patrick Caruana(9)                                                                   |       | 19,826     |       |                           | *          |
|                                                                                 |       |       |       |                           |       |
| Larry Buffington                                                                     |       | —     |       | —                         |       |
|                                                                                 |       |       |       |                           |       |
| Gerald Morrow                                                                        |       | —     |       | —                         |       |
|                                                                                 |       |       |       |                           |       |
| All directors and executive officers as a group (8 persons)                     |       | 7,532,668  |       | 17                             | %          |

 

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*  Lessthan one percent.

 

(1)                                  3,874,585 of these shares are held of recordby a revocable grantor trust established by Mr. Tjoa for himself and hisfamily members. Mr. Tjoa continues to beneficially own all such shares.

 

(2)                                  Includes 906,819 shares issuable pursuant tocurrently exercisable warrants and 2,329,099 shares issuable pursuant tocurrently convertible notes held by Atlantic Realty Group, Inc., CarlyleLiquid, LLC, and Carlyle Holdings, LLC, of which all are controlled by Mr. Chitayat,and 91,792 shares held of record by a trust established by Mr. Chitayatfor his family members. Mr. Chitayat continues to beneficially own allsuch shares.

 

(3)                                  Includes 84,542 shares issuable pursuant tocurrently exercisable warrants. Also includes 2,877,420 shares issuablepursuant to outstanding stock options that are exercisable currently or within60 days of March 17, 2008 and includes 969 shares held by James Kang’sminor children. Does not include the 1,700,000 shares that Mr. Kang hasagreed to personally purchase on October 31, 2006 from Innometal Co., Ltd.as an inducement for Innometal to enter into a Settlement Agreement with us. Innometalagreed to accept these shares in full satisfaction of all of our obligations tothem under January 2004 settlement agreement.

 

57

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(4)                                  As of August 22, 2003, John Kang wasnamed Chairman of our board of directors. Mr. Kang resigned from hisposition as President and Chief Executive Officer of our company on December 30,2005. However, he continues to serve as Chairman of the Board and continues towork for our company on a full-time basis. The beneficial shares include:

 

(a)                                  1,642,904 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 520,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2007; and

 

(b)                                 182,400 shares held by Mr. Kang’s minorchildren.

 

(5)                                  Includes 42,000 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 48,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2008.

 

(6)                                  Includes 16,130 shares held by Mr. Tanella’sinvestment firm, HarborLight Diversified Fund, LP. Also, includes 2,890 sharesheld by Mr. Tanella’s family. Includes 64,000 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 86,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2008.

 

(7)                                  Includes 60,065 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 44,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2008.

 

(8)                                  Includes 305,918 shares issuable pursuant tocurrently exercisable warrants and 424,362 shares issuable pursuant tocurrently convertible notes. Also, includes 36,000 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 44,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2008.

 

(9)                                  Includes 12,000 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of March 17,2008. Does not include 58,000 shares that are issuable pursuant to outstandingstock options that are not exercisable currently or within 60 days of March 17,2008.

 

**EquityIncentive / Equity Compensation Plans**

** **

Our executiveofficers, directors, and all of our employees are allowed to participate in ourequity incentive plans. We believe that providing them with the ability toparticipate in such plans provides them with a further incentive towardsensuring our success and accomplishing our corporate goals.

 

Securitiesauthorized for issuance under equity compensation plans as of December 31,2007 were as follows:

 
| **Plan Category**                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants, and rights  [a]** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants, and rights  [b]** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column [a])  [c]** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  stockholders     |       | 8,197,146                                                                                                                                              |       | $4.04                                                                                                             |       | 8,249,045                                                                                                                                                                                                             |       |
| Equity compensation plans not approved by  stockholders |       | 14,418,183                                                                                                                                             |       | $1.64                                                                                                             |       | —                                                                                                                                                                                                                |       |
| Total                                                   |       | 22,614,329                                                                                                                                             |       |                                                                                                              |       | 8,249,045                                                                                                                                                                                                             |       |

 

Equitycompensation plans not approved by stockholders consist of:

 

**•**                  Warrants to purchase up to 1,039,255shares issued on June 13, 2005 with an exercise price of $1.72 per shareand an expiration date of June 13, 2010;

** **

**•**                  Warrants to purchase up to 3,353,486shares issued on August 2, 2005 with an exercise price of $1.72 per shareand an expiration date of August 2, 2010;

** **

**•**                  Warrants to purchase up to 125,000shares issued on March 17, 2006 with an exercise price of $1.55 per shareand an expiration date of March 17, 2009;

 

58

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**•**                  Warrants to purchase up to 452,859shares issued between May 17, 2006 and December 1, 2006 with anexercise price of $1.72 per share and an expiration date of May 17, 2011;

** **

**•**                  Warrants to purchase up to 860,521shares issued between May 17, 2006 and December 1, 2006 with anexercise price of $2.07 per share and an expiration date of May 17, 2011;

** **

**•**                  Warrants to purchase up to 7,477,971shares issued on January 3, 2007 with an exercise price of $1.55 per shareand an expiration date of January 3, 2012;

** **

**•**                  Warrants to purchase up to 1,109,091shares issued on December 28, 2007 with an exercise price of $1.55 pershare and an expiration date of December 28, 2012;

** **

**•**                  Warrants to purchase up to 376,345shares issued to Paul Azinger on January 1, 2001 with an exercise price of$1.16 per share and an expiration date of January 1, 2008.

** **

The number ofsecurities and type of plans available for future issuance of stock options asof December 31, 2007 were as follows:

 
| ** **                                    | ** ** | **Options and Warrants for Common Shares** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Plan Name**                            | ** ** | **Authorized**                                                      | ** ** | **Exercised** | ** ** | **Outstanding** | ** ** | **Available** | ** ** |
| 1996 Stock  Option Plan                       |       | 12,903,226                                                          |       | 1,974,365 |   | 3,224,683 |   | — |   |
| 2002 Equity  Incentive Plan                   |       | 10,000,000                                                          |       | — |   | 2,350,955 |   | 7,649,045 |   |
| 2002  Non-employee Director Stock Option Plan |       | 1,000,000                                                           |       | — |   | 400,000 |   | 600,000 |   |
| Total Stock  Options                          |       | 23,903,226                                                          |       | 1,974,365 |   | 5,975,638 |   | 8,249,045 |   |

 

**1996 StockOption Plan**

 

Our 1996Stock Option Plan provides for the grant of stock options to employees,directors, and consultants of our company and its affiliates. The purpose ofthe plan is to retain the services of existing employees, directors, andconsultants; to secure and retain the services of new employees, directors, andconsultants; and to provide incentives for such persons to exert maximum effortsfor our success. The plan provides for the granting to employees of incentivestock options within the meaning of Section 422 of the Internal RevenueCode of 1986, as amended, and for the granting to employees and consultants ofnonstatutory stock options. Our board of directors terminated the 1996 StockOption Plan on April 4, 2002. The termination will not affect anyoutstanding options under the plan, and all such options will continue toremain outstanding and be governed by the plan.

 

Options grantedunder the 1996 Stock Option Plan are generally not transferable by the optioneeexcept by will or the laws of descent and distribution, and each option isexercisable, during the lifetime of the optionee, only by the optionee. Optionsgenerally must be exercised within 90 days after the optionee’s termination forcause, three months following the end of the optionee’s status as an employeeor consultant, other than for cause or for death or disability, or within sixmonths after the optionee’s termination by disability or twelve monthsfollowing the optionee’s termination by death. However, in no event may anoption be exercised later than the earlier of the expiration of the term of theoption or ten years from the date of the grant of the option or, where anoptionee owns stock representing more than 10% of the voting power, five yearsfrom the date of the grant of the option in the case of incentive stockoptions.

 

As of December 31,2007, options to purchase 3,224,683 shares of common stock were outstanding ata weighted average price of $6.14 per share under the 1996 Stock Option Plan.As of December 31, 2007, options to purchase 1,974,365 shares had beenissued upon exercise of options under the plan. There were 3,224,683 optionsexercisable under the 1996 Stock Option Plan as of December 31, 2006.

 

**2002Equity Incentive Plan**

 

Our 2002Equity Incentive Plan, which was adopted by our board of directors and approvedby our stockholders in April 2002, provides for the grant of stock optionsto officers, employees, consultants, and directors of our company and itssubsidiaries. The purpose of the plan is to advance the interests of ourstockholders by enhancing our ability to attract, retain, and motivate personswho make or are expected to make important contributions to our company and itssubsidiaries by providing such persons with equity ownership opportunities andperformance-based incentives, thereby better aligning their interests withthose of our

 

59

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stockholders.The plan provides for the granting to employees of incentive stock optionswithin the meaning of Section 422 of the Internal Revenue Code of 1986, asamended, and for the granting to employees and consultants of nonstatutorystock options. In addition, the plan permits the granting of stock appreciationrights, or SARs, with or independently of options, as well as stock bonuses andrights to purchase restricted stock. A total of ten million shares of ourcommon stock may be granted under the plan.

 

The plan isadministered by our board of directors or a committee appointed by our board ofdirectors. All members of such a committee must be a non-employee director andan outside director, as defined in the plan. Subject to the limitations set forthin the plan, the administrator has the authority to select the persons to whomgrants are to be made, to designate the number of shares to be covered by eachstock award, to determine whether an option is to be an incentive stock optionor a nonstatutory stock option, to establish vesting schedules, to specify theoption exercise price and the type of consideration to be paid upon exercise,and, subject to some restrictions, to specify other terms of stock awards.

 

Theadministrator establishes the option exercise price, which in the case ofincentive stock options, must be at least the fair market value of the commonstock on the date of the grant or, with respect to optionees who own at least10% of our outstanding common stock, 110% of fair market value. If our commonstock is listed and traded on a registered national or regional securitiesexchange, or quoted on the National Association of Securities Dealers’Automated Quotation System, fair market value is the average closing price of ashare of our common stock on such exchange or quotation system for the fivetrading days prior to the date of grant. If our common stock is not traded on aregistered securities exchange or quoted in such a quotation system, fairmarket value is determined in good faith by the administrator.

 

Optionsgranted under the plan are generally not transferable by the optionee except bywill or the laws of descent and distribution, and to certain relatedindividuals with the consent of the administrator. Options generally must beexercised within three months after the optionee’s termination of employmentfor any reason other than disability or death, or within 12 months after theoptionee’s termination by disability. Options granted under the plan vest atthe rate specified in the option agreement. However, in no event may an optionbe exercised later than the earlier of the expiration of the term of the optionor 10 years from the date of the grant of the option, or when an optionee ownsstock representing more than 10% of the voting power, five years from the dateof the grant of the option in the case of incentive stock options.

 

Any incentivestock options granted to an optionee which, when combined with all otherincentive stock options becoming exercisable for the first time in any calendaryear that are held by that person, would have an aggregate fair market value inexcess of $0.1 million, shall automatically be treated as nonstatutory stockoptions.

 

The plan maybe amended, altered, suspended or terminated by our board of directors at anytime, but no such amendment, alteration, suspension or termination mayadversely affect the terms of any option previously granted without the consentof the affected optionee. Unless terminated sooner, the plan will terminateautomatically in September 2012. As of December 31, 2007, there were2,350,955 outstanding options or stock awards at a weighted average price of$1.73 under the plan. There were 666,955 options exercisable under the 2002Equity Incentive Plan as of December 31, 2007.

 

**2002Non-employee Director Stock Option Plan**

 

Our 2002Non-employee Director Stock Option Plan was adopted by our board of directorsand by our stockholders in April 2002. We have reserved a total of onemillion shares of our common stock for issuance under the plan. The optiongrants under the plan are automatic and nondiscretionary, and the exerciseprice of the options is equal to 100% of the fair market value of our commonstock on the grant date.

 

Onlynon-employee directors are eligible for grants under the plan. The plan willprovide for an initial grant to a new non-employee director of an option topurchase 50,000 shares of our common stock. Subsequent to the initial grants,each non-employee director will be automatically granted on the first businessday of January commencing January 1, 2003, an option to purchase10,000 shares of our common stock.

 

The term ofthe options granted under the plan is 10 years, but the options expire 12months after the termination of the optionee’s status as a director or threemonths if the termination is due to the voluntary resignation of the optionee.The option grants will vest and become exercisable as to one-fifth of theshares on the date that is one year after the date of grant and an additionalone-fifth of the shares subject to the option on a cumulative basis will vestand become exercisable annually thereafter.

 

As of December 31,2007, options to purchase 400,000 shares of common stock were outstanding at aweighted average price of $2.05 per share under the 2002 Non-employee DirectorStock Option Plan. There were 120,000 options exercisable under the 2002Non-employee Director Stock Option Plan as of December 31, 2007.

 

The plan willterminate in October 2012, unless our board of directors terminates itsooner.

 

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**Item 13. Certain Relationships and Related Transactions**

 

In June 2003,we entered into an exclusive, ten-year license agreement with LLPG, Inc. (“LLPG”),a corporation headed by, Jack Chitayat, a former director of our company. Under the terms of the agreement, LLPG has the right to commercializeLiquidmetal alloys, particularly precious-metal based compositions, in jewelryand high-end luxury product markets.  We, in turn, will receive royaltypayments over the life of the contract on all Liquidmetal products produced andsold by LLPG.  In conjunction with its technology licensing contract, LLPGpurchased two proprietary Liquidmetal alloy melting machines and threeproprietary Liquidmetal alloy casting machines for a total purchase price of$2.0 million.  We recognized $0.1 million of revenues as minimum royaltyfees under the license agreement during the year ended December 31, 2006.

 

In December 2006,we entered into an amended license agreement with LLPG, which extends thelicense agreement to fifteen years at reduced royalty rates. Additionally, the amended license agreement includes a $0.4 milliontermination fee. We recognized $0.1 million of revenue as minimum royalty feesunder the licensing agreement during the year ended December 31, 2007.

 

As of December 31, 2007, Mr. Chitayat heldinterests in $ $2.5 million of our convertible subordinated notes and held atotal of 906,819 exercisable warrants through entities related to Mr. Chitayat.

 

We have alicense agreement with California Institute of Technology (“Caltech”) underwhich we exclusively license from Caltech certain inventions and technologyrelating to amorphous alloys.  Professor William Johnson, a member of ourboard of directors, is a professor at Caltech, and substantially all of theamorphous alloy technology licensed to us under the Caltech license agreementwas developed in Professor Johnson’s Caltech laboratory.  Additionally, we reimburse Caltech for laboratory expenses incurred byProfessor Johnson’s Caltech laboratory, which during the years ended December 31,2007, 2006 and 2005, amounted to $0.1 million, $0.1 million and $20 thousand,respectively.

 

Additionally, we are a party to aconsulting agreement with Mr. Johnson. Under this agreement, Mr. Johnsonprovides consulting services on an as-needed basis through 2004 as it relatesto marketing and development Liquidmetal alloy. During 2005, the agreementcontinued on a month to month basis. In April 2006, we entered into anagreement with Mr. Johnson effective from January 1, 2006 through December 31,2006. During theyears ended December 31, 2007, 2006 and 2005, we incurred $0.1million,  $0.1 million and $15 thousandin consulting fees from Mr. Johnson, respectively.

 

We are aparty to a consulting agreement with Chitnis Consulting, Inc., which isowned 100% by Shekhar Chitnis, a former director and executive officer of ourcompany. Under this agreement, we engaged Chitnis Consulting to provideconsulting services on an as-needed basis through December 31, 2005. On January 1,2006, the term of the agreement was extended to December 31, 2006 and on January 1,2007, the term of the agreement was once again extended to December 31,2007. During the years ended December 31, 2007, 2006 and 2005, we incurred$0, $0 and $0.1 million in consulting fees from Chitnis Consulting,respectively.

 

Soo Buchanan,the sister of John Kang, was employed by us and was paid aggregate compensationof approximately $0, $0 and $0.1 million as of December 31, 2007, 2006 and2005, respectively.  Effective, July 31, 2005, Ms. Buchanan wasterminated as an employee and began providing services to our company as aconsultant. During 2007, 2006 and 2005, we incurred $0.1 million, $0.1 millionand $24 thousand, respectively, for her services as a consultant. Additionally,Otis Buchanan, the husband of Ms. Buchanan, was employed by us and waspaid aggregate compensation of approximately $0.1 million for each period as ofDecember 31, 2007, 2006 and 2005.

 

In November 2004, we entered into anagreement with John Kang, our Chairman of the Board, in which Mr. Kangagreed that certain stock transactions by him in 2002 involving our company’scommon stock should have resulted in a liability under Section 16(b) ofthe Securities Exchange Act of 1934, as amended (“Section 16(b)”). Thesetransactions include Mr. Kang’s private sale of 285,715 shares of hispersonal Liquidmetal Technologies common stock to Growell Metal Co., Ltd. in February 2002,prior to our initial public offering. They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to GrowellMetal in February 2002 regarding the guaranteed minimum value of the stockpurchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively). Lastly, the transactions include open-market purchases of anaggregate of 89,300 shares of our company’s common stock made by Mr. Kangin August 2002.

 

The AuditCommittee of our Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committee concluded that the transactionsshould have resulted in a liability to us under Section 16(b) in theamount of $0.3 million. Mr. Kang has acknowledged this liability, and inan agreement negotiated between Mr. Kang and the Audit Committee andapproved by the full Board, Mr. Kang will pay this liability throughperiodic installments in 2005 and 2006. As a result, we accrued for the $0.3million receivable in other assets and other income as of December 31,2004. The above-described transactions involving GrowellMetal was reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reportedon a timely basis in August 2002. As of December 31, 2007 and 2006,the outstanding amount of the receivable was $0.2 million for each period,which is included in other assets. Mr. Kang has paid $0.1 million and $0during 2007 and 2006, respectively, and is currently in negotiation with theBoard of Directors on a payment plan for the remaining liability.

 

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As of December 31,2007 and 2006, Mr. Cho, a member of our Board of Directors, held $0.5million of our convertible subordinated notes and $0.6 million of our seniorconvertible notes, respectively, and held 305,918 and 92,584 exercisablewarrants as of December 31, 2007 and 2006, respectively.

 

During theyear ended December 31, 2006, Ricardo Salas, our former Chief ExecutiveOfficer, advanced us $0.6 million to cover short-term liquidity needs. We paid$0.1 million to Mr. Salas using 7.75% interest rate and on December 12006, the remaining balance of $0.5 million and accrued interest of $9 thousandwas converted into the unsecured subordinated notes due August 2007. As ofDecember 31, 2007 and 2006, Mr. Salas held $0 and $0.3 million ofsenior convertible notes, respectively, and $0.3 million and $0.6 million ofthe unsecured subordinated notes, respectively. He also held a total of 374,691and 154,529 of exercisable warrants as of December 31, 2007 and 2006,respectively.

 

On June 1, 2007, we entered into a transaction withGrace Metal (“GM”), under which (i) GM agreed to purchase from us variousequipment (including die casting machines and vacuum induction melters) used inour bulk amorphous alloy business segment and (ii) we granted GM a 10-yearexclusive license to manufacture products made from bulk Liquidmetal alloys forcustomers whose principal headquarters or whose major operations are located inSouth Korea. GM was formed by an investor group that includes our formerFounder and director, James Kang, who is also the brother of John Kang,Chairman of the Board of our company. Under an equipment purchase agreementbetween us and GM, GM agreed to buy the purchased equipment for a total purchaseprice of $2.0 million, of which $0.6 million were received as of December 31,2007. The equipment purchase agreement provides that delivery of the equipmentcan be delayed to accommodate our continuing manufacturing needs, and it alsoprovides that we will retain a security interest in the purchased equipmentuntil full payment of the purchase price.

 

In consideration of the license agreement with GM, we willbe entitled to royalty of 10% of GM’s net sales of licensed products (unless GM’smargin on the products falls below specified levels, in which case a newroyalty will be negotiated in good faith). The agreement provides that we mayconvert the license to a non-exclusive in the event that the net sales in thesecond year of the contract or thereafter are not sufficient to result inroyalties of $0.5 million or more per year. The agreement also provides that GMwill be required to purchase all alloy feedstock from us, and we will have theright to continue to manufacture Liquidmetal alloy products for South Koreancustomers until all purchased equipment has been commissioned.

 

Additionally, effective June 1, 2007, we discontinuedour post-processing operation in Weihai, China and transferred ourmanufacturing staff and equipment in Weihai to GM under an amendment to theequipment purchase agreement with GM. Further, we transferred certain of ourmanufacturing staff from our South Korean plant to GM. As a result, GM assumed$0.4 million of accrued severance liability for the transferred employee. Theequipment purchase agreement and the transfer agreement regarding our Weihaioperations resulted in a total net gain of $0.2 million, which is recorded asother income.

 

We have also changed the name of our South Korean subsidiaryto Liquidmetal Technologies Korea Co., Ltd, which was formerly LiquidmetalKorea Co., Ltd. GM assumed the name Liquidmetal Korea to conduct business inSouth Korea.

 

Wepurchased production supplies and outsourced production of certain bulk alloyproduction with GM, Lead Metal, and SDM, which are controlled by JamesKang   We purchased a total of $0.7million and $0.5 million for the year ended December 31, 2007 and 2006,respectively, of which $0 and $10 thousand is included in accounts payable andaccrued liabilities at December 31, 2007 and 2006, respectively.

 

Werecognized revenue from sales of raw materials and royalties for a total of $3million for the year ended December 31, 2007, of which $0.4 million isincluded in accounts receivable.

 

EffectiveOctober 20, 2006, Mr. Kang began providing services to us as aconsultant, which would have continued through December 31, 2009. On December 31,2007, the terms of the consulting agreement were accelerated whereby theremaining two years of Mr. Kang’s consulting fees were settled for $.04million.

 

In December 2007,we entered into agreements with two holders of our convertible subordinatednotes (the “January 2010 Notes”) and GM, a South Korean company formed byinvestor groups including our former Founder and director, James Kang, and thetwo holders, whereby GM would assume the liabilities due under the January 2010Notes, including principal, interest, and fees due by our company to the twoholders totaling $0.4 million and we released obligations due from GM foroutstanding trade accounts receivables. In connection with the assumption ofthe liabilities by GM, warrants to purchase 179,620 shares of our common stockheld by the holders were cancelled.

 

We believethat each of the foregoing transactions was consummated on terms at least asfavorable to us as we would expect to negotiate with unrelated third parties.

 

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**Item 14. Principal AccountingFees and Services**

 

Choi, Kim & Park, LLP

 

Thefollowing table summarizes the aggregate fees billed to the Company by Choi,Kim & Park, LLP for professional services:

 
| **Fees**       | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit Fees (1) |       | $        | 540,000    |     | $          | 406,000 |   |
|                |            |          |            |          |            |  |  |

 

----

(1) *Audit Fees.*Feesfor audit services billed in 2007 consisted of:

•                  Auditof the Company’s financial statements for 2006;

•                  Reviewof the Company’s quarterly financial statements for 2007;

•                  Reviewof the Company’s internal controls in accordance with Section 404 of theSarbanes-Oxley Act of 2002 for 2007;

•                  Reviewof the Company’s S-1 filing for 2007.

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

(a)  The following documents are filed as apart of this report:

 

1. *FinancialStatements*.

 

2. *FinancialStatement Schedules*. See the last page of ConsolidatedFinancial Statements.

 

3. *Exhibits*.See Item 15(c) below.

 
| (b)  *Exhibits*. | The exhibits listed  on the Exhibit Index, which appears at the end of this Item 15, are  filed as part of, or incorporated by reference into, this report. |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(c)   *FinancialStatement Schedules*. SeeItem 15(a)(2) above.

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Document  Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                       |       | Certificate of Incorporation *(incorporated  by reference to Exhibit 3.1 to the Form 10-Q filed on  August 14, 2003).*                                                                                                                                                                                                                                                                                                                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2                       |       | Bylaws *(incorporated by reference  to Exhibit 3.2 to the Form 10-Q filed on August 14, 2003).*                                                                                                                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                       |       | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2                       |       | Form of Common Stock Certificate *(incorporated  by reference to Exhibit 4.2 to the Form 10-Q filed on  August 14, 2003).*                                                                                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                      |       | Amended and Restated License Agreement, dated September 1, 2001,  between Liquidmetal Technologies, Inc. and California Institute of  Technology *(incorporated by reference to  Exhibit 10.1 to the Registration Statement on Form  S-1 filed on November 20, 2001 (Registration No. 333-73716)).*                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2*                     |       | 1996 Stock Option Plan, as amended, together with form of Stock Option  Agreement *(incorporated by reference to  Exhibit 10.7 to the Registration Statement on Form S-1 filed on  November 20, 2001 (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3*                     |       | 2002 Equity Incentive Plan *(incorporated  by reference to Exhibit 10.23 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on April 5, 2002  (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                                                      |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4*                     |       | 2002 Non-Employee Director Stock Option Plan *(incorporated by reference to Exhibit 10.24 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  April 5, 2002 (Registration No. 333-73716)).*                                                                                                                                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5*                     |       | Employment Agreement, dated December 31, 2000, between  Liquidmetal Technologies, Inc. and John Kang, as amended by Amendment  No. 1 to Employment Agreement, dated June 28, 2001 *(incorporated by reference to Exhibit 10.8 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).*                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6                      |       | Non-Qualified Stock Option Agreement, dated January 1, 2001,  between Liquidmetal Technologies, Inc. and Paul Azinger *(incorporated by reference to Exhibit 10.19 to  the Registration Statement on Form S-1 filed on November 20, 2001  (Registration No. 333-73716)).*                                                                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7                      |       | Foreign Corporation Lease Zone Occupancy (Lease) Agreement, dated  March 5, 2002, between Kyonggi Local Corporation and Liquidmetal Korea  Co., Ltd. *(incorporated by reference to  Exhibit 10.22 to the Registration Statement on Form S-1 (Amendment  No. 2) filed by Liquidmetal Technologies on April 5, 2002  (Registration No. 333-73716)).*                                                                                                                                           |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8                      |       | Credit Service Agreement, dated February 2003, between  Liquidmetal Korea Co., Ltd. and Kookmin Bank *(incorporated  by reference to Exhibit 10.20 to the Form 10-K filed on  March 31, 2003).*                                                                                                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9                      |       | Form of Common Stock Purchase Warrant, dated August 2, 2005  (*incorporated by reference from  Exhibit 10.3 of the Registrant’s 10-Q/A filed on 08/30/05)*                                                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10                     |       | Form of Common Stock Purchase Warrant, dated June 13, 2005 (*incorporated by reference from Exhibit 99.3 of  the Registrant’s 8-K filed on 06/16/05)*                                                                                                                                                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11                     |       | Agreement, dated November 3, 2004, between Liquidmetal  Technologies, Inc. and John Kang relating to liability under  Section 16(b) *(incorporated by  reference from Exhibit 10.58 to the Form 10-K filed on  March 16, 2006).*                                                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12                     |       | Form of Indemnity Agreement between Liquidmetal  Technologies, Inc. and directors and executive officers*(incorporated by reference from Exhibit 10.59  to the Form 10-K filed on March 16, 2006).*                                                                                                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13                     |       | Factoring, Loan, and Security Agreement, dated April 21, 2005,  between Liquidmetal Technologies, Inc. and Hana Financial, Inc. and  Amendment No. 1 to Factoring, Loan, and Security Agreement, dated  January 27, 2006, between Liquidmetal Technologies, Inc. and Hana  Financial, Inc. *(incorporated by  reference to Exhibit 10.60 to the Registration Statement on  Form S-1 (Amendment No. 1) filed on April 20, 2006  (Registration No. 333-130251)).* |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14                     |       | Warrant for Purchase of Shares of Common Stock, dated March 17,  2006, granted by Liquidmetal Technologies, Inc. to Atlantic Realty  Group, Inc.*(incorporated by  reference to Exhibit 10.62 to the Registration Statement on  Form S-1 (Amendment No. 1) filed on April 20, 2006 (Registration  No. 333-130251)).*                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15                     |       | Consulting Agreement, dated April 12, 2006, between Liquidmetal  Technologies, Inc. and William Johnson*(incorporated by reference to Exhibit 10.65 to the Registration  Statement on Form S-1 (Amendment No. 1) filed on April 20,  2006 (Registration No. 333-130251)).*                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16                     |       | Securities Purchase Agreement, dated May 17, 2006, among  Liquidmetal Technologies, Inc. and the parties identified as  “Purchasers” therein *(incorporated by  reference to Exhibit 10.66 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on July 20, 2006  (Registration No. 333-130251)).*                                                                                                                                                               |

 

64

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| **Exhibit   Number** | ** ** | **Document  Description**                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17                     |       | Form of 8% Unsecured Subordinated Note due August 2007 *(incorporated by reference to Exhibit 10.67 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  July 20, 2006 (Registration No. 333-130251)).*                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18                     |       | Form of Common Stock Purchase Warrant, dated May 17, 2006 *(incorporated by reference to Exhibit 10.68 to  the Registration Statement on Form S-1 (Amendment No. 2) filed on  July 20, 2006 (Registration No. 333-130251)).*                                                                                                                           |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19                     |       | Registration Rights Agreement, dated May 17, 2006, among  Liquidmetal Technologies, Inc. and the parties identified as  “Purchasers” therein *(incorporated by  reference to Exhibit 10.69 to the Registration Statement on  Form S-1 (Amendment No. 2) filed on July 20, 2006  (Registration No. 333-130251)).*                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20                     |       | Securities  Purchase Agreement, dated January 3, 2007 (the “Securities Purchase  Agreement”), among Liquidmetal Technologies, Inc. (the “Company”) and  the investors listed on the Schedule of Buyers attached thereto (the  “Buyers”) *(incorporated by reference from Exhibit 10.1 to the  Form 8-K filed on January 4, 2007).* |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21                     |       | Form of  Convertible Subordinated Note issued pursuant to Securities Purchase  Agreement *(incorporated by reference from Exhibit 10.2 to the  Form 8-K filed on January 4, 2007).*                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22                     |       | Form of Common Stock Purchase Warrant issued pursuant to  Securities Purchase Agreement *(incorporated  by reference from Exhibit 10.3 to the Form 8-K filed on  January 4, 2007).*                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23                     |       | Registration Rights Agreement, dated January 3, 2007, among the  Company and the Buyers *(incorporated by  reference from Exhibit 10.4 to the Form 8-K filed on  January 4, 2007).*                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24                     |       | Amendment No. 2 to Factoring, Loan & Security Agreement,  dated January 23, 2007, between Liquidmetal Technologies Inc. and Hana  Financial, Inc. *(incorporated by  reference from Exhibit 10.76 to the Form 10-K filed on  March 16, 2007).*                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.25                     |       | Amendment  No. 1 to the Securities Purchase Agreement and Convertible Subordinated  Notes, dated April 23, 2007, by and between Liquidmetal  Technologies, Inc. and the investors listed on the Schedule of Buyers  attached thereto *(incorporated by  reference from Exhibit 10.1 to the Form 8-K filed on April 27,  2007).*                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26                     |       | Standard  Industrial / Commercial Single-Tenant Lease, dated February 13, 2007,  between Liquidmetal Technologies, Inc. and 30452 Esperanza LLC *(incorporated by reference from Exhibit 10.1  to the Form 10-Q filed on May 15, 2007).*                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27                     |       | Lease, dated  March 19, 2007, between Liquidmetal Technologies, Inc. and Larry  Ruffino and Roland Ruffino *(incorporated  by reference from Exhibit 10.1 to the Form 10-Q filed on  May 15, 2007).*                                                                                                                                                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28                     |       | Principles of  Agreement and Security Agreement, dated June 1, 2007, between  Liquidmetal Technologies, Inc. and Foster Wheeler Energy  Services, Inc.*(incorporated by  reference from Exhibit 10.64**to the Registration  Statement on Form S-1 (Amendment No. 1) filed on July 2, 2007  (Registration No. *333-142442*)).*                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29                     |       | Equipment  Purchase Agreement and Licensing Agreement, dated June 1, 2007, between  Liquidmetal Technologies, Inc. and Gracemetal, as amended *(incorporated by reference from Exhibit 10.65**to the Registration  Statement on Form S-1 (Amendment No. 1) filed on July 2, 2007  (Registration No. *333-142442*)).*                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.30                     |       | Asset Purchase  and Contribution Agreement, dated July 24, 2007 between Company and  Liquidmetal Coatings, LLC. (includes Liquidmetal Coatings, LLC Operating  Agreement) *(incorporated by reference from  Exhibit 2.1 to the Form 8-K filed on July 27, 2007).*                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.31                     |       | Loan Agreement,  dated July 24, 2007 by and among Liquidmetal Coatings, LLC, Liquidmetal  Coatings Solutions, LLC and Bank Midwest, N.A. *(incorporated by reference from Exhibit 2.2 to the Form 8-K  filed on July 27, 2007).*                                                                                                                                      |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.32                     |       | Securities  Purchase Agreement, dated July 24, 2007, by and among Liquidmetal  Coatings, LLC, C3 Capital Partners, L.P., C3 Capital Partners II,  L.P. and Liquidmetal Coatings Solutions, LLC. *(incorporated by reference from Exhibit 2.3 to the Form 8-K  filed on July 27, 2007).*                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.33                     |       | First Amended  and Restated Operating Agreement of Liquidmetal Coatings, LLC, dated  February 22, 2008 *(incorporated by  reference from Exhibit 2.1 to the Form 8-K filed on  February 28, 2008).*                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.34                     |       | Form of  Convertible Subordinated Note, dated October 1, 2007*.*                                                                                                                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.35                     |       | Form of  Convertible Subordinated Note, dated December 28, 2007*.*                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.36                     |       | Form of Common Stock Purchase Warrant, dated December 28,  2007.                                                                                                                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.37                     |       | Form of Letter dated, October 31, 2007, to extend 8% Unsecured  Subordinated Note due date.                                                                                                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.38*                    |       | Employment Agreement, dated January 13, 2008, between Liquidmetal  Technologies, Inc. and Gerald Morrow.                                                                                                                                                                                                                                                                        |

 

65

----

 
| **Exhibit   Number** | ** ** | **Document  Description**                                                                                                                                                                          |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                         |
| 14                        |       | Code of Ethics for Chief Executive Officer and Senior Financial and  Accounting Officers (*incorporated by  reference to Exhibit 14 to the Form 10-K filed on November 10,  2004*). |
|                      |       |                                                                                                                                                                                               |
| 21                        |       | Subsidiaries of the Registrant. *(incorporated  by reference from Exhibit 21 to the Form 10-K filed on  November 10, 2004).*                                                        |
|                      |       |                                                                                                                                                                                               |
| 23.1                      |       | Consent of Registered Independent Public Accounting Firm, Choi,  Kim & Park, LLP.                                                                                                         |
|                      |       |                                                                                                                                                                                               |
| 24.1                      |       | Power of Attorney relating to subsequent amendments (included on the  signature page(s) of this report)                                                                                       |
|                      |       |                                                                                                                                                                                               |
| 31.1                      |       | Certification of Principal Executive Officer pursuant to  Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of  1934, as amended.                                          |
|                      |       |                                                                                                                                                                                               |
| 31.2                      |       | Certification of Principal Financial Officer pursuant to  Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of  1934, as amended.                                          |
|                      |       |                                                                                                                                                                                               |
| 32.1                      |       | Certification pursuant to 18 U.S.C. 1350.                                                                                                                                                          |

 

----

*                      Denotes a management contract or compensatoryplan or arrangement required to be filed as an exhibit this Form 10-K. 

 

66

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                |   | Liquidmetal  Technologies, Inc.                        |
|---------------------|--------|-------------------------------------------------------------|
|                |   |                                                        |
|                |   |                                                        |
|                | By:    | /s/ Larry E. Buffington                                     |
|                |   | Larry E. Buffington   President and Chief Executive Officer |
|                |   |                                                        |
| Date: April 3, 2008 |   |                                                        |
|                |   |                                                        |
|                | By:    | /s/ Gerald E. Morrow                                        |
|                |   | Gerald E. Morrow                                            |
|                |   | Chief Financial Officer                                     |
|                |   |                                                        |
| Date: April 3, 2008 |   |                                                        |

 

67

----

 

**POWER OF ATTORNEY**

 

KNOW ALL THESE PERSONSBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints Larry Buffington and Gerald Morrow and each of them, jointly andseverally, his attorneys-in-fact, each with full power of substitution, for himin any and all capacities, to sign any and all amendments to this Report on Form 10-K,and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each said attorneys-in-fact or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report on Form 10-Khas been signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated:

 
| **Signature**       | ** ** | **Title**                           | ** ** | **Date**      |
|---------------------|------------|-------------------------------------|------------|---------------|
| /s/ John Kang       |       | Chairman of the Boardand   Director |       | April 3, 2008 |
| John Kang           |       |                                |       |          |
|                |       |                                |       |          |
| /s/ William Johnson |       | Director                            |       | April 3, 2008 |
| William Johnson     |       |                                |       |          |
|                |       |                                |       |          |
| /s/ Robert Biehl    |       | Director                            |       | April 3, 2008 |
| Robert Biehl        |       |                                |       |          |
|                |       |                                |       |          |
| /s/ Dean Tanella    |       | Director                            |       | April 3, 2008 |
| Dean Tanella        |       |                                |       |          |
|                |       |                                |       |          |
| /s/ CK Cho          |       | Director                            |       | April 3, 2008 |
| CK Cho              |       |                                |       |          |
|                |       |                                |       |          |
| /s/ Patrick Caruana |       | Director                            |       | April 3, 2008 |
| Patrick Caruana     |       |                                |       |          |

 

Certificationsprovided as Exhibits.

 

68

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** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                             | **Page** |
|------------------------------------------------------------------------|----------|
|                                                                   |     |
| Report of Independent Registered Public Accounting  Firm               | 70       |
| Consolidated Financial  Statements:                                    |     |
| Consolidated Balance Sheets                                            | 71       |
| Consolidated Statements of  Operations and Comprehensive Income (Loss) | 72       |
| Consolidated Statements of  Shareholders’ Equity (Deficiency)     | 73       |
| Consolidated Statements of  Cash Flows                                 | 74       |
| Notes to Consolidated Financial Statements                             | 76       |

 

69

----

** **

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholders ofLiquidmetal Technologies, Inc.

 

We have audited the accompanying consolidatedbalance sheets of Liquidmetal Technologies, Inc. and subsidiaries (the“Company”) as of December 31, 2007 and 2006, and the related consolidatedstatements of operations and comprehensive loss, shareholders’ equity(deficiency), and cash flows for the years ended December 31, 2007, 2006, and2005.  Our audits also included thefinancial statement schedules listed at index in Item 15(a) as of and for theyears ended December 31, 2007, 2006, and 2005. Our responsibility is to express an opinion on the financial statementsand financial statement schedules based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofLiquidmetal Technologies, Inc. and subsidiaries as of December 31, 2007 and2006, and the results of their operations and cash flows for the years endedDecember 31, 2007, 2006, and 2005, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, such financialstatement schedules, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Liquidmetal Technologies, Inc.’s internalcontrol over financial reporting as of December 31, 2007, based oncriteria established in*  Internal Control-Integrated Framework*  issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report datedMarch 28, 2008 expressed an unqualified opinion on the effectiveness ofthe Company’s internal control over financial reporting.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 2 to the consolidated financialstatements, the Company's significant operating losses and working capitaldeficit raise substantial doubt about its ability to continue as a goingconcern. Management's plans regarding those matters also are described in Note2. The consolidated financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

 

 

/s/ Choi, Kim & Park LLP

 

Los Angeles, California

Certified Public Accountants

 

March 28, 2008

 

70

----

 

**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                            |       |                  |       |   |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Current assets:                                                                                                                                                       |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 1,180      |   | $ | 144 |   |
| Trade accounts receivables, net of  allowance for doubtful accounts of $89 and $82                                                                                    |       | 5,165                 |       | 3,934 |   |
| Inventories                                                                                                                                                           |       | 2,298                 |       | 3,765 |   |
| Prepaid expenses and other current assets                                                                                                                             |       | 708                   |       | 830 |   |
| Total current assets                                                                                                                                                  |       | 9,351                 |       | 8,673 |   |
| Property, plant and equipment, net                                                                                                                                    |       | 9,730                 |       | 12,095 |   |
| Idle equipment                                                                                                                                                        |       | 178                   |       | 194 |   |
| Other intangibles, net                                                                                                                                                |       | 1,142                 |       | 1,170 |   |
| Investment in joint venture                                                                                                                                           |       | 306                   |       | 3 |   |
| Other assets                                                                                                                                                          |       | 1,806                 |       | 109 |   |
| Total assets                                                                                                                                                          |       | $                     | 22,513     |   | $ | 22,244 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                  |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                 |       | 8,056                 |       | 9,802 |   |
| Deferred revenue                                                                                                                                                      |       | 316                   |       | 202 |   |
| Short-term debt                                                                                                                                                       |       | 2,182                 |       | 2,669 |   |
| Long-term debt, current portion, net of  debt discounts of $838 and $3,636                                                                                            |       | 6,092                 |       | 14,480 |   |
| Warrant liabilities                                                                                                                                                   |       | 2,583                 |       | 2,662 |   |
| Conversion feature liabilities                                                                                                                                        |       | 2,083                 |       | 1,838 |   |
| Other liabilities, current portion                                                                                                                                    |       | 398                   |       | 177 |   |
| Total current liabilities                                                                                                                                             |       | 21,710                |       | 31,830 |   |
| Long-term debt, net of current portion and  debt discounts of $9,634 and $0                                                                                           |       | 14,588                |       | 225 |   |
| Other long-term liabilities, net of current  portion                                                                                                                  |       | 411                   |       | 552 |   |
| Total liabilities                                                                                                                                                     |       | 36,709                |       | 32,607 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Minority interests                                                                                                                                                    |       | 384                   |       | — |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| Shareholders’ deficiency:                                                                                                                                        |       |                  |       |   |   |
| Common stock, $0.001 par value; 100,000,000  shares authorized and 44,726,295 and 44,311,768 issued and outstanding at  December 31, 2007 and 2006, respectively |       | 45                    |       | 44 |   |
| Additional paid-in capital                                                                                                                                            |       | 137,293               |       | 136,031 |   |
| Accumulated deficit                                                                                                                                                   |       | (154,710              | )          | (149,047 | ) |
| Accumulated other comprehensive income                                                                                                                                |       | 2,792                 |       | 2,609 |   |
| Total shareholders’ deficiency                                                                                                                                   |       | (14,580               | )          | (10,363 | ) |
|                                                                                                                                                                  |       |                  |       |   |   |
| Total liabilities and shareholders’  deficiency                                                                                                                  |       | $                     | 22,513     |   | $ | 22,244 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

71

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(inthousands, except per share data)**

 
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| ** **                                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                  |       | $                                           | 29,022     |   | $ | 27,669 |   | $ | 16,365 |   |
| Cost of sales                                                            |       | 26,459                                      |       | 22,418 |   | 15,129 |   |
| Gross profit                                                             |       | 2,563                                       |       | 5,251 |   | 1,236 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Operating expenses                                                       |       |                                        |       |   |   |   |   |
| Selling, general, and administrative                                     |       | 8,921                                       |       | 9,962 |   | 8,534 |   |
| Research and development                                                 |       | 1,123                                       |       | 950 |   | 1,120 |   |
| Impairment of long lived assets                                          |       | —                                      |       | — |   | 4,487 |   |
| Total operating expenses                                                 |       | 10,044                                      |       | 10,912 |   | 14,141 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before interest, other income, income  taxes, and minority interest |       | (7,481                                      | )          | (5,661 | ) | (12,905 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss from extinguishments of debt                                        |       | (648                                        | )          | — |   | (1,247 | ) |
| Change in value of warrants, gain                                        |       | 4,923                                       |       | 279 |   | 3,985 |   |
| Change in value of conversion feature, gain  (loss)                      |       | 6,965                                       |       | (226 | ) | 9,118 |   |
| Other income                                                             |       | 226                                         |       | 572 |   | — |   |
| Interest expense                                                         |       | (9,364                                      | )          | (9,509 | ) | (6,021 | ) |
| Interest income                                                          |       | 123                                         |       | 23 |   | 17 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before income income taxes and  minority interest                   |       | (5,256                                      | )          | (14,522 | ) | (7,053 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Income Taxes                                                             |       | —                                      |       | — |   | — |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before minority interest                                            |       | (5,256                                      | )          | (14,522 | ) | (7,053 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Minority interests                                                       |       | (384                                        | )          | — |   | — |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss from continuing operations                                          |       | (5,640                                      | )          | (14,522 | ) | (7,053 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                 |       | (5,640                                      | )          | (14,522 | ) | (7,053 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Other comprehensive income:                                              |       |                                        |       |   |   |   |   |
| Foreign exchange translation gain during  the period                     |       | 183                                         |       | 339 |   | 299 |   |
| Comprehensive income                                                     |       | $                                           | (5,457     | ) | $ | (14,183 | ) | $ | (6,754 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Per common share basic and diluted:                                      |       |                                        |       |   |   |   |   |
| Loss per share basic and diluted                                         |       | $                                           | (0.12      | ) | $ | (0.33 | ) | $ | (0.17 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Number of weighted average shares - basic  and diluted                   |       | 44,730                                      |       | 43,809 |   | 41,833 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

72

----

 

**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)**

**(inthousands, except share data)**

 
| ** **                                   | ** ** | **Common  Shares** | ** **                     | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (loss)** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|--------------------|--------------------------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | ** **         | ** **                     | ** **        | ** ** | **(Restated)**                   | ** ** | **(Restated)**           | ** ** | ** **                                                | ** ** | ** ** | ** ** |
|                                         |       |               |                           |              |       |                             |       |                     |       |                                                      |       |       |       |
| **Balance, December 31, 2004 (As Restated)** |       | 41,609,652         |                           | $                 | 42         |                             | $          | 129,650                  |       | $                                                         | (127,472   | )          | $          | 1,971 |   | $ | 4,191 |   |
| Stock-based compensation                     |       | —             |                           | —            |       | 41                               |       | —                   |       | —                                                    |       | 41         |       |
| Conversion of notes payable                  |       | 485,750            |                           | —            |       | 1,026                            |       | —                   |       | —                                                    |       | 1,026      |       |
| Redemption of convertible notes payable      |       | —             |                           | —            |       | 1                                |       | —                   |       | —                                                    |       | 1          |       |
| Common stock issued as director’s fees  |       | 92,219             |                           | —            |       | 175                              |       | —                   |       | —                                                    |       | 175        |       |
| Foreign exchange translation gain            |       | —             |                           | —            |       | —                           |       | —                   |       | 299                                                       |       | 299        |       |
| Net loss                                     |       | —             |                           | —            |       | —                           |       | (7,053                   | )          | —                                                    |       | (7,053     | )          |
|                                         |       |               |                           |              |       |                             |       |                     |       |                                                      |       |       |       |
| **Balance, December 31, 2005 (As Restated)** |       | 42,187,621         |                           | $                 | 42         |                             | $          | 130,893                  |       | $                                                         | (134,525   | )          | $          | 2,270 |   | $ | (1,320 | ) |
| Conversion of notes payable                  |       | 285,750            |                           | —            |       | 471                              |       | —                   |       | —                                                    |       | 471        |       |
| Common stock issued as director’s fees  |       | 109,437            |                           | —            |       | 102                              |       | —                   |       | —                                                    |       | 102        |       |
| Common stock issued to Innometal             |       | 1,700,000          |                           | 2                 |       | 3,448                            |       | —                   |       | —                                                    |       | 3,450      |       |
| Stock awards                                 |       | 28,960             |                           | —            |       | 42                               |       | —                   |       | —                                                    |       | 42         |       |
| Stock-based compensation                     |       | —             |                           | —            |       | 1,075                            |       | —                   |       | —                                                    |       | 1,075      |       |
| Foreign exchange translation gain            |       | —             |                           | —            |       | —                           |       | —                   |       | 339                                                       |       | 339        |       |
| Net loss                                     |       | —             |                           | —            |       | —                           |       | (14,522                  | )          | —                                                    |       | (14,522    | )          |
| ** **                                   |       |               |                           |              |       |                             |       |                     |       |                                                      |       |       |       |
| **Balance, December 31, 2006**               |       | 44,311,768         |                           | $                 | 44         |                             | $          | 136,031                  |       | $                                                         | (149,047   | )          | $          | 2,609 |   | $ | (10,363 | ) |
| Conversion of notes payable                  |       | 365,455            |                           | 1                 |       | 578                              |       | —                   |       | —                                                    |       | 579        |       |
| Common stocks issued as director’s fees |       | 49,072             |                           | —            |       | 42                               |       | —                   |       | —                                                    |       | 42         |       |
| Stock-based compensation                     |       | —             |                           | —            |       | 642                              |       | —                   |       | —                                                    |       | 642        |       |
| Foreign exchange translation gain            |       | —             |                           | —            |       | —                           |       | —                   |       | 183                                                       |       | 183        |       |
| Cash distribution to minority interests      |       | —             |                           | —            |       | —                           |       | (23                      | )          | —                                                    |       | (23        | )          |
| Net loss                                     |       | —             |       | —            |       | —                           |       | (5,640                   | )          | —                                                    |       | (5,640     | )          |
| ** **                                   |       |               |                           |              |       |                             |       |                     |       |                                                      |       |       |       |   |   |   |   |   |
| **Balance, December 31, 2007**               |       | 44,726,295         |                           | $                 | 45         |                             | $          | 137,293                  |       | $                                                         | (154,710   | )          | $          | 2,792 |   | $ | (14,580 | ) |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands, exceptshare data)**

 
| ** **                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Operating activities:**                                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                  |       | $                                           | (5,640     | ) | $ | (14,522 | ) | $ | (7,053 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Adjustments to reconcile loss from  operations to net cash used for operating activities: |       |                                        |       |   |   |   |   |
| Impairment of long lived assets                                                           |       | —                                      |       | — |   | 4,307 |   |
| Gain on disposal of asset                                                                 |       | (226                                        | )          | — |   | (14 | ) |
| Minority interests in income of  consolidated subsidiary                                  |       | 384                                         |       | — |   | — |   |
| Depreciation and amortization                                                             |       | 3,102                                       |       | 3,574 |   | 3,401 |   |
| Loss on extinguishment of debt                                                            |       | 648                                         |       | — |   | 1,247 |   |
| Amortization of debt discount                                                             |       | 5,350                                       |       | 6,158 |   | 3,869 |   |
| Stock-based compensation                                                                  |       | 642                                         |       | 1,075 |   | 41 |   |
| Bad debt expense (recovery)                                                               |       | 7                                           |       | 47 |   | (6 | ) |
| Warranty expense                                                                          |       | 169                                         |       | 46 |   | 101 |   |
| Gain from change in value of warrants                                                     |       | (4,923                                      | )          | (279 | ) | (3,985 | ) |
| (Gain) loss from change in value of  conversion feature                                   |       | (6,965                                      | )          | 225 |   | (9,118 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Changes in operating assets and  liabilities:                                             |       |                                        |       |   |   |   |   |
| Trade accounts receivable                                                                 |       | (1,061                                      | )          | (1,621 | ) | (686 | ) |
| Inventories                                                                               |       | 1,467                                       |       | (2,017 | ) | (151 | ) |
| Prepaid expenses and other current assets                                                 |       | (1                                          | )          | (221 | ) | 350 |   |
| Other assets                                                                              |       | (2,211                                      | )          | 142 |   | (378 | ) |
| Accounts payable and accrued expenses                                                     |       | (1,545                                      | )          | 3,371 |   | 1,606 |   |
| Deferred revenue                                                                          |       | 114                                         |       | (1,073 | ) | 375 |   |
| Other liabilities                                                                         |       | 450                                         |       | (171 | ) | (412 | ) |
| Net cash used for continuing activities                                                   |       | (10,239                                     | )          | (5,266 | ) | (6,506 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Investing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                       |       | (1,171                                      | )          | (932 | ) | (169 | ) |
| Proceeds from the sale of property and  equipment                                         |       | 400                                         |       | 104 |   | 69 |   |
| Investment in patents and trademarks                                                      |       | (103                                        | )          | (104 | ) | (159 | ) |
| Investment in joint venture                                                               |       | (303                                        | )          | (3 | ) | — |   |
| Net cash used for investing activities                                                    |       | (1,177                                      | )          | (935 | ) | (259 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Financing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Proceeds from borrowings                                                                  |       | 45,863                                      |       | 23,620 |   | 17,774 |   |
| Repayment of borrowings                                                                   |       | (33,166                                     | )          | (18,117 | ) | (11,333 | ) |
| Repayment of other liabilities                                                            |       | —                                      |       | 69 |   | (133 | ) |
| Proceeds from restricted cash                                                             |       | —                                      |       | — |   | 754 |   |
| Cash distributions                                                                        |       | (23                                         | )          | — |   | — |   |
| Net cash provided by financing activities                                                 |       | 12,674                                      |       | 5,572 |   | 7,062 |   |
| Effect of foreign exchange translation                                                    |       | (222                                        | )          | (619 | ) | 353 |   |
| Net (decrease) increase in cash and cash  equivalents                                     |       | 1,036                                       |       | (1,248 | ) | 650 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Cash and cash equivalents at beginning of  period                                         |       | 144                                         |       | 1,392 |   | 742 |   |
| Cash and cash equivalents at end of period                                                |       | $                                           | 1,180      |   | $ | 144 |   | $ | 1,392 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Supplemental cash flow information                                                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                             |       | $                                           | 2,874      |   | $ | 1,970 |   | $ | 1,472 |   |
| Taxes paid                                                                                |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

74

----

 

In2007, $400 of the Company’s 7% senior convertible notes due July 2007 wasconverted into 320,000 shares of the Company’s common stock at a conversionprice of $1.25 per share.

 

In2007, $50 of the Company’s 8% convertible subordinate notes due January 2010was converted into 45,455 shares of the Company’s common stock at a conversionprice of $1.10 per share.

 

In2006, $286 of the Company’s 6% senior convertible notes due July 2007 wasconverted into 285,750 shares of the Company’s common stock at a conversionprice of $1.00 per share.

 

In 2006, the Companyfulfilled its settlement payable to Innometal (formerly known as Growell Metal)of $3,450, net of foreign exchange translation loss, through stock issuance of1,700,000 shares of the company’s common stock.

 

In 2005, the Company’s6% senior convertible notes due July 2007 were converted into 485,750 ofthe Company’s common stock at a conversion price of $1.00 per share.

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

75

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** **

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

**1. Description of Business**

 

Liquidmetal Technologies, Inc. (“LiquidmetalTechnologies”) and its subsidiaries (collectively “the Company”) are in thebusiness of developing, manufacturing, and marketing products made fromamorphous alloys. Liquidmetal Technologies markets and sells Liquidmetal® alloyindustrial coatings and also manufactures, markets and sells products andcomponents from bulk Liquidmetal alloys that can be incorporated into thefinished goods of its customers across a variety of industries.   The Company also partners with third-partylicensees and distributors to develop and commercialize Liquidmetal alloyproducts.

 

The Company classifies operations into tworeportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloys. Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used by coal-burning power plants. BulkLiquidmetal alloys include potential market opportunities to manufacture andsell products and components for electronic devices, medical devices, defenseapplications, and sporting goods.  Inaddition, the bulk Liquidmetal alloys segment includes tooling and prototypesampling, and the manufacture and sale of die casting and VIM equipment (seeNote 14 for disclosure regarding the disposal of this segment). In addition,such alloys are used to generate research and development services revenue fordeveloping uses related primarily to defense and medical applications as wellas potential license fees, royalties, and other compensation from strategicpartnering transactions.

 

On August 4, 2004, the Company establisheda post-processing plant in the city of Weihai in Shandong province of Chinaunder Weihai Liquidmetal Company Limited, which is 100%  owned by Liquidmetal Korea, to facilitate ourbulk alloy manufacturing business. Weihai Liquidmetal is consolidated into Liquidmetal Technologies withall intercompany transactions eliminated. Effective June 1, 2007, the Companydiscontinued its operation in Weihai (see Note 20).

 

On July 24, 2007, the Company transferredsubstantially all of the assets of its Liquidmetal alloy industrial coatingsbusiness to a newly formed, newly capitalized subsidiary named LiquidmetalCoatings, LLC, a Delaware limited liability company (“LMC”), and LMC assumedsubstantially all of the liabilities of the coatings business.  The transfer included the thermal spraycoatings assets and liabilities acquired under a purchase agreement with FosterWheeler Energy Services in June 2007.  The Company holds a 69.25%ownership interest in LMC.  The resultsof operation of LMC are consolidated and comprise our Liquidmetal alloyindustrial coatings segment for financial reporting purposes.

 

**2. Liquidity**

 

The Company has experienced losses fromcontinuing operations during the last three fiscal years and has an accumulateddeficit of $154,710 as of December 31, 2007.  Net cash used for continuing operations forthe year ended December 31, 2007 was $10,239.  At December 31, 2007, working capitaldeficit was $12,359.  As of December 31,2007, the Company’s principal source of liquidity is $1,180 of cash and $5,165of trade accounts receivable.  Suchconditions raise substantial doubt that the Company will be able to continue asa going concern.  These operating resultsoccurred while the Company was developing and continues to develop,commercialize, and manufacture products from an entirely new and uniquetechnology.  These factors have placed asignificant strain on the financial resources of the Company.  The ability of the Company to overcome thesechallenges depends on its ability to correct its production inefficiencies,continue to reduce its operating costs, generate higher revenue, and achievepositive cash flow from continuing operations and profitability and continuedsources of debt and equity financing. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of the uncertainties.

 

On February 22, 2008, the Company received $1,714distribution from its majority owned subsidiary, Liquidmetal Coatings, LLC (“LMC”)from which it issued and sold $2,500 in preferred membership units to twoexisting holders of LMC common membership units.  The preferredunits issued by LMC have an accruing priority return of 14% per year andare redeemable by the preferred holders on the fourth anniversary of theissue date (see Note 21).

 

Weanticipate that we will not have sufficient funds to pursue our currentoperating plan through the second quarter of 2008 and we will therefore requireadditional funding.  We are actively seeking additional sources of capitaland seeking to restructure and/or modify existing indebtedness.  Theamount of funding that we seek and the timing of such fundraising efforts willdepend on the extent to which we are able to increase revenues throughobtaining additional purchase orders for our products and/or the extent towhich we can restructure or modify our debt.  Because we cannot be certainthat we will be able to obtain adequate funding from debt, equity, or othertraditional financing sources, we are also actively exploring several strategicfinancing options, including the possible sale of our manufacturing plant inSouth Korea (which would then be replaced with a smaller facility) andadditional licensing and outsourcing of our manufacturing operations.

 

76

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

Wecannot guarantee that adequate funds will be available when needed, and if wedo not receive sufficient capital, we may be required to alter or reduce thescope of our operations.

 

Additionally, we have approximately $2,994 of principaland accrued interest outstanding as of December 31, 2007, under the 8%unsecured subordinated notes (the “Bridge Notes”), which were due August 17,2007.  Subsequent to December 31, 2007 and as of the filing of thisreport, we repaid $1,872 of principal and accrued interest due under the BridgeNotes and have approximately $1,149 of principal and accrued interestoutstanding.  We intend to fully repaythe amounts due under the Bridge Notes.  However, as of the filing of thisreport we do not have sufficient funds to repay the Bridge Notes.  As aresult, we are currently in default under the Bridge Notes.  Such a default may have material adverse effect on our operations, financialcondition, and results of operations. We have not received a formal noticeof default and we are currently working to resolve this matter with investorsholding our Bridge Notes.

 

We were required under our amendedSecurity Purchase Agreement, dated April 23, 2007, between our company andholders of our 8% convertible subordinated notes due January 2010 (the “January 2010Notes”), to repay outstanding debt under previously issued promissory notes,including the Bridge Notes (“Debt Satisfaction Covenant”) by October 1,2007.  As we have not yet fully repaid our Bridge Notes, we are not incompliance with this covenant and are subject to default under the January 2010Notes.  Such a default may have material adverse effect on our operations,financial condition, and results of operations. We have not received a formalnotice of default under this covenant and we are currently working to resolvethis matter.

 

**3. Summary of SignificantAccounting Policies**

 

*Principles of Consolidation.*Theconsolidated financial statements include the accounts of LiquidmetalTechnologies, Inc. and its wholly-owned subsidiaries, LiquidmetalTechnologies Korea Co., Ltd., formerly Liquidmetal Korea Co., Ltd., (“LMT Korea”),located in South Korea, and Liquidmetal Golf and its subsidiaries, whichincluded the retail golf segment, now accounted for as a discontinuedoperations, and its majority-owned subsidiary, Liquidmetal Coatings, LLC,located in Texas. All intercompany balances and transactions have beeneliminated. A minority interest in Liquidmetal Golf is included in theconsolidated financial statements as a component of the loss from operations ofthe discontinued retail golf segment (see Note 14).   In August 2004,the Company established a post-processing plant in the city of Weihai inShandong province of China under Weihai Liquidmetal Company Limited, which is100% owned by Liquidmetal Korea, to facilitate our bulk alloy manufacturingbusiness. Effective June 1, 2007, the Companydiscontinued its operation in Weihai (see Note 20).

 

*Revenue Recognition.*Revenueis recognized pursuant to applicable accounting standards including Securitiesand Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101(SAB 101), *“Revenue Recognition in FinancialStatements”*, and *SAB 104, RevenueRecognition*. SAB 101 as amended and SAB 104 summarize certain pointsof the SEC staff’s views in applying generally accepted accounting principlesto revenue recognition in financial statements and provide guidance on revenuerecognition issues in the absence of authoritative literature addressing aspecific arrangement or a specific industry. The Company’s revenue recognition policy complies with the requirementsof SAB 101 and SAB 104. Revenue is recognized at the time the Company ships itsproducts, as this is when title passes to the customer and all other incidencesof a sale have occurred. Revenue is deferred and included in liabilities whenthe Company receives cash in advance for services not yet performed or goodsnot yet delivered.

 

The Company applies the percentage of completionmethod to recognize revenue earned from government contracts that havecost-plus-fixed-fee arrangements.  Thesearrangements provide the Company with full reimbursement on the actual costincurred, plus a fixed fee that the Company is entitled to.  These arrangements are covered by theAmerican Institute of Certified Public Accountants Statement of Position 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts* (SOP 81-1) and Accounting ResearchBulletin No. 45, *Long-termConstruction-Type Contracts* (ARB 45). In addition, cost-reimbursablecontracts are also specifically covered by Accounting Research Bulletin No. 43,Chapter 11, Section A, *GovernmentContracts, Cost-Plus-Fixed Fee Contracts*(ARB 43). Substantially allof our cost-reimbursable and time and material contracts are with the U.S.Government, primarily with the Department of Defense.  Revenues recognized under cost-plus-fixed feeare consistent with percentage of completion method and are consistent with ARB43.

 

Sales on cost-reimbursable plus fixed fee typecontracts are recognized as allowable costs are incurred on the contract andbecome billable to the customer, at an amount equal to the allowable costs plusthe estimated profit on those costs.  Theestimated profit on a cost-reimbursable contract is generally fixed or variablebased on the contract fee arrangement.

 

77

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

*Cash and Cash Equivalents.*TheCompany considers all highly liquid investments with maturity dates of threemonths or less when purchased to be cash equivalents. The Company limits theamount of credit exposure to each individual financial institution and placesits temporary cash into investments of high credit quality. There are nosignificant concentrations of credit risk to the Company associated with cashand cash equivalents.

 

*Restricted Cash.* The Companyconsiders all cash and cash equivalents held under restrictive accounts asrestricted cash.

 

*Marketable Securities.*TheCompany follows Statement of Financial Accounting Standards (“SFAS”) No. 115,*Accounting for Certain Investments in Debtand Equity Securities*, and classifies all of its investmentsecurities as available -for-sale. Available-for-sale securities are carried atfair value, with the unrealized gains and losses reported in Shareholders’Equity (Deficiency) under the caption “Accumulated Other Comprehensive Income.”

 

*Trade Accounts Receivables.*TheCompany grants credit to its customers generally in the form of short-termtrade accounts receivable. The creditworthiness of customers is evaluated priorto the sale of inventory.  As of December 31,2007, two customers represented 22%, or $1,148, of the total outstanding tradeaccounts receivable.  As of December 31,2006, four customers represented 52%, or $2,057, of the total outstanding tradeaccounts receivable.

 

The allowance for doubtful accounts reflectsmanagement’s best estimate of probable losses inherent in the trade accountsreceivable.  Management primarily determines the allowance based on theaging of accounts receivable balances, historical write-off experience,customer concentrations, customer creditworthiness and current industry andeconomic trends.  The Company’s provisions for uncollectible receivablesare included in selling, general and administrative expense in the accompanyingconsolidated statements of operations and comprehensive loss.

 

*Inventories.*Inventoriesare accounted for using the moving average basis and reported at the lower ofcost or market. Inventories consist of raw materials, work in process, andfinished goods. The Company records write-offs for inventory obsolescence whenit is deemed that there is impairment of the value of the inventories on hand.

 

*Property, Plant and Equipment.*Property, plant and equipment are statedat cost less accumulated depreciation and amortization. Additions and majorrenewals are capitalized. Repairs and maintenance are charged to expense asincurred. Upon disposal, the related cost and accumulated depreciation areremoved from the accounts, with the resulting gain or loss included inoperating income. Depreciation is provided principally on the straight-linemethod over the estimated useful lives of the assets, which range from two totwenty years.

 

Leased property meeting certain criteria iscapitalized and the present value of the related lease payments is recorded asa liability. Amortization of capitalized leased assets is provided on thestraight-line method over the estimated useful lives of the assets, which isfive years.

 

*Intangible Assets.*Intangibleassets consist of the costs incurred to purchase patent rights and costsincurred to internally develop patents and trademarks. Intangible assets arereported net of accumulated amortization. Patents and trademarks are amortizedusing the straight-line method over a period based on their contractual livesranging from ten to seventeen years.

 

*Goodwill. *Beginning January 1, 2002, the Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*(See “NewAccounting Pronouncements”). According to this statement, goodwill and otherintangible assets are no longer subject to amortization, but instead must bereviewed annually for impairment by applying a fair value-based test.

 

*Impairment of Long-livedAssets*.The Company reviews long-lived assets to be held and used in operations forimpairment whenever events or changes in circumstances indicate that thecarrying value of an asset may be impaired. An impairment loss is recognizedwhen the estimated fair value of the assets is less than the carrying value ofthe assets.  The Company recognized $0,$0, and $4,487 during the years ended December 31, 2007, 2006, and 2005,respectively, for impairment of long-lived assets.

 

*Fair Value of FinancialInstruments.*The estimatedfair value of amounts reported in the consolidated financial statements havebeen determined using available market information and valuation methodologies,as applicable. The carrying amount of cash and cash equivalents, accountsreceivable, accounts payable, and all other current assets and liabilitiesapproximate their fair value because of their short term maturities at December 31,2007 and 2006, unless otherwise stated. The fair value of non-current assetsand liabilities approximate their carrying value unless otherwise stated.  The fair value of the Company’s long-termdebt is based on interest rates that would be available to the Company for theissuance of debt with similar terms.

 

*Research and DevelopmentExpenses.*Research anddevelopment expenses represent salaries, related benefits expense, expensesincurred for the design and testing of new processing methods and otherexpenses related to the research and development of Liquidmetal alloys.Development costs incurred in research and development activities are expensedas incurred.

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

*Advertising and PromotionExpenses.*Advertising andpromotion expenses are expensed when incurred. Advertising and promotionexpenses were $1, $10, and $2, for the years ended December 31, 2007,2006, and 2005, respectively.

 

*Debt Discount Amortization.*Debtdiscounts for notes payable are amortized to interest expense, using a methodthat approximates the interest method over the term of the related debtinstruments.

 

*Stock-Based Compensation*.The Company previously applied Accounting Principles Board (“APB”) Opinion No. 25for options when the exercise price of options granted to employees is lessthan the fair value of the underlying stock on the date of grant.  As permitted, the Company had previouslyelected to adopt provisions of Statement of Financial Accounting Standard (“SFAS”)No. 123, Accounting for Stock-Based Compensation for options granted tonon-employees who perform services for the Company and the disclosure-onlyprovisions of options granted to employees.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment (“SFAS 123R”), whichreplaces SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”)*and supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees, (“APB 25”). SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. Under SFAS 123R, the Companyis required to measure the cost of employee services received in exchange forstock options and similar awards based on the grant-date fair value of theaward and recognize this cost in the income statement over the period duringwhich an employee is required to provide service in exchange for the award. Thepro forma disclosures previously permitted under SFAS 123 are no longer analternative to financial statement recognition. The Company adoptedSFAS 123R on January 1, 2006 using the modified prospective methodand recorded $642 and $1,075 for the years ended December 31, 2007 and2006, respectively, of non-cash charges for stock compensation related toamortization of the fair value of restricted stock and unvested stock optionsrepresenting an increase from the stock compensation that would have beenrecorded under APB 25 and SFAS 123. Under this method, the Company willrecognize compensation cost, on a prospective basis, for the portion ofoutstanding awards for which the requisite service has not yet been rendered asof January 1, 2006 and any new grants, based upon the grant-date fairvalue of those awards calculated under SFAS 123 for pro forma disclosurepurposes. Accordingly, we have not restated prior period amounts. The followingtable illustrates the pro forma effect on net income for periods prior to the adoptionof SFAS 123R as if we had applied the fair value recognition provisions of SFAS123 during such periods:

 
| ** **                        | ** **                                                                                                                                | **For the year  ended  December 31,** | ** ** |
|-----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|------------|
| ** **                        | ** **                                                                                                                                | **2005**                                             | ** ** |
| ** **                        | ** **                                                                                                                                | **(Restated)**                                       | ** ** |
| ** **                        | ** **                                                                                                                                | ** **                                           | ** ** |
| Net loss as reported              |                                                                                                                                      | $                                                    | (7,053     | ) |
|                              |                                                                                                                                      |                                                 |       |
| *Add:*                            | stock-based  employee compensation expense included in reported net loss, net of related  tax effects                                     |                                                 | 41         |   |
| * *                          |                                                                                                                                      |                                                 |       |   |
| *Deduct:*                         | total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |                                                 | (2,861     | ) |
| * *                          |                                                                                                                                      |                                                 |       |   |
| Proforma net loss:                |                                                                                                                                      | $                                                    | (9,873     | ) |
| Basic and diluted loss per share: |                                                                                                                                      |                                                 |       |
| As reported                       |                                                                                                                                      | $                                                    | (0.17      | ) |
| Proforma                          |                                                                                                                                      | $                                                    | (0.24      | ) |

 

Thefair value of each option grant is estimated on the date of the grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions used for grants for the years ended December 31, 2005:expected volatility of approximately 100% for all periods; dividend yield of0.0% for all periods; expected option life of approximately 5 years; and arisk-free interest rate ranging from 2.9% to 4.8%.

 

79

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

*Income Taxes.*Incometaxes are provided under the asset and liability method as required by SFAS No. 109,*Accounting for Income Taxes*.Under this method, deferred income taxes are recognized for the taxconsequences of “temporary differences” by applying enacted statutory tax ratesapplicable to future years to differences between the financial statementcarrying amounts and the tax basis of existing assets and liabilities. Theeffect of a tax rate change on deferred taxes is recognized in operations inthe period that the change in the rate is enacted. Valuation allowances areestablished when necessary to reduce net deferred tax assets to the amountexpected to be realized.

 

The Company adopted the provisions ofInterpretation No. 48, *Accounting forUncertainty in Income Taxes*, an interpretation of FASB Statement No. 109(“FIN 48”) on January 1, 2007. At the adoption date and as of December 31,2007, the Company had no material unrecognized tax benefits and no adjustmentsto liabilities or operations were required. The Company recognizes interest andpenalties related to uncertain tax positions in income tax expense. There wasno expense related to interest and penalties for the year ended December 31,2007.

 

*Translation of ForeignCurrency*. The Company applies *FASB No. 52, Foreign Currency Translation*,for translating foreign currency into US dollars in ourconsolidation of the financial statements. Upon consolidation of the Company’s foreign subsidiaries into theCompany’s consolidated financial statements, any balances with the subsidiariesdenominated in the foreign currency are translated at the exchange rate at yearend. The financial statements of LMT Korea have been translated based uponKorean Won as the functional currency. LMT Korea’s assets and liabilities were translated using the exchangerate at period end and income and expense items were translated at the averageexchange rate for the periods reported. The resulting translation adjustmentwas included in other comprehensive income (loss).

 

*Earnings Per Share.*Basicearnings per share (“EPS”) is computed by dividing earnings(losses) attributable to common shareholders by the weighted averagenumber of common shares outstanding for the periods. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.

 

*Use of Estimates.*Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expenses duringthe reported periods. Actual results could differ from those estimates. Thesemanagement estimates are primarily related to impairment of long-lived assets,inventory valuation, product warranty, and the allowance for bad debt accountbalances.

 

*Restatement.* The Company has restated previously issuedconsolidated financial statements for the fiscal year ended December 31,2005 to properly account for the conversion feature of the senior convertiblenotes.  The restatement adjustments resulted in a cumulative net increaseof shareholders’ equity by $66 as of December 31, 2005 and a decrease inpreviously reported net loss by $4,193 for the year ended December 31,2005. The restated consolidated financial statements were filed on Form 10-K/Aon July 20, 2006.

 

*New Accounting Pronouncements.*

 

In February 2007, the FASBissued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities Including an amendment of FASB Statement No. 115 (SFAS 159),”which permits entities to choose to measure many financial instruments andcertain other items at fair value. The effective date of SFAS 159 will be thefirst quarter of 2008.  The Company iscurrently evaluating the provisions of SFAS 159 and does not expect theadoption of this new standard to have a material impact on its consolidatedfinancial statements.

 

In December 2007, the FASBissued SFAS 141R, “Business Combinations” (SFAS 141R). SFAS 141R amends therequirements for accounting for business combinations.  SFAS 141R will beeffective for financial statements issued for fiscal years beginning after December 15,2008.  The Company is currently evaluating the impact of adopting SFAS141R and SFAS 160 on its financial statements.

 

Other recent accountingpronouncements issued by the FASB (including its Emerging Issues  Task Force), the AICPA and the SEC did not orare not believed by management to have a material impact on our company’spresent or future consolidated financial statements.

 

80

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

**4. Trade accounts receivable**

 

Trade accounts receivables from continuing operationswere comprised of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Trade accounts receivable             |       | $                     | 5,254      |   | $ | 4,016 |   |
| Less: Allowance for doubtful accounts |       | (89                   | )          | (82 | ) |
| Trade accounts receivable, net        |       | $                     | 5,165      |   | $ | 3,934 |   |

 

**5. Inventories**

 

Inventories were comprised of the following:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Raw materials     |       | $                     | 1,216      |   | $ | 966 |   |
| Work in process   |       | 536                   |       | 1,729 |   |
| Finished goods    |       | 546                   |       | 1,070 |   |
| Total inventories |       | $                     | 2,298      |   | $ | 3,765 |   |

 

The Company maintained certain of its raw material inventories inamounts in excess of our operating cycle of one year due to the nature of ourmanufacturing process, production lead time, and the recyclability of our rawmaterial. These inventories were classified as long-term inventory as of December 31,2004.  During 2005, the Companydetermined that its current and projected raw material requirements were notsufficient enough to warrant the use of such raw materials in the foreseeablefuture. Accordingly, the Company reduced the carrying value of raw materialsheld by its subsidiary, Liquidmetal Korea, by the amounts considered to beexcessive during the year ended 2005. The write-down during the year ended December 31, 2005 amounted to$2,746 and is included in “Impairment of long lived assets” in the accompanyingConsolidated Statement of Operations and Comprehensive Loss for the year ended December 31,2005. The total amount of long term inventory was $0 as of both December 31,2007 and 2006.

 

The Company analyzes inventory held for any excess or obsolescenceissues.  Any amounts considered excess orobsolete are written off.  Further, assignificant amount of sales of Liquidmetal bulk alloy parts are used primarilyin consumer electronics components, our inventory is subject to fluctuations indemand for those consumer electronics goods. Accordingly, the Company reducesthe carrying value of raw materials held by its subsidiaries, by the amountsconsidered to be excess or obsolete.  Therewere no such write downs as of December 31, 2007 and 2006.

 

81

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

**6. Property, Plant andEquipment**

 

Property, plant and equipment consists of thefollowing:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                             |       |                  |       |   |   |
| Machinery and equipment                          |       | $                     | 11,388     |   | $ | 12,699 |   |
| Computer equipment                               |       | 1,233                 |       | 1,354 |   |
| Office equipment, furnishings, and  improvements |       | 1,294                 |       | 1,553 |   |
| Buildings                                        |       | 13,561                |       | 13,959 |   |
| Construction in progress                         |       | 370                   |       | — |   |
| Total                                            |       | 27,846                |       | 29,565 |   |
| Accumulated depreciation                         |       | (18,116               | )          | (17,470 | ) |
| Total property, plant and equipment, net         |       | $                     | 9,730      |   | $ | 12,095 |   |

 

Depreciation expense is classified as follows:

 
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                |       |                                        |       |   |   |   |   |
| Cost of Sales                       |       | $                                           | 2,831      |   | $ | 3,229 |   | $ | 2,744 |   |
| Selling, general and administrative |       | 153                                         |       | 225 |   | 542 |   |
| Research and development            |       | —                                      |       | — |   | — |   |
| Total depreciation expense          |       | $                                           | 2,984      |   | $ | 3,454 |   | $ | 3,286 |   |

 

**7. Idle Equipment**

 

Idle equipment consists of certain equipmentheld by the Company for use in expansion of bulk alloy partsmanufacturing.  While the equipment may be used internally to meet futurecapacity requirements, considering our current revenue and foreseeableproduction requirements, the Company does not anticipate utilizing thisequipment internally in the near future. For these reasons, during the second quarter of 2005, the Companydetermined to write down the carrying value of the idle equipment held by itssubsidiary, Liquidmetal Korea, to its net realizable value. The write-downduring the quarter ended June 30, 2005 amounted to $1,741 and is includedin operating expenses as “Impairment of long lived assets” in the accompanyingConsolidated Statement of Operations and Comprehensive Loss for the year ended December 31,2005.  Total amount of idle equipmentremaining was $178 and $194 as of December 31, 2007 and 2006,respectively.

 

During the year ended December 31, 2007,the Company disposed of $7 of idle equipment as part of the equipment purchaseagreement and transfer agreement regarding Weihai operations with Grace Metal(see Note 20).  During the year ended December 31,2006, the Company disposed of $12 of its idle equipment for proceeds of$104.  The resulting gain of $92 isincluded in other income.

 

82

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

**8. Other Intangible Assets**

 

Intangiable assets consist of the following:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                 |       |                  |       |   |   |
| Purchased and licensed patent rights |       | $                     | 566        |   | $ | 566 |   |
| Internally developed patents         |       | 1,404                 |       | 1,309 |   |
| Trademarks                           |       | 85                    |       | 85 |   |
| Total                                |       | 2,055                 |       | 1,960 |   |
| Accumulated amortization             |       | $                     | (913       | ) | (790 | ) |
| Total intangible assets, net         |       | $                     | 1,142      |   | $ | 1,170 |   |

 

Amortization expense was $123, $119, and $117for the years ended December 31, 2007, 2006, and 2005, respectively.   The estimated aggregate amortization expensefor each of the five succeeding years is as follows:

 
| **December 31,** | ** ** | **Aggregate Amortization Expense** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| 2008                  |       | 121                                          |       |
| 2009                  |       | 118                                          |       |
| 2010                  |       | 116                                          |       |
| 2011                  |       | 114                                          |       |
| 2012                  |       | 102                                          |       |

 

Accumulated Amortization for the years endedDecember 31, 2007 and 2006 is as follows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Purchased and licensed patent rights |       | $                     | (289       | ) | $ | (251 | ) |
| Internally developed patents         |       | (579                  | )          | (502 | ) |
| Trademarks                           |       | (45                   | )          | (37 | ) |
| Total                                |       | $                     | (913       | ) | $ | (790 | ) |

 

The weighted average amortization periods foreach of the years ended December 31, 2007, 2006, and 2005, is as follows:

 
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchased and licensed patent right |       | 17                    |       | 17 |   | 17 |   |
| Internally developed patents        |       | 17                    |       | 17 |   | 17 |   |
| Trademarks                          |       | 10                    |       | 10 |   | 10 |   |

 

Purchased patent rights represent the exclusiveright to commercialize the bulk amorphous alloy and other amorphous alloytechnology acquired from California Institute of Technology (“Caltech”), ashareholder, through a license agreement with Caltech and other institutions.All fees and other amounts payable by the Company for these rights and licenseshave been paid or accrued in full, and no further royalties, license fees orother amounts will be payable in the future under the License Agreements.

 

83

----

** **

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

In addition to the purchased and licensedpatents, the Company has internally developed patents. Internally developedpatents include legal and registration costs incurred to obtain the respectivepatents. The Company currently holds various patents and numerous pendingpatent applications in the United States, as well as numerous foreigncounterparts to these patents outside of the United States.

 

**9. Other Liabilities**

 

The other liabilities balance consists ofaccrued severance and operating lease costs associated with the Company’s costreduction measures for the Tampa, Florida executive offices, a capital leaseobligation for office furniture and furnishings and capital lease obligationsfor a SEM Microscope and a JSM Electron Microscope used in the laboratory inRancho Santa Margarita, California.

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued severance                                  |       | $                     | 745        |   | $ | 558 |   |
| Accrued operating lease costs                      |       | 64                    |       | 165 |   |
| Accrued capital lease costs                        |       | —                |       | 6 |   |
| Total                                              |       | 809                   |       | 729 |   |
|                                               |       |                  |       |   |   |
| Imputed interest                                   |       | —                |       | — |   |
| Total                                              |       | 809                   |       | 729 |   |
| Less current portion                               |       | (398                  | )          | (177 | ) |
| Other long term liabilities, less current  portion |       | $                     | 411        |   | $ | 552 |   |

 

During2003, the Company initiated activities to substantially reduce the number ofemployees and consolidate manufacturing and administrative facilities toimprove operational effectiveness and efficiency and reduce expenses.  Certain relocating expenses associated withthe move have been recorded and total liability accrued from therelocation and terminations in 2003, including the severance and leaseaccruals, were $64 and $165 as of December 31, 2007 and 2006,respectively.  The Company hassubstantially concluded all cost reduction and restructuring activities as of March 31,2004.

 

All leases with an initial term greater than oneyear are accounted for under SFAS No. 13 *Accountingfor Leases.*These leases are classified as either capital leases oroperating leases, as appropriate.  Assetsunder capital leases are capitalized using interest rates appropriate at theinception of each lease.  At December 31,2007, the cost recorded for the office furniture and furnishings, the SEMMicroscope and the JSM 6360 Electron Microscope under the capital lease was$112, $47 and $320, respectively, and the accumulated depreciation was $112,$36 and $269, respectively.  At December 31,2006, the cost recorded for the office furniture and furnishings, the SEMMicroscope and the JSM 6360 Electron Microscope under the capital lease was$107, $47 and $289, respectively, and the accumulated depreciation was $100,$32 and $205, respectively.

 

84

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

**10. Product Warranty**

 

Management estimates product warranties as apercentage of certain bulk alloy product sales earned during the period. As of December 31,2007 and 2006, the Company used 5% of bulk alloy product sales as an estimateof warranties to be claimed.  As of December 31,2007, the Company used 1% of coatings applications sales as estimate ofwarranties to be claimed.  During theyears ended December 31, 2006 and 2007, the Company’s product warrantyaccrual balance had the following activity:

 
| Balance, December 31, 2005 |   | $      | 634    |   |
|---------------------------------|--------|--------|--------|--------|
| Expense accrual                 |   | 46     |   |
| Warranty charges                |   | 58     |   |
| Balance, December 31, 2006 |   | $      | 738    |   |
| Expense accrual                 |   | (107   | )      |
| Warranty charges                |   | — |   |
| Balance, December 31, 2007 |   | 631    |   |

 

The product warranty accrual balance wasincluded in accounts payable and accrued expenses at December 31, 2007 andDecember 31, 2006.

 

**11. Notes Payable**

 

Secured Senior Convertible Note

 

On August 19,2004, the Company issued $2,855 of 6% Senior Secured Notes Due 2007 (the “July 2007Notes”) and $2,855 of 10% Senior Secured Notes Due 2005 (the “July 2005Notes”) in exchange for previously issued 6% Senior Convertible Notes due2007 including placement agent costs. The July 2005 and July 2007 Notes are convertible into CommonStock at $2.00 and $1.00, respectively.

 

In August 2005, the July 2005 Notes were retired andexchanged for 7% Convertible Secured Promissory Notes Due August 2007.Additionally, the July 2007 Notes were retired in July 2007.

 

The Company’s gross outstanding loan balance of the July 2007Notes totaled $0 and $2,083, as of December 31, 2007 and 2006,respectively.  As of December 31,2007 and December 31, 2006, un-amortized discounts for conversion featureand warrants totaled $0 and $391, respectively, and other asset debt issuancecosts totaled $0 and $14, respectively. Interest expense for the amortization of debt issuance cost and discounton note was $405, $750, and $1,765 for the years ended December 31, 2007,2006, and 2005, respectively.  As of December 31,2007, 2006, and 2005 the effective interest rate of the July 2007 Noteswas 35%, 35%, 37%, respectively.

 

On August 9, 2005, the Company issued $9,878 in principal amountof new 7% Convertible Secured Promissory Notes due August 2007 (the “August 2007Notes”).  The issuance consisted of$5,000 cash, exchange of $1,284 in principal amount of the previously issued July 2005Notes, the exchange of $2,996 in principal amount of the 10% ConvertibleUnsecured Notes Due June 2006 (the “June 2006 Notes”), satisfactionof accrued interest and late registration fees in the amount of $589 on the July 2005Notes, and satisfaction of accrued interest of $9 on the June 2006 Notes.The August 2007 Notes are convertible into shares of the Company’s commonstock at $2.00 per share.

 

In July 2007, the August 2007 Notes were retired.

 

As of December 31, 2007 and 2006, ourgross outstanding loan balance of the August 2007 Notes totaled $0 and$9,878, respectively.  As of December 31,2007 and 2006, un-amortized discounts for beneficial conversion feature andwarrants totaled $0 and $2,441, respectively, and other asset debt issuancecosts totaled $0 and $139, respectively, and contra liability debt issuancecost totaled $0 and $172, respectively. Interest expense for the amortization of debt issuance cost and discounton note was $2,114, $4,078 and $1,913 for the years ended December 31,2007, 2006, and 2005, respectively.  Asof December 31, 2007, 2006, and 2005, the effective interest rate for the August 2007Notes was 54%.

 

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” the Company is required to report a value of the conversionliability as a fair value and record the fluctuation to the fair value of theconversion feature liability to current operations.  The change in the fair value of theconversion feature liability resulted in a gain of $354, $339, and $3,849 forthe years ended December 31, 2007, 2006, and 2005, respectively.  The fair value of conversion featureoutstanding at December 31, 2006 of $619 was computed using theBlack-Scholes model under the following assumptions: (1) 0.59 year; (2) volatilityof 55%, (3) risk free interest of 5.00% and dividend rate of 0%.

 

85

----

 

**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

Unsecured SubordinatedNote

 

On March 17, 2006, the Company issued a $1,000 10%subordinated promissory note due October 16, 2006 (the “October 2006Note”) to Atlantic Realty Group, Inc., a company controlled by JackChitayat, a former director of the Company. The October 2006 Note has been retired during the first quarter of2007.

 

As of December 31, 2007 and 2006, ourgross outstanding loan balance of the October 2006 Note totaled $0 and$1,000, respectively, and is included in short-term debt.  Interest expense for the amortization ofdiscount on the note was $0 and $84 for the years ended December 31, 2007and 2006, respectively.

 

OnMay 17, 2006, September 21, 2006, and December 1, 2006, theCompany issued 8% unsecured subordinated notes due August 2007 in theaggregate principal amount of $4,584 (the “August 2007 Subordinated Notes”).  The August 2007 Subordinated Notes areunsecured and became due August 2007.

 

In January 2007,$900 of August Subordinated 2007 Notes and $46 of accrued interest wasretired as of December 31, 2007.

 

Further, as part of aprivate placement offer in January 2007, $925 of August Subordinated2007 Notes and $45 of accrued interest were exchanged for 8% ConvertibleSubordinated Notes due January 2010 (see Convertible Subordinated Notesbelow).

 

As of December 31,2007 our gross outstanding loan balance of the August 2007 SubordinatedNotes totaled $2,659.  We intend to fullyrepay the amounts due under Notes.  Subsequent to December 31, 2007and as of the filing of this report, the Company has repaid $1,650 in principaldue under the August 2007 Subordinated Notes.  However, as of the filing of this report wedo not have sufficient funds to repay the Notes.  As a result, we arecurrently in default under the notes.  We have not received aformal notice of default and we are currently working to resolve this matterwith investors holding the August 2007 Subordinated Notes.

 

As of December 31,2006, our gross outstanding loan balance of the August 2007 SubordinatedNotes totaled $4,584.  As of December 31,2007 and 2006, un-amortized discounts for warrants totaled $0 and $631,respectively.  Interest expense for theamortization of discount on the note was $630 and $434 for years ended December 31,2007 and 2006, respectively.  As of December 31,2007 and 2006, the effective interest rate for the August 2007Subordinated Notes was 33%.

 

As part of the issuanceof the August 2007 Subordinated Notes in 2006, the Company issued warrantsto the purchasers of the notes and placement agents giving them right topurchase up to an aggregate of 972,964 shares of the Company’s commonstock.  The warrants had an originalexercise price of $2.58 per share, which is subject to price adjustment foranti-dilution purposes.  In October 2007,the Company reduced the exercise price of warrants to $1.75 and increased theoutstanding warrants withcertain holders of the August 2007 Subordinated Notes by 30% for anextension of the maturity of the August 2007 Subordinated Notes.   As of December 31, 2007, the exerciseprice of the warrants was reduced to $1.72 and $2.07 per share and total amountof warrants was increased to 1,313,380 as of December 31, 2007.  The warrants will expire on May 17,2011.

 

Secured ConvertibleSubordinated Notes

 

OnJanuary 3, 2007, the Company completed a private placement of 8%Convertible Subordinated Notes due January 2010 (the “January 2010Notes”).  In April 2007, the placement was amended, and the Companyissued $16,300 in principal amount of January 2010 Notes.  The January 2010Notes were issued for aggregate cash in the amount of $12,850, in payment of atotal of $3,377 in principal and accrued but unpaid interest under ourpreviously issued 7% Senior Secured Convertible notes due August 2007 (“August 2007Notes”) and our 8% Unsecured Subordinated notes (the “August 2007Subordinated Notes”), and $73 cash discount.

 

Thepayment of the previously issued notes was treated as an extinguishment of thedebt in accordance with Emerging Issues Task Force No. 96-19, “DebtorsAccounting for a Modification or Exchange of Debt Instruments.”  Theplacement resulted in a $648 loss from extinguishment of debt, which consistedof write down of $64 of deferred issue costs, $733 of debt discount, anddecrease of $149 in conversion feature liability as a result of the change incarrying value of exchanged notes.

 

TheJanuary 2010 Notes were originally convertible into the Company’s commonstock at $1.55 per share.  As a part of the private placement, the Companyissued warrants to the purchasers of the notes giving them the right topurchase up to an aggregate of 5,257,921 shares of our common stock at anexercise price of $1.93 per share. In connection with the private placement,the Company also issued to the placement agent for the transaction warrants topurchase an aggregate of 248,710 shares of our common stock at an exerciseprice of $1.55 per share.  The warrants will expire on January 3,2012 and are subject to exercise price adjustment for anti-dilution purposes.

 

86

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

InApril 2007, the Company entered into an amendment to the SecuritiesPurchase Agreement, dated January 3, 2007, between the Company and thepurchasers of the January 2010 Notes (“April 2007 Amendment”)providing that the Company will have until October 1, 2007 to repayapproximately $15,461 of the Company’s outstanding debt under previously issuedpromissory notes, including the August 2007 Subordinated Notes (“DebtSatisfaction Covenant”).  The Company hasnot fully repaid $2,659 principal due under the August 2007 SubordinatedNotes as of December 31, 2007.  As aresult, the Company is not in compliance with the Debt Satisfaction Covenant and are subject to default under the January 2010 Notes.  Subsequent to December 31, 2007 and asof the filing of this report, the Company has repaid $1,650 of the principaland has outstanding $1,149 in principal and interest due under the August 2007Subordinated Notes.   We have not received a formal notice of default under this covenant and weare currently working to resolve this matter.

 

TheApril 2007 Amendment also finalized the schedule of investors in thePrivate Placement to show a total of $16,300 in principal amount of Notes;decreased the conversion price of the Notes to $1.10, decreased the warrantexercise price for the warrants issued to $1.55, increased the number of sharessubject to such warrants issued to equal 7,657,591, and the purchasers of theNotes consented to the Company granting a security interest in its South Koreanmanufacturing plant to purchasers of convertible notes in a subsequentoffering, provided a  pari passu  security interest is granted to thepurchasers of the Notes.

 

OnDecember 28, 2007, the Company issued $1,000 of January 2010 Notes,together with warrants to purchase up to an aggregate of 909,091 and 200,000 ofthe Company’s common stock to purchasers of the notes and placementagents.  The warrants will expire on December 28,2012 and are subject to exercise price adjustment for anti-dilution purposes.

 

InDecember 2007, the Company entered into agreements with two holders of theJanuary 2010 Notes and Grace Metal, a South Korean company formed byinvestor groups including our former Founder and director, James Kang, and thetwo holders, whereby Grace Metal would assume the liabilities due under the January 2010Notes, including principal, interest, and fees due to the two holders totaling$434.  In connection with the assumptionof the liabilities by Grace Metal, warrants to purchase 179,620 shares of ourcommon stock held by the holders were cancelled (see Note 20).

 

TheJanuary 2010 Notes bear interest at 8% per annum with interest payablequarterly in arrears in cash, or, at our option, in the form of additional January 2010Notes (in which case the interest rate will be 10% per annum). The ability topay interest with additional January 2010 Notes is subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of interest and certainminimum trading volumes in the stock to be issued. From and after an event ofdefault under the January 2010 Notes and for so long as the event ofdefault is continuing, the January 2010 Notes will bear default interestat a rate of 12% per annum (or 15% per annum if we elect to pay interest withadditional January 2010 Notes).  In December 2007,the Company issued $971 of additional January 2010 Notes for accrued interestand late registration fees.

 

BeginningJuly 31, 2008 and at the end of each month thereafter, the Company will berequired to redeem 1/36th of the principal amount of the January 2010Notes in cash or, at the Company’s election, with shares of our commonstock.  The January 2010 Notes andare subordinate to certain secured financing from commercial lenders incurredby the Company in the future.

 

Inconnection with the January 2007 private placement, the Company enteredinto a Registration Rights Agreement with the purchasers of the January 2010Notes under which the Company is be subject to monetary penalties up to amaximum amount of 18% of the aggregate amount of Notes sold in the PrivatePlacement if the registration statement is not filed or does not becomeeffective on a timely basis. The monetary penalties will accrue at the rate of1% per month of the then-outstanding principal amount of the January 2010Notes. As of December 31, 2007, an aggregate of $682 in monetary penaltiesunder the Registration Rights Agreement had already been paid to investors inthe form of additional notes, while an additional $188 in such penalties wereaccrued but unpaid.

 

Pursuantto Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $6,205 have been recorded asconversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was 

 

87

----

** **

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 1.6 to 3 years; (2) volatility of 55%; (3) risk free interestof 4.69% to 4.76% and dividend rate of 0%.  The original fair value of theadditional embedded conversion feature of $1,005 resulting from reducedconversion price under the amended Securities Purchase Agreement, have beenrecorded as conversion feature liability. The value was computed using theBlack-Scholes model under the following assumptions: (1) expected life of1.3 to 2.7 years; (2) volatility of 55%; (3) risk free interest of4.6% to 4.9% and dividend rate of 0%.  In addition, the Company isrequired to report a value of the conversion liability as a fair value andrecord the fluctuation to the fair value of the conversion feature liability tocurrent operations.

 

Thechange in the fair value of the conversion feature liability resulted in a gainof $5,393 for the year ended December 31, 2007. The fair value ofconversion feature outstanding at December 31, 2007 of $2,083 was computedusing the Black-Scholes model under the following assumptions: (1) expectedlife of 0.6 to 2.0 years; (2) volatility of 63%, (3) risk freeinterest of 3.05% to 3.34% and dividend rate of 0%.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $3,964 have been recorded as warrant liability, which was computedusing the Black-Scholes pricing model under the following assumptions: (1) expectedlife of 5 years; (2) volatility of 55%; (3) risk free interest of4.68% and (4) dividend rate of 0%.  The original fair values of thewarrants of $608 from the additional warrants issued under the amendedSecurities Purchase Agreement, have been recorded as additional warrantliability, which was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 4.70 years; (2) volatilityof 50%; (3) risk free interest of 4.51% and (4) dividend rate of 0%.

 

Theoriginal fair value of the embedded conversion feature of $7,210 was recordedas discounts of the convertible note.  The original fair value of the7,408,881 warrants issued to investors of $4,372, the original fair value of248,710 warrants issued to Placement Agents of $200, and $73 cash discount wererecorded as discounts of the convertible note.  In addition, $2,069 directcosts incurred relating to issuance of the convertible note was recorded as debtissuance cost in other assets.

 

TheCompany’s gross outstanding loan balance of the January 2010 Notes totaled$17,797 as of December 31, 2007.  As of December 31, 2007,un-amortized discounts for conversion feature, warrants, and cash discounttotaled $10,471, and other asset debt issuance costs totaled $967. Interest expense for the amortization of debt issuance cost and discount onnote was $2,117 for the year ended December, 2007.  As of December 31,2007, the effective interest rate of the January 2010 Notes was 65%.

 

The following is a repayment schedule of the January 2010based on maturity date of the notes:

 
| **January 2010 Notes** | ** ** | ** **   | ** ** |
|----------------------------------|------------|--------------|------------|
| **Repayment Schedule**      | ** ** | **Minimum**  | ** ** |
| **December 31,**            | ** ** | **Payments** | ** ** |
|                             |       |         |       |
| 2008                             |       | $            | 2,966      |   |
| 2009                             |       | 5,932        |       |
| 2010                             |       | 8,899        |       |
|                             |       |         |       |
| Total                            |       | $            | 17,797     |   |

 

Factoring Agreement

 

The Company entered into a Factoring, Loan, andSecurity Agreement (the “Agreement”) with a financing company on April 21,2005, which allows for borrowings of up to $1,500.  The Agreement expires on April 21, 2006,and automatically renews annually thereafter. All borrowings are secured byoutstanding receivables specifically assigned to the financing company.  Assigned receivables are considered “Approved”or “Non-Approved” by the financing company. In January 2007, the Company entered into a second amendment to theAgreement to provide for increased borrowings against non-approved receivablesassigned of 80%.  Borrowings made againstnon-approved receivables assigned are limited to $1,000 and total borrowingsmade on approved and non-approved receivables assigned are limited to$5,000.  Further, the amendment providesfor interest charges of 0.5% plus prime rate of interest less 2%.  The agreement will continue until February 1,2008 and will renew annually thereafter. In February 2007, the Company entered into an agreement to depositcash of $2,083 with a rate of prime rate of interest less 2% with the financingcompany.  The agreement is effectiveuntil July 27, 2007 and the cash deposit will be used to pay downprincipal amount of the July 2007 Notes. Additionally, the financing company reserves the right to offsetoutstanding advances against the cash deposit. In July 2007, the Company entered into a third amendment to excludeintellectual property transferred to LMC as collateral and to release securityinterest in receivables previously assigned in consideration of full 

 

88

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

repayment of the outstanding advances.  The Company paid $628 and the financingcompany applied the $2,083 cash deposit held against the outstanding advance of$2,711 on July 23, 2007. Additionally, the financing company reduced the borrowings againstnon-approved receivables assigned to 50% of the receivable value.

 

Payments on assignedreceivables are received directly by the financing company, and applied tooutstanding advances.  All outstandingadvances and uncollected assigned receivables are subject to fees and interestcharges ranging from 0.55% to 1.5% plus prime rate as published by the WallStreet Journal, with a minimum annual fee of $30. All receivables assigned andadvances made are subject to return and recall by the financing company,respectively.  As such, the advances havebeen classified as short-term secured borrowings in accordance with SFAS No. 140“Accounting for Transfer and Servicing of Financial Assets and Extinguishmentsof Liabilities.”

 

For the year ended December 31,2007, the Company borrowed $11,943 and repaid $12,604 under the Agreement.  The total outstanding advance made under theagreement is $1,008 and $1,669 as of December 31, 2007 and December 31,2006, respectively, which is presented as short-term debt.   The weighted average rate of interest forborrowings made under the Agreement was 8.95% for the year ended December 31,2007.  As of December 31, 2007, theCompany’s availability for future borrowing under the agreement is $3,992 whichis contingent on approval of eligible receivables by the financing company.

 

Kookmin Note

 

On February 4, 2003, the Company’s Koreansubsidiary received 6,500,000 in South Korean Won, or approximately $5,488,under a loan from Kookmin Bank of South Korea. The loan bears interest at an annual rate of 7.1%.  In the event of delayed repayment, theinterest increases to a maximum of 21%, depending on the length of time therepayment is delayed.  As of December 31,2007, the interest rate was increased to 9.2% from delayed interest paymentsmade.  This loan is collateralized by theplant facilities and certain equipment in South Korea.  During the first eighteen months from theorigination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873of principal at the request of Kookmin Bank due to the sale of machines thathad been part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating.  TheCompany made two payments on the requested additional loan pay down in November andDecember 2003 of $320 and $205, respectively.  The remaining payment of $341 wassubsequently made in February 2004. Beginning in September 2004, the Company is required to make equalmonthly installments of principal and interest to repay the remaining balancethrough February 2008.  Principalpayments made to Kookmin Bank totaled $1,350 and $994 for the year ended December 31,2007 and 2006, respectively, which includes $5 and $207 of foreign exchangetranslation loss for the year ended December 31, 2007 and 2006,respectively.  The outstanding loanbalance totaled $451 and $1,796, of which $451 and $225 is included in currentportion of long-term debt, as of December 31, 2007 and 2006, respectively.Subsequentto December 31, 2007 and as of the filing of this report, the Company repaid $242of principal and accrued interest due under the Kookmin Note and hasapproximately $209 of principal and accrued interest outstanding.

 

The notes payable from Kookmin Loan as of December 31,2007 and 2006 and the activity for the year ended December 31, 2005 isshown in the following table:

 
| ** **                          | ** ** | **December 31,** | ** ** | ** **     | ** ** | ** **     | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **Borrowings** | ** ** | **Repayments** | ** ** | **2007**              | ** ** |
|                                |       |                  |       |           |       |           |       |                  |       |
| Kookmin Loan 9.2%, principal $5,488 |       | $                     | 1,796      |           | $          | —         |       | $                     | (1,345     | ) | $ | 451 |   |
|                                     |            |                       |            |                |            |                |            |                       |            |  |  |  |  |

 
| **Kookmin Repayment Schedule** | ** ** | **Minimum**  | ** ** |
|------------------------------------------|------------|--------------|------------|
| **December 31,**                    | ** ** | **Payments** | ** ** |
|                                     |       |         |       |
| 2008                                     |       | $            | 451        |   |
| Total                                    |       | $            | 451        |   |

 

Debtof Majority Owned Subsidiary

 

OnJuly 24, 2007, the Company completed an $11,500 financing transaction (the“Transaction”) that provided funding to repay convertible notes previouslyissued by us that were scheduled to become due in July and August 2007. In the Transaction, the Company transferred substantially all of the assets ofthe Company’s Liquidmetal Coatings division to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the division.

 

89

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

LMCwas capitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners and a $5,000 senior credit facility with Bank Midwest,N.A.  This debt and equity resulted in cash proceeds of $11,102 afterrelated debt issuance costs of $398, which proceeds LMC used to purchase all ofthe assets and liabilities from the Company. The Company incurred an additional $459 in issuance costs directlyrelated to the debt issuance.  As aresult, $857 was recorded as deferred debt issuance costs to be amortized overthe life of the debt.  Interest expensefor the amortization of debt issuance cost was $83 for the year ended December 31,2007.

 

TheCompany retains a 69.25% ownership interest in LMC, C3  Capital Partners (“C3”)holds a 19% ownership interest, Larry Buffington, the Company’s President andCEO, (who also serves as the President and CEO of LMC) holds a 10% ownershipinterest, and CRESO Capital Partners (the Company’s financial advisor in theTransaction) holds a 1.75% ownership interest. The equity interests acquired by C3 and issued to CRESO were notconsidered a discount to debt, as the unconsolidated net assets of LMC weredeemed to have an initial value of $0 upon closing of the Transaction forfinancial accounting purposes.  Further,LMC is fully responsible for the repayment of debt obligations.

 

*MidwestDebt*

 

In connection with the Transaction, LMC enteredinto a Loan Agreement, dated July 24, 2007 (the “Loan Agreement”), withBank Midwest, N.A. (“Midwest”).  The Loan Agreement provides for totalloan availability of $5,500, consisting of a $4,000 term loan with an annualinterest rate of 8.48% and a revolving loan of up to $1,500 with a variableinterest equal to prime rate as published in the Wall Street Journal. Interestpayments are due monthly.  The term loanhas a maturity date of July 20, 2011.  The revolving loan allows forborrowings up to $1,500 and has a maturity date of July 20, 2008. Borrowing availability under the revolving loan is based in a percentage of LMC’seligible receivables and eligible inventory, and the initial advance under therevolving loan was $1,000 on July 24, 2007.  LMC’s obligations underthe Loan Agreement are secured by a blanket security interest in all of LMC’sassets and the Company’s equity interest in LMC, and pursuant to anintercreditor agreement between the C3 and Midwest. Midwest’s securityinterest in the assets is senior to C3’s security interest in the same assets.

 

LMC is required to make monthly principalpayments under the term loan of: $63 during months 1 through 12, $83 duringmonths 13 through 36, and $104 during months 37 through 48.  All remainingprincipal is due and payable on July 20, 2011.  If the term loan isprepaid within the first twenty-four (24) months after July 24, 2007, LMCwill pay a prepayment penalty of 1% of the outstanding principal balance,together with accrued interest.  After the twenty-four month period haslapsed, LMC will have the right to prepay the term loan without penalty.

 

As of December 31, 2007, the grossoutstanding loan balance under the term loan and revolving loan totaled $3,688and $1,130, respectively, which are presented as long term debt and short termdebt on the Company’s consolidated balance sheet, respectively.  Interest expense incurred under the term loanand revolving loan totaled $143 and $37, respectively, for the year ended December 31,2007.

 
| **Midwest Debt term loan** | ** ** | ** **   | ** ** |
|-------------------------------------------|------------|--------------|------------|
| **Repayment Schedule**               | ** ** | **Minimum**  | ** ** |
| **December 31,**                     | ** ** | **Payments** | ** ** |
|                                      |       |         |       |
| 2008                                      |       | $            | 855        |   |
| 2009                                      |       | 1,000        |       |
| 2010                                      |       | 1,104        |       |
| 2011                                      |       | 729          |       |
| Total                                     |       | $            | 451        |   |

 

90

----

 

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2007,2006, and 2005**

**(in thousands, except share data)**

 

Additionally, LMC entered into a PromissoryNote, dated August 29, 2007 (the “Capital Loan”), with Midwest to providefor $49 with an annual interest of 8.25% to be used towards the purchase of acompany truck.  The Capital Loan has amaturity date of September 1, 2012. LMC is required to make monthly principal and interest payments of $1per month.  As of December 31, 2007,the gross outstanding loan balance under the Capital Loan totaled $44, which ispresented as short term debt on the Company’s consolidated balance sheet.  Interest expense incurred under the term loanand revolving loan totaled $1 for the year ended December 31, 2007.

 
| **Capital loan**       | ** ** | ** **   | ** ** |
|-----------------------------|------------|--------------|------------|
| **Repayment Schedule** | ** ** | **Minimum**  | ** ** |
| **December 31,**       | ** ** | **Payments** | ** ** |
|                        |       |         |       |
| 2008                        |       | $            | 6          |   |
| 2009                        |       | 9            |       |
| 2010                        |       | 10           |       |
| 2011                        |       | 11           |       |
| 2012                        |       | 8            |       |
| Total                       |       | $            | 44         |   |

 

*C3 Debt*

 

In the Transaction, LMC also entered into aSecurities Purchase Agreement, dated July 24, 2007 (the “SecuritiesPurchase Agreement”), with C3 Capital Partners, L.P. (“C3”),C3 Capital Partners II, L.P. (“C3 II”, and with C3, the “C3 entities”),and Liquidmetal Coatings Solutions, LLC, a wholly owned subsidiary of LMC thatwill operate the thermal spray coatings business (“LMCS”).  Pursuant tothe Securities Purchase Agreement, LMC issued to the C3 entitiessubordinated promissory notes in the aggregate principal amount of $6,500 (the “SubordinatedNotes”). Under the Securities Purchase Agreement, the C3 entities have theright, beginning on the July 24, 2012 (or, if earlier, upon a default byLMC under the Subordinated Notes or Securities Purchase Agreement) to requireLMC to purchase the C3 entities’ membership interests in LMC for a purchaseprice equal to their pro rata portion of the greater of (i) the appraisedfair market value of LMC or (ii) six times LMC’s trailing 12-monthearnings before interest taxes, depreciation, and amortization, less fundeddebt.

 

The Subordinated Notes have a maturity date of July 20,2012 with no required principal payments before maturity other than uponspecified triggering events, such as a change in control of LMC.  Interestaccrues under at an annual rate of 14%, with 12% interest being payable monthlybeginning September 2007 and the remaining 2% interest being payable at maturity. In connection with the Securities Purchase Agreement and the SubordinatedNotes, the Company and LMC entered into pledge agreements with theC3 entities in which the Company pledged its membership interest in LMC tosecure the obligations under the notes and LMC pledged its membership interestsin LMCS to secure its obligations under the notes.  LMC and LMCS alsogranted to C3 a blanket security interest in all of their assets to securetheir obligations under the Subordinated Notes.

 

The gross outstanding loan balance including accrued interest payable upon maturity of the Subordinated Note totaled$6,557 as of December 31, 2007.  Interest expense incurred under theSubordinated Notes totaled $344 for year ended December 31, 2007.

 
| **C3 Notes**           | ** ** | ** **   | ** ** |
|-----------------------------|------------|--------------|------------|
| **Repayment Schedule** | ** ** | **Minimum**  | ** ** |
| **December 31,**       | ** ** | **Payments** | ** ** |
|                        |       |         |       |
| 2008                        |       | $            | —     |   |
| 2009                        |       | —       |       |
| 2010                        |       | —       |       |
| 2011                        |       | —       |       |
| 2012                        |       | 6,557        |       |
| Total                       |       | $            | 6,557      |   |

 

**12. Shareholders’ Equity(Deficiency)**

 

*Initial Public Offering.*Pursuantto the Company’s Registration Statement (Registration No. 333-73716) on Form S-1,as amended, initially filed with the Securities and Exchange Commission on November 20,2001 and declared effective May 21, 2002, the Company closed an initialpublic offering of 5,000,000 registered shares of common stock on May 28,2002, plus an additional 229,000 shares on June 10, 2002 pursuant to anover allotment option, at a price of $15.00 per share (which sale is referredto herein as the “Offering”). The Offering generated net cash proceeds for theCompany during the second quarter 2002 of approximately $70,721, net ofunderwriting commissions of $5,490 and other transaction fees of approximately$2,224.

 

*Stock Split.*OnJune 29, 2001 the Company declared a ten-for-one stock split to its commonshareholders of record on June 29, 2001. This stock split was effected inthe form of a stock dividend. On April 4, 2002, the Company declared aone-for-3.1 reverse stock split to its common shareholders of record on April 4,2002. The consolidated financial statements and accompanying notes have beenretroactively adjusted to reflect the effects of the split and reverse split.

 

91

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* *

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

* *

*Reincorporation*.  On May 21, 2003, the Company completed areincorporation by transitioning from a California corporation to a Delawarecorporation. The reincorporation was effected though the merger of the formerCalifornia entity into its newly created wholly owned Delaware subsidiary. Inconnection with the reincorporation, the number of authorized common shares wasreduced from 200,000,000 to 100,000,000. Additionally, the par value of thecommon stock was changed from no par value common stock to common stock with apar value of $0.001 per share. For purposes of these notes, the term “Company”refers to the former California entity with respect to periods prior to May 21,2003.

 

*Preferred Stock.*Asof December 31, 2001, the Company received net proceeds of $5,577 from thesale of the preferred stock at a per share price of $12.40, as adjusted for therevised stock split. Upon the completion of the Offering, each share ofpreferred stock was converted automatically into one share of Class Acommon stock pursuant to the terms of the preferred stock issued.

 

Warrants

 

Asof December 31, 2007, outstanding warrants to acquire shares of theCompany’s common stock are as follows:

 
| **Number of Shares** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **         |
|--------------------------------|------------|-------------------------|------------|--------------------------|--------------------|
|                           |       |                    |       |                     |               |
| 1,039,255                      |       | $                       | 1.72       |                     | June 13, 2010 |   |
| 125,000                        |       | 1.55                    |       | March 17, 2009      |               |
| 3,353,486                      |       | 1.72                    |       | August 2, 2010      |               |
| 452,859                        |       | 1.72                    |       | May 17, 2011        |               |
| 860,521                        |       | 2.07                    |       | May 17, 2011        |               |
| 7,477,971                      |       | 1.55                    |       | January 3, 2012     |               |
| 1,109,091                      |       | 1.55                    |       | December 28, 2012   |               |
| 14,418,183                     |       |                    |       |                     |               |
|                                |            |                         |            |                          |                    |  |

 

**Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in gains of $4,923, $279, and $3,985 for the years ended December 31,2007, 2006, and 2005.  The fair value ofwarrants outstanding at December 31, 2007 of $2,583 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of1.21 to 4.99 years; (2) volatility of 63%, (3) risk free interest of3.07% to 3.45%, and dividend rate of 0%. The fair value of the warrants outstanding at December 31, 2006 of$2,662 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 2.21to 4.38 years; (2) volatilityof 55%; (3) risk free interest of 4.70% to 4.82% and dividend rate of 0%.**

** **

**13. Stock Compensation Plan**

 

Underthe Company’s 1996 Stock Option Plan (“1996 Company Plan”) the Company couldgrant to employees, directors or consultants options to purchase up to12,903,226 shares of common stock as adjusted for the reverse stock split. Thestock options are exercisable over a period determined by the Board ofDirectors or the Compensation Committee, but no longer than 10 years.

 

OnApril 4, 2002, our shareholders and board of directors adopted the 2002Equity Incentive Plan (“2002 Equity Plan”). The 2002 Equity Plan provides forthe grant of stock options to officers, employees, consultants and directors ofthe Company and its subsidiaries. In addition, the plan permits the granting ofstock appreciation rights with, or independently of, options, as well as stockbonuses and rights to purchase restricted stock. A total of 10,000,000 sharesof our common stock may be granted under the 2002 Equity Plan.  As of December 31, 2007, there are2,350,955 options outstanding under the 2002 Equity Plan.

 

In2006, certain of our current and former non-employee directors and our formerChief Executive Officer were given the opportunity to receive 138,397 shares ofstock at prices ranging from $0.88 to $1.50 per share under the 2002 EquityPlan in lieu of past-due director and consulting fees that were due to them forfiscal year 2006 and 2005.

 

Priorto the approval of the 2002 Equity Plan, options were primarily granted underthe Company’s 1996 Stock Option Plan (“1996 Company Plan”). On April 4,2002, our board of directors terminated the 1996 Company Plan. The terminationwill not affect any outstanding options under the 1996 Company Plan and allsuch options will continue to remain outstanding and be governed by the Plan.No additional options may be granted under the 1996 Company Plan. As of December 31,2007, there were 3,224,683 options outstanding under the 1996 Company Plan.

 

92

----

 

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

 

OnApril 4, 2002, our shareholders and board of directors adopted the 2002Non-employee Director Stock Option Plan (“2002 Director Plan”). Onlynon-employee directors are eligible for grants under the 2002 Director Plan. Atotal of 1,000,000 shares of the Company’s Common Stock may be granted underthe 2002 Director Plan. There are 400,000 options outstanding under the 2002Director Plan as of December 31, 2007.

 

Additionally,the Company has 2,221,508 options outstanding at December 31, 2007 whichwere granted outside the 1996 Company Plan, 2002 Equity Plan and 2002 DirectorPlan.

 

TheCompany previously applied Accounting Principles Board (“APB”) Opinion No. 25for options when the exercise price of options granted to employees is lessthan the fair value of the underlying stock on the date of grant.  As permitted, the Company had previouslyelected to adopt provisions of Statement of Financial Accounting Standard (“SFAS”)No. 123, Accounting for Stock-Based Compensation for options granted tonon-employees who perform services for the Company and the disclosure-onlyprovisions of options granted to employees.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123, Accountingfor Stock-Based Compensation, (“SFAS 123”) and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, (“APB 25”). SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues. Under SFAS 123R, the Company is required to measure the cost ofemployee services received in exchange for stock options and similar awardsbased on the grant-date fair value of the award and recognize this cost in theincome statement over the period during which an employee is required toprovide service in exchange for the award. The pro forma disclosures previouslypermitted under SFAS 123 are no longer an alternative to financialstatement recognition.  The Companyadopted SFAS 123R on January 1, 2006 using the modified prospectivemethod and recorded $643 and $1,075 for the year ended December 31, 2007and 2006, respectively, of non-cash charges for stock compensation related toamortization of the fair value of restricted stock and unvested stock optionsrepresenting a $643, or $0.01 per share, increase from the stock compensationthat would have been recorded under APB 25 and SFAS 123. Under this method, theCompany will recognize compensation cost, on a prospective basis, for theportion of outstanding awards for which the requisite service has not yet beenrendered as of January 1, 2006 and any new grants, based upon thegrant-date fair value of those awards calculated under SFAS 123 for pro formadisclosure purposes.  Accordingly, wehave not restated prior period amounts.

 

The fair value of each option grant is estimated on thedate of the grant using the Black-Scholes option-pricing model with the  assumptions noted in the followingtable.  Expected volatilities are basedon historical volatility expected over the expected life of the options.  The Company uses historical data to estimateoption exercise and employee termination within the valuation model. Theexpected term of options granted is represents the period of time that optionsgranted are expected to be outstanding. Actual forfeitures were used for years ended December 31, 2007,2006, and 2005.  The risk free rate forperiod within the expected life of the options is based on U.S. Treasury ratesin effect at the time of grant.

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                     |       |                  |       |   |   |   |   |
| Expected volatility      |       | 58%  - 100%           |       | 100% |   | 100% |   |
| Expected dividends       |       | —                |       | — |   | — |   |
| Expected term (in years) |       | 5  - 6                |       | 5 |   | 5 |   |
| Risk-free rate           |       | 3.84%  - 4.68%        |       | 4.3%  - 4.82% |   | 3.6  % - 4.3% |   |

 

Stock-basedcompensation expense was recognized as follows for the year ended December 31,2007:

 
| ** **                 | ** ** | **In accordance with** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **No. 25**                  | ** ** | **No. 123R** | ** ** | **Total** | ** ** |
|                       |       |                             |       |   |   |   |   |
| General and administrative |       | $                                | —     |   | $ | 643 |   | $ | 643 |   |
| Research and development   |       | —                           |       | — |   | — |   |
| Total                      |       | $                                | —     |   | $ | 643 |   | $ | 643 |   |

 

93

----

 

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

 

Stock-basedcompensation expense was recognized as follows for the year ended December 31,2006:

 
| ** **                 | ** ** | **In accordance with** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **No. 25**                  | ** ** | **No. 123R** | ** ** | **Total** | ** ** |
|                       |       |                             |       |   |   |   |   |
| General and administrative |       | $                                | —     |   | $ | 1,075 |   | $ | 1,075 |   |
| Research and development   |       | —                           |       | — |   | — |   |
| Total                      |       | $                                | —     |   | $ | 1,075 |   | $ | 1,075 |   |

 

Stock-basedcompensation expense was recognized as follows for the year ended December 31,2005:

 
| ** **                 | ** ** | **In accordance with** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **APB Opinion**             | ** ** | **SFAS** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **No. 25**                  | ** ** | **No. 123** | ** ** | **Total** | ** ** |
|                       |       |                             |       |   |   |   |   |
| General and administrative |       | $                                | —     |   | $ | 41 |   | $ | 41 |   |
| Research and development   |       | —                           |       | — |   | — |   |
| Total                      |       | $                                | —     |   | $ | 41 |   | $ | 41 |   |

 

Thefollowing table summarizes the Company’s stock option transactions for thethree years ended December 31, 2007:

 
| ** **                                              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | ** **                 | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
| Options outstanding at December 31, 2004                |       | 7,375,509                  |       | 4.72                                       |       |                                                |       |                                |       |
| Granted                                                 |       | 1,048,165                  |       | 2.18                                       |       |                                                |       |                                |       |
| Exercised                                               |       | —                     |       | —                                     |       |                                                |       |                                |       |
| Forfeited                                               |       | (429,919                   | )          | 3.43                                       |       |                                                |       |                                |       |
| Options outstanding at December 31, 2005                |       | 7,993,755                  |       | 4.45                                       |       |                                                |       |                                |       |
| Granted                                                 |       | 992,500                    |       | 1.42                                       |       |                                                |       |                                |       |
| Exercised                                               |       | —                     |       | —                                     |       |                                                |       |                                |       |
| Forfeited                                               |       | (1,193,664                 | )          | 2.56                                       |       |                                                |       |                                |       |
| Options outstanding at December 31, 2006                |       | 7,792,591                  |       | 4.35                                       |       |                                                |       |                                |       |
| Granted                                                 |       | 1,334,565                  |       | 0.08                                       |       |                                                |       |                                |       |
| Exercised                                               |       | —                     |       | —                                     |       |                                                |       |                                |       |
| Forfeited                                               |       | (930,010                   | )          | 2.00                                       |       |                                                |       |                                |       |
| Options outstanding at December 31, 2007                |       | 8,197,146                  |       | $                                          | 4.04       |                                                | 4.8        |                                |       |   |
| Options vested or expected to vest at December 31, 2007 |       | 8,061,154                  |       | $                                          | 5.01       |                                                | 4.9        |                                | $          | — |   |
| Options exercisable at December 31, 2007                |       | 6,263,146                  |       | $                                          | 4.93       |                                                | 3.2        |                                | $          | — |   |

 

Theweighted average fair value of options granted during the years ended December 31,2007, 2006, and 2005 was $0.81, $1.10, and $1.74, respectively.  There were 6,263,146 options with a weightedaverage exercise price of $4.93 exercisable at December 31, 2007, therewere 6,352,670 options with a weighted average exercise price of $4.88exercisable at December 31, 2006, and 6,451,364 options with a weightedaverage exercise price of $4.87.

 

94

----

 

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

 

Included in the abovetables are certain options granted where their exercise prices were below thefair market value of the common stock at the grant date (measurementdate).  Such options totaled 734,927 witha weighted average fair value of $7.56 were outstanding at December 31,2007 and 2006.

 

The following table summarizes the Company’s stock optionsoutstanding and exercisable by ranges of option prices as of December 31,2007:

 
| **Options Outstanding**            | ** ** | **Options Exercisable**              | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Numbers of  options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| $0.00 - $1.55                           |       | 2,120,040                                 |       | 8.10 |   | $ | 0.97 |   | 532,540 |   | $ | 1.19 |   |
| 1.56 - 3.10                             |       | 1,530,356                                 |       | 4.40 |   | 2.42 |   | 1,207,856 |   | 2.48 |   |
| 3.11 - 4.65                             |       | 1,694,163                                 |       | 3.10 |   | 4.62 |   | 1,672,163 |   | 4.63 |   |
| 4.66 - 6.20                             |       | 2,580,646                                 |       | 3.40 |   | 6.20 |   | 2,580,646 |   | 6.20 |   |
| 6.21 - 7.75                             |       | —                                    |       | — |   | — |   | — |   | — |   |
| 7.76 - 9.30                             |       | —                                    |       | — |   | — |   | — |   | — |   |
| 9.31 - 10.85                            |       | 10,000                                    |       | 5.00 |   | 9.81 |   | 8,000 |   | 9.81 |   |
| 10.86 - 12.40                           |       | 190,326                                   |       | 3.60 |   | 12.40 |   | 190,003 |   | 12.40 |   |
| 12.41 - 13.95                           |       | —                                    |       | 0.00 |   | 0.00 |   | — |   | 0.00 |   |
| 13.96 - 15.50                           |       | 71,938                                    |       | 4.40 |   | 15.00 |   | 71,938 |   | 15.00 |   |
| Total                                   |       | 8,197,469                                 |       |   |   |   |   | 6,263,146 |   |   |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

**14. Discontinued Operations**

 

*Liquidmetal Golf*

 

OnApril 30, 2002, management terminated the operations of the retail golfsegment by means of liquidating substantially all of the retail golf assets andliabilities. The disposition of the retail golf operations represents thedisposal of a business segment. Accordingly, the accompanying consolidatedfinancial statements reflect the retail golf segment as a discontinuedoperation for all periods presented.

 

Therewere no assets associated with discontinued retail golf operations at December 31,2004 and 2005, and there were no gain or loss resulted from the discontinuedoperations for the years ended December 31, 2007, 2006, and 2005.

 

*Stock Compensation Plan*.Historically, Liquidmetal Golf granted its own options to employees, directorsand consultants under a stock option plan (“1997 Golf Plan”) approved byLiquidmetal Golf’s Board of Directors pursuant to which Liquidmetal Golf couldhave granted stock options exercisable over a period determined by the Board ofDirectors to purchase up to 500,000 shares of common stock of Liquidmetal Golf.In connection with the Company’s plan to discontinue the retail golfoperations, the Company does not intend to issue additional options under the1997 Golf Plan.

 

LiquidmetalGolf previously applied Accounting Principles Board (“APB”) Opinion No. 25for options when the exercise price of options granted to employees is lessthan the fair value of the underlying stock on the date of grant.  As permitted, the Company had previouslyelected to adopt provisions of Statement of Financial Accounting Standard (“SFAS”)No. 123, Accounting for Stock-Based Compensation for options granted tonon-employees who perform services for the Company and the disclosure-onlyprovisions of options granted to employees. There was no compensation expenserecorded during the years ended December 31, 2007, 2006, and 2005.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123, Accountingfor Stock-Based Compensation, (“SFAS 123”) and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, (“APB 25”). SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues. Under SFAS 123R, the Company is required 

 

95

----

 

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

 

tomeasure the cost of employee services received in exchange for stock optionsand similar awards based on the grant-date fair value of the award and recognizethis cost in the income statement over the period during which an employee isrequired to provide service in exchange for the award. The pro formadisclosures previously permitted under SFAS 123 are no longer analternative to financial statement recognition. The Company adoptedSFAS 123R on January 1, 2006 using the modified prospective methodfor outstanding option.  Under thismethod, the Company would recognize compensation cost, on a prospective basis,for the portion of outstanding awards for which the requisite service has notyet been rendered as of January 1, 2006 and any new grants, based upon thegrant-date fair value of those awards calculated under SFAS 123 for pro formadisclosure purposes. Accordingly, we have not restated prior periodamounts.  There were no charges for stockcompensation related to amortization of the fair value of restricted stock asthe outstanding options were fully vested as of December 31, 2005 and nonew grants were made during the years ended December 31, 2007 and  2006.

 

Thefollowing table summarizes Liquidmetal Golf’s stock option transactions for thethree years ended December 31, 2007:

 
| ** **                                                   | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                   | ** ** | ** **                 | ** ** | ** **                                     | ** ** | ** **                                                  | ** ** | **(in thousands)**             | ** ** |
| Options outstanding at December 31, 2004                |       | 88,700                     |       | 8.80                                           |       |                                                        |       |                                |       |
| Granted                                                      |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Exercised                                                    |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Forfeited                                                    |       | (10,500                    | )          | 13.71                                          |       |                                                        |       |                                |       |
| Options outstanding at December 31, 2005                |       | 78,200                     |       | 8.14                                           |       |                                                        |       |                                |       |
| Granted                                                      |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Exercised                                                    |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Forfeited                                                    |       | (78,200                    | )          | 8.14                                           |       |                                                        |       |                                |       |
| Options outstanding at December 31, 2006                |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Granted                                                      |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Exercised                                                    |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Forfeited                                                    |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Options outstanding at December 31, 2007                |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |
| Options vested or expected to vest at December 31, 2007 |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |
| Options exercisable at December 31, 2007                |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |

 

Therewere no options exercisable at December 31, 2007 and 2006.  There were 78,200 options with a weightedaverage exercise price of $8.14 exercisable at December 31, 2005.

 

Includedin the above tables are certain options granted where their exercise priceswere below the fair market value of the common stock at the grant date. Suchoptions totaled 10,000 with weighted average fair values of $5.74, wereoutstanding at December 31, 2005.

 

**15. Income Taxes**

 

Significantcomponents of deferred tax assets are as follows:

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
|                          |       |                                        |       |   |   |
| Loss carry forwards           |       | $                                           | 36,577     |   | $ | 40,862 |   |
| Other                         |       | 2,227                                       |       | 2,272 |   |
| Total deferred tax asset      |       | 38,804                                      |       | 43,134 |   |
| Valuation allowance           |       | (38,804                                     | )          | (43,134 | ) |
| Total deferred tax asset, net |       | $                                           | —     |   | $ | — |   |

 

96

----

 

**LIQUIDMETALTECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Forthe Years Ended December 31, 2007, 2006, and 2005**

**(inthousands, except share data)**

 

Thefollowing table accounts for the differences between the expected federal taxbenefit (based on the statutory U.S. federal income tax rate of 34%) and theactual tax provision:

 
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| ** **                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected federal tax benefit                           |       | (34                               | )%         | (34 | )% | (34 | )% |
| State tax expense, net of expected federal tax benefit |       | 0                                 | %          | (4 | )% | 0.00 | % |
| Foreign loss not subject to U.S. federal income tax    |       | 33                                | %          | 7 | % | 42 | % |
| Net operating loss utilized or expired                 |       | 88                                | %          | — |   | — |   |
| Other                                                  |       | 0                                 | %          | (38 | )% | 0 | % |
| Increase (decrease) in valuation allowance             |       | (87                               | )%         | 70 | % | (8 | )% |
| Total tax provision                                    |       | 0.00                              | %          | 0.00 | % | 0.00 | % |

 

Asof December 31, 2007, the Company had approximately $99 of net operatingloss (“NOL”) carryforwards for U.S. federal income tax purposes expiring in2008 through 2028. In addition, the Company has California state NOLcarryforwards of approximately $52 expiring in 2008 through 2018. The Companyand Liquidmetal Golf filed on a separate company basis for federal income taxpurposes. Accordingly, the federal NOL carryforwards of one legal entity arenot available to offset federal taxable income of the other. As of December 31,2007, Liquidmetal Technologies, Inc. had approximately $61 in federal NOLcarryforwards, expiring in 2008 through 2028 and Liquidmetal Golf, Inc.had approximately $38 in federal NOL carryforwards, expiring in 2013 through2028.

 

Asof December 31, 2007, the Company had approximately $171 of Research &Development (“R&D”) credit carryforwards for U.S. federal income taxpurposes expiring in 2022 through 2028. In addition, the Company has California R&D credit carryforwards ofapproximately $241, which do not expire under current California law.

 

Section 382of the Internal Revenue Code (“IRC”) imposes limitations on the use of NOL’sand credits following changes in ownership as defined in the IRC. Thelimitation could reduce the amount of benefits that would be available tooffset future taxable income each year, starting with the year of an ownershipchange. The Company has not completed the complex analysis required by the IRCto determine if an ownership change has occurred.

 

Theability to realize the tax benefits associated with deferred tax assets, whichincludes benefits related to NOL’s, is principally dependent upon the Company’sability to generate future taxable income from operations.  The Company has provided a full valuationallowance for its net deferred tax assets due to the Company’s net operatinglosses.

 

TheCompany adopted the provisions of FIN 48 on January 1, 2007. At theadoption date and as of December 31, 2007, the Company had no materialunrecognized tax benefits and no adjustments to liabilities or operations wererequired. The Company recognizes interest and penalties related to uncertaintax positions in income tax expense which were $0 for the year ended December 31,2007.

 

Taxyears 2004 through 2007 and 1997 through 2007 are subject to examination by thefederal and state taxing authorities, respectively. There are no income taxexaminations currently in process.

 

**16. Segment Reporting and Geographic Information**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise and Related Information,*requirescompanies to provide certain information about their operating segments.  In April 2002, the Company beganclassifying operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys.  The Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used bycoal burning power plants.  BulkLiquidmetal alloys include market opportunities to manufacture and sell

 

97

----

 

**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment. Theexpenses incurred by the bulk Liquidmetal alloy segment are manufacturing,research and development costs, and selling expenses associated withidentifying and developing market opportunities. Bulk Liquidmetal alloyproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment. Revenue and expensesassociated with research and development services are included in the bulkLiquidmetal alloy segment. The accounting policies of the reportable segmentsare the same as those described in Note 3 above.

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables:

 
| ** **                                 | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
|                                       |       |         |       |                |       |                    |       |
| Year ended December 31, 2007          |       |         |       |                |       |                    |       |
| Revenue to external customers              |       | $            | 14,393     |                | $          | 14,629                  |       | $ | 29,022 |   |
| Gross profit (loss)                        |       | 5,638        |       | (3,075              | )          | 2,563                   |       |
| Total segment income (loss)                |       | 3,337        |       | (4,386              | )          | (1,049                  | )          |
| Total identifiable assets at end of period |       | 14,557       |       | 7,956               |       | 22,513                  |       |
|                                       |       |         |       |                |       |                    |       |
| Year ended December 31, 2006:         |       |         |       |                |       |                    |       |
| Revenue to external customers              |       | $            | 9,419      |                | $          | 18,250                  |       | $ | 27,669 |   |
| Gross profit (loss)                        |       | 3,879        |       | 1,372               |       | 5,251                   |       |
| Total segment income (loss)                |       | 3,075        |       | (1,815              | )          | 1,260                   |       |
| Total identifiable assets at end of period |       | —       |       | 20,286              |       | 20,286                  |       |
|                                       |       |         |       |                |       |                    |       |
| Year ended December 31, 2005:         |       |         |       |                |       |                    |       |
| Revenue to external customers              |       | $            | 5,894      |                | $          | 10,471                  |       | $ | 16,365 |   |
| Gross profit (loss)                        |       | 2,505        |       | (1,269              | )          | 1,236                   |       |
| Total segment income (loss)                |       | 1,746        |       | (7,747              | )          | (6,001                  | )          |
| Total identifiable assets at end of period |       | 1,199        |       | 16,474              |       | 17,673                  |       |

 

Reconcilinginformation for the statements of operations between reportable segments andthe Company’s consolidated totals is shown in the following table:

 
| ** **                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                                        |       |                                        |       |   |   |   |   |
| Total segment income (loss) before interest  expense and discontinued operations            |       | $                                           | (1,049     | ) | $ | 1,260 |   | $ | (6,001 | ) |
| General and administrative expenses,  excluded                                              |       | (6,206                                      | )          | (6,349 | ) | (6,904 | ) |
| Consolidated loss before interest, other  income, income taxes, and discontinued operations |       | (7,255                                      | )          | (5,089 | ) | (12,905 | ) |
| Loss from extinguishment of debt                                                            |       | (648                                        | )          | — |   | (1,247 | ) |
| Change in value of warrants, gain                                                           |       | 4,923                                       |       | 279 |   | 3,985 |   |
| Change in value of conversion feature,  (loss) gain                                         |       | 6,965                                       |       | (226 | ) | 9,118 |   |
| Interest expense                                                                            |       | (9,364                                      | )          | (9,509 | ) | (6,021 | ) |
| Interest income                                                                             |       | 123                                         |       | 23 |   | 17 |   |
| Minority interests                                                                          |       | (384                                        | )          |   |   |   |   |
| Consolidated net loss                                                                       |       | $                                           | (5,640     | ) | $ | (14,522 | ) | $ | (7,053 | ) |

 

98

----

 

**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

Includedin bulk alloy segment income is $226 of other income from gain on disposal of assetsin connection with the equipment purchase agreement and transfer agreement ofthe Weihei operations to Grace Metal (see Note 20). Included in bulk alloysegment net income for the year ended December 31, 2006 is $572, of otherincome recognized from $480 gain on termination of a distribution agreement in March 2006(see Note 18) and $92 gain on disposal of idle equipment in June 2006 (SeeNote 7).

 

Excludedgeneral and administrative expenses are attributable to the Company’s corporateheadquarters. These expenses primarily include corporate salaries, consulting,professional fees and facility costs. Research and development expenses areincluded in the operating costs of the segment that performed the research anddevelopment.

 

Reconciling informationfor the balance sheets between reportable segments and the Company’sconsolidated totals is shown in the following table:

 
| ** **                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment assets                      |       | $19,339    |       | $20,286    |       |
| Cash and cash equivalents                 |       | 1,055      |       | 118        |       |
| Prepaid expenses and other current assets |       | 785        |       | 375        |       |
| Other property, plant and equipment       |       | 123        |       | 266        |       |
| Intangibles, net                          |       | 1,120      |       | 1,170      |       |
| Other assets                              |       | 91         |       | 29         |       |
| Total consolidated assets                 |       | $22,513    |       | $22,244    |       |

 

Assetsexcluded from segments include assets attributable to the Company’s corporateheadquarters. The largest asset represents the Company’s intangible assets,consisting primarily of the Company’s patents and trademarks.

 

Certain customersaccounted for more than 10% of revenues from continuing operations as follows:

 
| ** **                      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Samsung                         |       | 2          | %          | 5          | %          | 10         | %          |
| Flextronics Manufacturing, LTD  |       | 6          | %          | 13         | %          | 8          | %          |
| Grant Prideco                   |       | 10         | %          | 5          | %          | 2          | %          |
| Liquidmetal Korea (Grace Metal) |       | 12         | %          | 0          | %          | 0          | %          |

 

Revenues from sales to companies inthe United States were $15,003, $12,142, and $8,536 during the years ended December 31,2007, 2006, and 2005, respectively. The revenue related to the United States ofAmerica was earned under defense-related research and development contracts,sales of coatings products, and sales of Liquidmetal bulk alloy products.

 

During the year ended December 31,2007, 2006, and 2005 the Company had revenue on sales to companies outside ofthe United States of $14,019, $15,527, and $7,829, respectively, of which$7,850, $3,211, and $5,047 represented sales to companies located in SouthKorea, respectively.

 

Long-lived assetsinclude net property, plant, and equipment and net intangible assets. TheCompany had long-lived assets of $1,613, and $1,439 located in the UnitedStates at December 31, 2007 and 2006, respectively. The Company hadlong-lived assets of $8,935 and $11,799 located in South Korea at December 31,2007 and 2006, respectively. Further, the Company has long lived assets locatedin China of $0 and $221 at December 31, 2007 and 2006, respectively, as aresult of a post-processing plant opened August 2004 (see Note 1).

 

99

----

 

**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

**17.Income (Loss) Per Common Share**

 

Basic EPS is computedby dividing earnings (loss) attributable to common shareholders by theweighted average number of common shares outstanding for the periods. DilutedEPS reflects the potential dilution of securities that could share in theearnings. A reconciliation of the number of common shares used in calculationof basic and diluted EPS is presented below:

 
| ** **                      | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average basic shares   |       | 44,730,091                                                    |       | 43,809,339 |   | 41,833,058 |   |
| Effect of dilutive securities:  |       |                                                          |       |   |   |   |   |
| Stock options                   |       | —                                                        |       | — |   | — |   |
| Conversion of notes payable     |       | —                                                        |       | — |   | — |   |
| Weighted average diluted shares |       | 44,730,091                                                    |       | 43,809,339 |   | 41,833,058 |   |

 

Options to purchase8,197,146 shares of common stock at prices ranging from $0.75 to $15.00 pershare were outstanding at December 31, 2007, but were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive. Options to purchase 7,792,591 shares of common stock at pricesranging from $0.77 to $15.00 per share were outstanding at December 31,2006, but were not included in the computation of diluted EPS for the sameperiod as the inclusion would have been antidilutive. Options to purchaseapproximately 7,993,755 shares of common stock at prices ranging from $0.88 to$15.00 per share were outstanding at December 31, 2005, but were notincluded in the computation of diluted EPS for the same period as the inclusionwould have been antidilutive.

 

Warrants to purchase14,418,183 shares of common stock between $1.55 and $2.07 per share outstandingat December 31, 2007 were not included in the computation of diluted EPSfor the same period as the inclusion would have been antidilutive. Warrants topurchase 4,875,778 shares of common stock between $2.00 and $2.58 per shareoutstanding at December 31, 2006 were not included in the computation ofdiluted EPS for the same period as the inclusion would have been antidilutive.Warrants to purchase 4,986,028 shares of common stock between $2.00 and $4.65per share outstanding at December 31, 2005 were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.

 

16,179,548 shares ofcommon stock issuable upon conversion of the Company’s senior convertible noteswith conversion prices of $1.10 per share outstanding at December 31, 2007were not included in the computation of diluted EPS for the period as theinclusion would have been antidilutive. 7,021,935 and 7,308,685 shares ofcommon stock issuable upon conversion of the Company’s senior convertible noteswith conversion prices between $1.00 and $2.00 per share outstanding at December 31,2006 and 2005, respectively, were not included in the computation of dilutedEPS for the period as the inclusion would have been antidilutive.

 

**18.Commitments and Contingencies**

 

The Company is fromtime to time a party to certain legal proceedings arising in the ordinarycourse of business. Although outcomes cannot be predicted with certainty, theCompany does not believe that any legal proceeding to which it is a party willhave a material adverse effect on the Company’s financial position, results ofoperations, and cash flows.

 

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**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

In August 2006, the UnitedStates Department of Justice (“DOJ”) instituted a grand jury proceeding in theMiddle District of Florida to investigate, among other things, allegedaccounting improprieties in relation to certain of our business transactionsand a personal stock transaction by our former chief executive officer. Thegrand jury proceeding is based primarily upon the same underlying facts andcircumstances as alleged in the federal class action and shareholder derivativeactions. To date, subpoenas for the production of documents and/or grand jurytestimony have been issued to our company and several present and formerofficers and directors. We are cooperating with the DOJ in its investigation.

 

In March 1996,the Company entered into a distribution agreement whereby it granted to a thirdparty exclusive rights to market and sell golf products incorporatingLiquidmetal Technology to certain Japanese sporting equipment companies. Thethird party paid the Company a $1,000 distribution fee as part of this agreement,of which a portion was refundable according to a formula based on the grossprofit earned by the third party. The remaining unearned distribution fee of$830 had not been refunded. On March 28, 2003, the distribution agreementwas terminated and the Company entered into a new agreement to pay to the samethird party a commission on the net sales price of all Liquidmetal golfequipment that is shipped by the Company or its affiliates to Japanese golfcompanies for sale into the Japanese end-market. This commission was to beapplied to golf equipment shipped by the Company or its affiliates during theperiod beginning on March 28, 2003 and ending on March 28, 2006. If,by March 28, 2006, the Company has not paid $350 in commission payments,the balance between commission paid and $350 were to be paid by April 30,2006, thereby guaranteeing the third party a $350 minimum payment during theterm of the agreement. As of December 31, 2007 the Company has paid $35 ofcommission and $315 remains as liability and is included in accounts payableand accrued liabilities. Further, the Company recognized net balance of theunearned distribution fee of $480 as other income during the year ended December 31,2006. The Company is currently is in the process of renegotiating thedistribution agreement with the same third party to settle the balance.

 

On June 26, 2006, the Companyentered into a joint venture agreement with SAGA, SpA in Padova, Italy, (“SAGA”)a specialist precision parts manufacturer.  The joint venture is namedLiquidmetal SAGA Italy, Srl (“LSI”).  The Company also entered into anexclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, the Company has option to buyownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,the Company exercised the 19.9% interest in LSI and will have two years topurchase the additional interest at a nominal price. In January 2007and June 2007, the Company contributed additional $217 and $86, respectively,into LSI as additional investment.  The contribution did not change theCompany’s 19.9% interest in LSI. Under the licensing agreement, at any timefollowing 18 months after the effective date of the agreement, LSI may exerciseits option to sell to the Company certain business assets includingmanufacturing equipment acquired under the joint venture. During year ended December 31,2007 and 2006, the Company recognized revenues of $103 and $702, respectively,of Liquidmetal alloys sold to SAGA for use in the joint venture.

 

101

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** **

**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

***Operating Leases***

 

The Company leases itsoffices and warehouse facilities under various lease agreements, certain ofwhich are subject to escalations based upon increases in specified operatingexpenses or increases in the Consumer Price Index. Future minimum leasepayments under non-cancelable operating leases during subsequent years are asfollows:

 
| ** **            | ** ** | **Minimum**  | ** ** |
|-----------------------|------------|--------------|------------|
| **December 31,** | ** ** | **Payments** | ** ** |
|                  |       |         |       |
| 2008                  |       | $            | 269        |   |
| 2009                  |       | 247          |       |
| 2010                  |       | 230          |       |
| 2011                  |       | 215          |       |
| 2012                  |       | 87           |       |
| Total                 |       | $            | 1,048      |   |

 

Rent expense was $464,$449, and $508 for the years ended December 31, 2007, 2006, and 2005,respectively.

 

**19.     401(k) SavingsPlan**

 

The Company has atax-qualified employee savings and retirement plan, or 401(k) plan, whichcovers all of its United States-based employees. Our Korean employees arecovered under a government sponsored pension program and do not participate inthe U.S. based 401(k) program.

 

Under the U.S. based401 (k) plan, participants may elect to reduce their current compensation,on a pre-tax basis, by up to 15% of their taxable compensation or of thestatutorily prescribed annual limit, whichever is lower, and have the amount ofthe reduction contributed to the 401(k) plan. The 401(k) plan permitsthe Company, in its sole discretion, to make additional employer contributionsto the 401(k) plan. However, the Company did not make employercontributions to the 401(k) plan during any of the periods presented inthe accompanying consolidated financial statements.

 

**20.Related Party Transactions**

 

In June 2003,the Company entered into an exclusive, ten-year license agreement with LLPG, Inc.(“LLPG”), a corporation headed by, Jack Chitayat, a former director of theCompany.  Under the terms of the agreement, LLPG has the right tocommercialize Liquidmetal alloys, particularly precious-metal basedcompositions, in jewelry and high-end luxury product markets.  TheCompany, in turn, will receive royalty payments over the life of the contracton all Liquidmetal products produced and sold by LLPG.  In conjunctionwith its technology licensing contract, LLPG purchased two proprietaryLiquidmetal alloy melting machines and three proprietary Liquidmetal alloycasting machines for a total purchase price of $2,000.  The Companyrecognized $125 of revenues as minimum royalty fees under the license agreementduring the year ended December 31, 2006.

 

In December 2006,the Company entered into an amended the license agreement with LLPG, whichextends the license agreement to fifteen years at reduced royalty rates. Additionally, the amended license agreement includes a $400 terminationfee. The Company recognized $50 of revenue as minimum royalty fees under thelicensing agreement during the year ended December 31, 2007.

 

**As of December 31,2007, Mr. Chitayat held interests in $ $2,500 of 8% ConvertibleSubordinated Notes due January 2010 and held a total of 906,819exercisable warrants through entities related to Mr. Chitayat.**

** **

The Companyhas a license agreement with California Institute of Technology (“Caltech”)under which we exclusively license from Caltech certain inventions andtechnology relating to amorphous alloys.  Professor William Johnson, amember of the Company’s board of directors, is a professor at Caltech, andsubstantially all of the amorphous alloy technology licensed to us under theCaltech license agreement was developed in Professor Johnson’s Caltechlaboratory.   Additionally, the Company reimburses Caltech forlaboratory expenses incurred by Professor Johnson’s Caltech laboratory, whichduring the years ended December 31, 2007, 2006 and 2005, amounted to $60,$50 and $20, respectively.

 

102

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**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

Additionally, the Company is a party to aconsulting agreement with Mr. Johnson. Under this agreement, Mr. Johnsonprovides consulting services on an as-needed basis through 2004 as it relatesto marketing and development Liquidmetal alloy. During 2005, the agreementcontinued on a month to month basis. In April 2006, the Company enteredinto an agreement with Mr. Johnson effective from January 1, 2006through December 31, 2006. During the years ended December 31, 2007, 2006 and2005, the Company incurred $60, $60 and $15 in consulting fees from Mr. Johnson,respectively.

 

The Companyis a party to a consulting agreement with Chitnis Consulting, Inc., whichis owned 100% by Shekhar Chitnis, a former director and executive officer ofthe Company. Under this agreement, the Company engaged Chitnis Consulting toprovide consulting services on an as-needed basis through December 31,2005. On January 1, 2006, the term of the agreement was extended to December 31,2006 and on January 1, 2007, the term of the agreement was once againextended to December 31, 2007. During the years ended December 31,2007, 2006 and 2005, the Company incurred $0, $0 and $53 in consulting feesfrom Chitnis Consulting, respectively.

 

Soo Buchanan,the sister of John Kang, was employed by the Company and was paid aggregatecompensation of approximately $0, $0 and $104 as of December 31, 2007,2006 and 2005, respectively.  Effective, July 31, 2005, Ms. Buchananwas terminated as an employee and began providing services to the Company as aconsultant. During 2007, 2006 and 2005, the Company incurred $94, $116 and $24,respectively, for her services as a consultant. Additionally, Otis Buchanan,the husband of Ms. Buchanan, was employed by the Company and was paidaggregate compensation of approximately $110, $110 and $103 as of December 31,2007, 2006 and 2005, respectively.

 

In November 2004, the Companyentered into an agreement with John Kang, our Chairman of the Board, in which Mr. Kangagreed that certain stock transactions by him in 2002 involving the Company’scommon stock should have resulted in a liability under Section 16(b) ofthe Securities Exchange Act of 1934, as amended (“Section 16(b)”). Thesetransactions include Mr. Kang’s private sale of 285,715 shares of hispersonal Liquidmetal Technologies common stock to Growell Metal Co., Ltd. in February 2002,prior to our initial public offering. They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to GrowellMetal in February 2002 regarding the guaranteed minimum value of the stockpurchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively). Lastly, the transactions include open-market purchases of anaggregate of 89,300 shares of the Company’s common stock made by Mr. Kangin August 2002.

 

The AuditCommittee of our Board of Directors conducted an independent inquiry into theabove-described transactions with the aid of independent legal counsel and, asa result of such inquiry, the Audit Committee concluded that the transactionsshould have resulted in a liability to the Company under Section 16(b) inthe amount of $302. Mr. Kang has acknowledged this liability, and in anagreement negotiated between Mr. Kang and the Audit Committee and approvedby the full Board, Mr. Kang will pay this liability through periodicinstallments in 2005 and 2006. As a result, the Company accrued for the $302receivable in other assets and other income as of December 31, 2004. Theabove-described transactions involving Growell Metal was reported ona new Form 4 filed by Mr. Kang on November 15, 2004, andthe open-market purchases were previously reported on a timely basis in August 2002.As of December 31, 2007 and 2006, the outstanding amount of the receivablewas $178 and $235, respectively, which is included in other assets. Mr. Kanghas paid $57 and $0 during 2007 and 2006, respectively, and is currently innegotiation with the Board of Directors on a payment plan for the remainingliability.

 

As of December 31,2007 and 2006, Mr. Cho, a member of our Board of Directors, held $467 ofthe convertible subordinated notes and $620 of senior convertible notes,respectively and held 305,918 and 92,584 exercisable warrants as of December 31,2007 and 2006, respectively.

 

During theyear ended December 31, 2006, Ricardo Salas, the Company’s former ChiefExecutive Officer, advanced the Company $550 to cover short-term liquidityneeds. The Company paid $100 to Mr. Salas using 7.75% interest rate and onDecember 1 2006, the remaining balance of $450 and accrued interest of $9was converted into the unsecured subordinated notes. As of December 31,2007 and 2006, Mr. Salas held $0 and $310 of senior convertible notes,respectively, and $259 and $559 of the unsecured subordinated notes,respectively. He also held a total of 374,691 and 154,529 of exercisablewarrants as of December 31, 2007 and 2006, respectively.

 

On June 1, 2007, the Company entered into a transactionwith Grace Metal (“GM”), under which (i) GM agreed to purchase from usvarious equipment (including die casting machines and vacuum induction melters)used in the Company’s bulk amorphous alloy business segment and (ii) wegranted GM a 10-year exclusive license to manufacture products made from bulkLiquidmetal alloys for customers whose principal headquarters or whose majoroperations are located in South Korea. GM was formed by an investor group thatincludes the former Founder and director of the Company, James Kang, who isalso the brother of John Kang, Chairman of the Board of our company. Under anequipment purchase agreement between us and GM, GM agreed to buy the purchasedequipment for a total purchase price of $2,000, of which $577 were received asof December 31, 2007. The equipment purchase agreement provides thatdelivery of the equipment can be delayed to accommodate our continuingmanufacturing needs, and it also provides that the Company will retain asecurity interest in the purchased equipment until full payment of the purchaseprice.

 

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**LUQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2007, 2006, and 2005(in thousands, except share data)**

 

In consideration of the license agreement with GM, theCompany will be entitled to royalty of 10% of GM’s net sales of licensed products(unless GM’s margin on the products falls below specified levels, in which casea new royalty will be negotiated in good faith). The agreement provides thatthe Company may convert the license to a non-exclusive in the event that thenet sales in the second year of the contract or thereafter are not sufficientto result in royalties of $500 or more per year. The agreement also providesthat GM will be required to purchase all alloy feedstock from us, and theCompany will have the right to continue to manufacture Liquidmetal alloyproducts for South Korean customers until all purchased equipment has beencommissioned.

 

Additionally, effective June 1, 2007, the Companydiscontinued our post-processing operation in Weihai, China and transferred ourmanufacturing staff and equipment in Weihai to GM under an amendment to theequipment purchase agreement with GM. Further, the Company transferred certainof our manufacturing staff from our South Korean plant to GM. As a result, GMassumed $370 of accrued severance liability for the transferred employee. Theequipment purchase agreement and the transfer agreement regarding our Weihaioperations resulted in a total net gain of $226, which is recorded as otherincome.

 

The Company has also changed the name of its South Koreansubsidiary to Liquidmetal Technologies Korea Co., Ltd, which was formerlyLiquidmetal Korea Co., Ltd. GM assumed the name Liquidmetal Korea to conductbusiness in South Korea.

 

TheCompany purchased production supplies and outsourced production of certain bulkalloy production with GM, Lead Metal, and SDM, which are controlled by JamesKang, a former director and officer of the Company and the brother of ourcurrent Chairman. The Company purchased a total of $650 and $466 for the yearended December 31, 2007 and 2006, respectively, of which $0 and $10 isincluded in accounts payable and accrued liabilities at December 31, 2007and 2006, respectively. The Company recognized revenue from sales of rawmaterials and royalties for a total of $3,392 for the year ended December 31,2007, of which $401 is included in accounts receivable.

 

EffectiveOctober 20, 2006, Mr. Kang began providing services to the Company asa consultant, which would have continued through December 31, 2009. On December 31,2007, the terms of the consulting agreement were accelerated whereby theremaining two years of Mr. Kang’s consulting fees were settled for $435.

 

In December 2007,the Company entered into agreements with two holders of our convertiblesubordinated notes (the “January 2010 Notes”) and GM, a South Koreancompany formed by investor groups including our former Founder and director,James Kang, and the two holders, whereby GM would assume the liabilities dueunder the January 2010 Notes, including principal, interest, and fees dueby our company to the two holders totaling $434 and the Company releasedobligations due from GM for outstanding trade accounts receivables. Inconnection with the assumption of the liabilities by Grace Metal, warrants topurchase 179,620 shares of our common stock held by the holders were cancelled.

 

**21. SubsequentEvent**

 

OnFebruary 22, 2008, Liquidmetal Coatings, LLC (“LMC”) completed atransaction under which it issued and sold $2,500 in preferred membership unitsto two existing holders of LMC common membership units.  LMC isa majority owned subsidiary of Liquidmetal Technologies, Inc. (the “Company”),and the preferred membership units were sold to two minority members ofLMC.  Immediately following the sale of the preferred membership units,the subscription proceeds (after a 1% transaction fee) were distributed to LMC’scommon unit members, and as a result of such distribution, the Companyreceived approximately $1.7 million in the distribution.  The preferredunits issued by LMC have an accruing priority return of 14% per year andare redeemable by the preferred holders on the fourth anniversary of theissue date, and if LMC fails to redeem the preferred units on or beforethe second anniversary of the issue date, the preferred units will receive anadditional distribution equal to 200 common membership units (equal to 2%of the currently outstanding common units) per quarter until thepreferred units are redeemed in full.

 

During January and February 2008,the Company paid a total of $1,650 of principal due under its 8% unsecuredsubordinated notes due August 2007 along with $222 of interest accruedrelated to the notes. 

 

104

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**Schedule II – Valuation and Qualifying Accounts**

** **
| ** **

**Schedule II - Valuation and Qualifying Accounts** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Expenses** | ** ** | **Write-offs  and  Payments** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                    | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** **                    | ** ** | ** **                               | ** ** |
| Allowance for doubful accounts                                                 |       |                                           |       |                                     |       |                          |       |                                     |       |
| Year ended December 31, 2007                                                             |       | $                                              | 82         |                                     | $          | 7                             |       | $                                        | —     |   | $ | 89 |   |
| Year ended December 31, 2006                                                             |       | 61                                             |       | 47                                       |       | (26                           | )          | 82                                       |       |
| Year ended December 31, 2005                                                             |       | 108                                            |       | (6                                       | )          | (41                           | )          | 61                                       |       |
|                                                                                          |       |                                           |       |                                     |       |                          |       |                                     |       |
| Product warranty accrual                                                                      |       |                                           |       |                                     |       |                          |       |                                     |       |
| Year ended December 31, 2007                                                             |       | $                                              | 738        |                                     | $          | —                        |       | $                                        | (107       | ) | $ | 631 |   |
| Year ended December 31, 2006                                                             |       | 634                                            |       | 46                                       |       | 58                            |       | 738                                      |       |
| Year ended December 31, 2005                                                             |       | 519                                            |       | 101                                      |       | 14                            |       | 634                                      |       |
|                                                                                          |       |                                           |       |                                     |       |                          |       |                                     |       |
| Deferred tax asset valuation allowance *                                                      |       |                                           |       |                                     |       |                          |       |                                     |       |
| Year ended December 31, 2007                                                             |       | $                                              | 43,134     |                                     | $          | —                        |       | $                                        | (4,330     | ) | $ | 38,804 |   |
| Year ended December 31, 2006                                                             |       | 32,771                                         |       | 10,363                                   |       | —                        |       | 43,134                                   |       |
| Year ended December 31, 2005                                                             |       | 33,477                                         |       | —                                   |       | (706                          | )          | 32,771                                   |       |

 

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*    Thedeferred tax asset valuation allowance represents a 100% reserve against thedeferred tax asset accounts at December 31, 2007, 2006, and 2005,respectively.

 

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