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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 
| **x**                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT  OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                     |
| **For the  fiscal year ended December 31, 2008** |
|                                                  |                                                                                                     |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from             to            **

 

**CommissionFile No. 000-31332**

 

**LIQUIDMETAL TECHNOLOGIES, INC.**

(Exact name of Registrant as specified inits charter)

 

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

 

**30452Esperanza**

**RanchoSanta Margarita, CA 92688**

(address ofprincipal executive office, zip code)

 

Registrant’s telephone number, includingarea code: **(949) 635-2100**

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

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

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor at least the past 90 days.   Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Act).  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated  filer o | Accelerated filer o | Non-accelerated  filer o | Smaller reporting  company x |
|---------------------------------|--------------------------|-------------------------------|-----------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   Yes o  No x

 

The aggregate marketvalue of the registrant’s Common Stock held by non-affiliates of the registrantas of June 30, 2008 was approximately $20,105,556. For purposes of thiscalculation only, (i) shares of Common Stock are deemed to have a marketvalue of $0.55 per share, the closing price of the Common Stock as reported onthe OTC Bulletin Board on June 30, 2008, and (ii) each of theexecutive officers, directors and persons holding more than 10% of theoutstanding Common Stock as of June 30, 2008 is deemed to be an affiliate.

 

 

 

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**TABLEOF CONTENTS**

 
| ** **    | ** **    | **Page**                                                                                         |
|---------------|---------------|--------------------------------------------------------------------------------------------------|
| PART I   |          |                                                                                             |
|          | Item 1.  | Business                                                                                         |   | 3 |
|          | Item 1A.      | Risk Factors                                                                                     |   | 13 |
|          | Item 1B.      | Unresolved  Staff Comments                                                                       |   | 24 |
|          | Item 2.  | Properties                                                                                       |   | 24 |
|          | Item 3.  | Legal  Proceedings                                                                               |   | 25 |
|          | 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                                                                                |   | 42 |
| PART III |          |                                                                                             |
|          | Item 10. | Directors  and Executive Officers of the Registrant                                              |   | 43 |
|          | Item 11. | Executive  Compensation                                                                          |   | 46 |
|          | Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   | 54 |
|          | Item 13. | Certain  Relationships and Related Transactions                                                  |   | 59 |
|          | Item 14.      | Principal  Accounting Fees and Services                                                          |   | 61 |
| PART IV  |          | 61                                                                                               |
|          | Item 15. | Exhibits and  Financial Statement Schedules                                                      |   |   |

 

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**PART I**

 

**Forward-Looking Statements**

 

Thisannual report on Form 10-K of Liquidmetal Technologies, Inc. contains“forward-looking statements” that may state our management’s currentexpectations, estimates, forecasts, and projections about the company and itsbusiness. Any statement in this report that is not a statement of historicalfact is a forward-looking statement, and in some cases, words such as “believe,”“estimate,” “project,” “expect,” “intend,” “may,” “anticipate,” “plans,” “seeks,”and similar 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.  It isimportant 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:

 

·                 Ourhistory of operating losses and uncertainty surrounding our ability to achieveor sustain profitability;

·                 Ourlimited history of developing, manufacturing, and selling products made fromour bulk amorphous alloys;

·                 Lengthycustomer adoption cycles and unpredictable customer adoption practices;

·                 Ourability to identify, develop, and commercialize new product applications forour technology;

·                 Competitionfrom current suppliers of incumbent materials or producers of competingproducts;

·                 Ourability to identify, consummate, and/or integrate strategic partnerships;

·                 Thepotential for manufacturing problems or delays; and

·                 Potentialdifficulties associated with protecting or expanding our intellectual propertyposition.

 

LiquidmetalTechnologies, Inc. undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**Item 1. Business**

 

Inthis annual report on Form 10-K, unless the context indicates otherwise,references to “the Company”, “Liquidmetal Technologies”, “our Company”, “we”, “us”,and similar references refer to Liquidmetal Technologies, Inc. and itssubsidiaries.

 

**Overview**

 

We are a materials technology company thatdevelops and commercializes products made from amorphous alloys.  OurLiquidmetal® family of alloys consists of a variety of proprietary coatings,powders, bulk alloys, and composites that utilize the advantages offered byamorphous alloy technology. We develop, manufacture, and sell products and componentsfrom bulk amorphous alloys to customers in various industries, and we alsopartner with third-party licensees and distributors 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 marketand sell a line of proprietary amorphous alloy-based industrial coatings underthe Liquidmetal ArmacorTM Coatings brand.

 

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms in othermetals and alloys when they solidify. Liquidmetal alloys possess a combinationof performance, processing, and potential cost advantages that we believe willmake them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys such as Ti-6Al-4V, but they also have some of thebeneficial processing characteristics more commonly associated with plastics.We believe these advantages could result in Liquidmetal alloys supplantinghigh-performance alloys, such as titanium and stainless steel, and otherincumbent materials in a wide variety of applications. Moreover, we believethese advantages could enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

 

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**General Corporate Information**

** **

**We were originally incorporatedin California in 1987, and we reincorporated in Delaware in May 2003. Our principal executive offices are located at 30452 Esperanza, Rancho SantaMargarita, California 92688. Our telephone number at that address is (949)635-2100. Our Internet website address is www.liquidmetal.com and all of ourfilings with the Securities and Exchange Commission are available free ofcharge on our website.**

 

**Subsidiaries and Other Locations**

 

Wecurrently own and operate a manufacturing facility in Pyongtaek, South Korea,which became operational in the third quarter of 2002.  This Koreansubsidiary handles our Bulk Liquidmetal alloy business which includes marketopportunities to manufacture and sell components made out our bulkalloys.  We operate a distribution warehouse division in Huntsville, Texasto handle our Liquidmetal alloy industrial coatings which are used primarily asprotective coatings for industrial machinery and equipment, such as drill pipeused by the oil drilling industry and boiler tubes used by coal burning powerplants.  Lastly, we operate a coatings application business based inDothan, Alabama used to support our industrial coatings business.

 

**Segments**

 

In April 2002, we began classifying operations intotwo reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys.  The Liquidmetalalloy industrial coatings are used primarily as a protective coating forindustrial machinery and equipment, such as drill pipe used by the oil drillingindustry and boiler tubes used by coal burning power plants.  Bulk Liquidmetal alloys include marketopportunities to manufacture and sell components made out of our bulkalloys.  The expenses incurred by thebulk Liquidmetal alloy segment are manufacturing, research and development costs,and selling expenses associated with identifying and developing marketopportunities.  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 expenses associated with researchand development services are included in the bulk Liquidmetal alloy segment.

 

Results of segment operations and assets are included inNote 17 to the Consolidated Financial Statements contained in this Form 10-K.

 

**Our Technology**

 

Theperformance, processing, and potential cost advantages of Liquidmetal alloys area function of their unique atomic structure and their proprietary materialcomposition.

 

***Unique Atomic Structure***

 

The atomic structure of Liquidmetal alloys isthe fundamental feature that differentiates them from other alloys and metals.In the molten state, the atomic particles of all alloys and metals have anamorphous atomic structure, which means that the atomic particles appear in a completely randomstructure with no discernible patterns. However, when non-amorphous alloys andmetals are cooled to a solid state, their atoms bond together in a repeatingpattern of regular and predictable shapes, or crystalline grains. This processis analogous to the way ice forms when water freezes and crystallizes. Innon-amorphous metals and alloys, the individual crystalline grains containnaturally occurring structural defects that limit the potential strength andperformance characteristics of the material. These defects, known asdislocations, consist of discontinuities or inconsistencies in the patterned atomicstructure of each grain. Unlike other alloys and metals, bulk Liquidmetalalloys 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.

 

Prior to 1993, commercially viableamorphous alloys could be created only in thin forms, such as coatings, films,or ribbons. However, in 1993, researchers at the California Institute ofTechnology (Caltech) developed the first commercially viable amorphous alloy ina bulk form. Today, bulk Liquidmetal alloys can be formed into objects that

 

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are up to one inch thick, and we arenot aware 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.

 

***Proprietary Material Composition***

 

The constituent elements andpercentage composition of Liquidmetal alloys are critical to their ability tosolidify into an amorphous atomic structure. We have several different alloycompositions that have different constituent elements in varying percentages.These compositions are protected by various patents that we own or exclusivelylicense from third parties, including Caltech. The raw materials that we use inLiquidmetal alloys are readily available and can be purchased from multiplesuppliers.

 

**Advantages of Liquidmetal Alloys**

 

Liquidmetalalloys possess a unique combination of performance, processing and costadvantages that we believe makes them superior in many ways to othercommercially available materials for a variety of existing and potential futureproduct applications.

 

***Performance Advantages***

 

Our bulk Liquidmetalalloys provide several distinct performance advantages over other materials,and we believe that these advantages make the alloys desirable in applicationsthat require high yield strength, strength-to-weight ratio, elasticity andhardness.

The high yield strengthof bulk Liquidmetal alloys means that a high amount of stress must be exertedto create permanent deformation. However, because the yield strength is sohigh, the yield strength of many of our bulk Liquidmetal alloy compositions isvery near their ultimate strength, which is the measure of stress at whichtotal breakage occurs. Therefore, very little additional stress may be requiredto break an object made of bulk Liquidmetal alloys once the yield strength isexceeded. Although we believe that the yield strength of many of our bulkalloys exceeds the ultimate strength of most other commonly used alloys andmetals, our bulk alloys may not be suitable for certain applications, such aspressurized tanks, in which the ability of the material to yield significantlybefore it breaks is more important than its strength advantage. Additionally,although our bulk alloys show a high resistance to crack initiation because oftheir very high strength and hardness, certain of our bulk alloys are sensitiveto crack propagation under certain long-term, cyclical loading conditions.Crack propagation is the tendency of a crack to grow after it forms. We arecurrently developing new alloy compositions that have improved materialproperties to overcome these limitations.

 

***Processing Advantages***

 

The processing of amaterial generally refers to how a material is shaped, formed, or combined withother materials to create a finished product. Bulk Liquidmetal alloys possessprocessing characteristics that we believe make them preferable to othermaterials in a wide variety of applications. In particular, our alloys areamenable 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.

 

Bulk Liquidmetal alloysalso permit the creation of composite materials that cannot be created withmost non-amorphous metals and alloys. A composite is a material that is madefrom two or more different types of materials. In general, the ability to createcomposites is beneficial because constituent materials can be combined with oneanother to optimize the composite’s performance characteristics for differentapplications. In other metals and alloys, the high temperatures required forprocessing could damage some of the composite’s constituent materials andtherefore limit their utility. However, the relatively low melting temperaturesof bulk Liquidmetal alloys allow mild processing conditions that eliminate orlimit damage to the constituent materials when creating composites. In additionto composites, we believe that the processing advantages of Liquidmetal alloyswill ultimately allow for a variety of other finished forms, including sheetsand extrusions.

 

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Notwithstanding theforegoing advantages, our bulk Liquidmetal alloys possess certain limitationsrelative to processing. The beneficial processing features of our bulk alloysare made possible in part by the alloys’ relatively low melting temperatures.Although a lower melting temperature is a beneficial characteristic forprocessing purposes, it renders certain bulk alloy compositions unsuitable forcertain high-temperature applications, such as jet engine exhaust components.Additionally, the current one-inch thickness limitation of ourzirconium-titanium bulk alloy renders our alloys currently unsuitable for useas structural materials in large-scale applications, such as load-bearing beamsin building construction. We are currently engaged in research and developmentwith the goal of developing processing technology and new alloy compositionsthat will enable our bulk alloys to be formed into thicker objects.

 

***Cost Advantages***

 

Liquidmetal alloys havethe potential to provide cost advantages over other high-strength metals andalloys in certain applications. Because bulk Liquidmetal alloy has processingcharacteristics similar in some respects to plastics, which lends itself tonear-to-net shape casting and molding, Liquidmetal alloys can in many cases beshaped efficiently into intricate, engineered products. This capability caneliminate or reduce certain post-casting steps, such as machining and re-forming,and therefore has the potential to significantly reduce processing costsassociated with making parts in high volume.

 

Additionally, because thenear-to-net shape processing of Liquidmetal alloys reduces the need forcapital-intensive heavy industrial equipment such as that found in foundry andforging 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 advantagesmay allow our customers an opportunity to maintain or improve the performanceof their products without a commensurate increase in cost.

 

**Our Strategy**

 

Asa result of the experience and knowledge that we have gained through ouractivities to date, and recognizing that developing and commercializing arevolutionary new technology is an evolutionary process, we are continuallymodifying our business strategy to enable us to better capitalize on ourevolving core strengths and more effectively pursue revenue growth andprofitability.  The key elements of ourstrategy include:

 
| · | *Identifying  and Developing New Applications for Our Liquidmetal Alloy Technology.* We intend to continue to identify and  develop new applications that will benefit from the performance, processing,  and cost advantages of Liquidmetal alloys.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | *Focusing  Our Marketing and Internal Manufacturing Activities on Select Products with  Expected Higher Gross-Margins. *We intend to focus our marketing and  internal manufacturing activities on select products with anticipated higher  gross margins.  This strategy is designed to align our product  development initiatives with our manufacturing processes and manufacturing  cost structure, and to reduce our exposure to more commodity-type product  applications that are prone to unpredictable demand and fluctuating  pricing.  Our focus is primarily on higher-margin products that possess  design features that take optimal advantage of our existing and developing  manufacturing technology and that command a price commensurate with the  performance advantages of our alloys.  In addition to our focus on  products with higher gross margins, we will continue to engage in prototype  manufacturing, both for internally manufactured products and for products  that will ultimately be licensed to or manufactured by third parties. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | *Further  Developing Our Manufacturing Processes, Capabilities, and Efficiencies for  Bulk Liquidmetal Alloys.* We intend to improve and enhance our internal  manufacturing processes, capabilities, and efficiencies in order to maintain  quality control over products made from bulk Liquidmetal 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 would involve the licensing of  Liquidmetal technology to third parties for certain market segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | *Pursuing  Strategic Partnerships In Order to More Rapidly Develop and Commercialize  Products*.  We intend to actively pursue and support  strategic partnerships that will enable us to leverage the resources,  strength, and technologies of other companies in order to more rapidly  develop and commercialize products.  These partnerships may include  licensing transactions in which we license full commercial rights to our  technology in a specific application area, or they may include transactions  of a more limited scope in which, for example, we outsource manufacturing  activities or grant distribution rights.  We believe that utilizing such  a partnering strategy will enable us to reduce our working capital burden,  better fund product development efforts, better understand customer adoption  practices, leverage the technical and financial resources of our partners,  and more                                                                                                                                                   |

 

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|   | effectively handle  product design and process challenges.  As this partnering strategy  evolves, a growing portion of our revenue mix may be comprised of revenue  from the provision of product development services, technical support, and  engineering services, as well as revenues from royalties on the sale of  Liquidmetal alloy products by our partners.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | *Advancing  the Liquidmetal® Brand*. We believe that building our corporate brand will foster continued  adoption of our technology. Our goal is to position Liquidmetal alloys as a  superior substitute for materials currently used in a variety of products  across a range of industries. Furthermore, we seek to establish Liquidmetal  alloys as an enabling technology that will facilitate the creation of a broad  range of commercially viable new products. To enhance industry awareness of  our company and increase demand for Liquidmetal alloys, we are reviewing  various brand development strategies that could include collaborative  advertising and promotional campaigns with select customers, industry  conference and trade show appearances, public relations, and other means. |

 

**Applications for Liquidmetal Alloys**

 

We have focused our commercializationefforts for Liquidmetal alloys on five identified product areas.  Webelieve that these areas are consistent with our strategy in terms of marketsize, building brand recognition, and providing an opportunity to develop andrefine our processing capabilities. Although we believe that strategicpartnering transactions could create valuable opportunities beyond theparameters of these target markets, we anticipate continuing to pursue thesemarkets both internally and in conjunction with partners.

 

***Componentsfor Electronic Products***

 

We produce components for electronicdevices using our bulk Liquidmetal alloys and believe that our alloys offerenhanced performance and design benefits for these components in certainapplications.  Bulk Liquidmetal alloys can be used for various structuralcomponents of a cellular phone, including the shield, faceplate, hinge, hingehousings, back plate, side plates, brackets, and the cover on the phones. Weinitially targeted the electronic casings market because of its potential forhigh product volumes and branding opportunities; however, unpredictablecustomer adoption practices, short product model lives, processing limitations,and intense pricing pressures make it very challenging to compete in thishigh-volume market.  Accordingly, we are currently limiting our focus inthis market to higher-margin applications that have the potential to benefitfrom the unique performance characteristics of bulk Liquidmetal alloys. We continue to believe that the high strength-to-weight ratio and elastic limitof bulk Liquidmetal alloys enable the production of stronger and thinnerelectronic devices as compared to plastic, zinc, and magnesium, and we intendto focus on products that require these design and performance benefits.

 

***Sporting Goods andLeisure Products***

 

We are developing avariety of applications for Liquidmetal alloys in the sporting goods andleisure products area.

 

In the sporting goods industry, we believe thatthe high strength, hardness, and elasticity of our bulk alloys have thepotential to enhance performance in a variety of products, and we furtherbelieve that many sporting goods products are conducive to our internalmanufacturing strategy of focusing on high-margin products that meet our designcriteria.  Substantial opportunities also exist for our amorphous alloycoatings, powders and composites. In 2003, Rawlings Sporting Goods Companylaunched a new line of baseball and softball bats that utilize a Liquidmetalalloy coating, and HEAD NV Sport launched a new line of HEAD® Liquidmetal®tennis racquets that incorporates Liquidmetal alloy in composite form in theirracquet design. In 2005, we have also launched goods that utilize Liquidmetalalloy including skis.  Other potential applications for our alloys in thisindustry include golf clubs, eyewear, fishing, hunting, and other sport products.

 

In the leisure products category, we believethat bulk Liquidmetal alloys can be used to efficiently produce intricatelyengineered designs with high-quality finishes, such as premium watchcases, andwe further believe that Liquidmetal alloy technology can be used to makehigh-quality, high-strength jewelry from precious metals.  We havesuccessfully produced prototype rings made from an amorphous Liquidmetalplatinum alloy that is harder (and hence more scratch resistant) thanconventional platinum jewelry.

 

In order to accelerate the commercialization ofLiquidmetal alloys in the jewelry and high-end luxury products market, in June 2003,we entered into an exclusive, ten-year license agreement with LLPG, Inc. (“LLPG”). 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.

 

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***MedicalDevices***

 

We are engaged in product development effortsrelating to various medical devices that could be made from Liquidmetal alloys.We believe that the unique properties of bulk Liquidmetal alloys provide acombination of performance and cost benefits that could make them a desirablereplacement to incumbent materials, such as stainless steel and titanium,currently used in various medical device applications.  Our ongoingemphasis in 2006 and 2007 has been on surgical instrument applications forLiquidmetal alloys. These include, but are not limited to, specialized blades,orthopedic instruments utilized for implant surgery procedures, dental devices,and general surgery devices. The potential value offered by our alloys is highperformance in some cases and cost reduction in others, the latter stemmingfrom the ability of Liquidmetal alloys to be net shape cast into components,thus reducing costs of secondary processing. The status of most components inthe prototyping phase is subject to non-disclosure agreements with ourcustomers.

 

We believe that our future success in themedical device market will be driven largely by strategically aligningourselves with well-established companies that are uniquely positioned tofacilitate the introduction of Liquidmetal alloys into this market, especiallyas it relates to the unique processing challenges and stringent materialqualification requirements that are prevalent in this industry.  We alsobelieve that our prospects for success in this market will be enhanced throughour focus on optimizing existing alloy compositions and developing new alloycompositions to satisfy the industry’s rigorous material qualificationstandards.

 

***IndustrialCoatings and Powders***

 

We continue to market and sell amorphous alloyindustrial coatings and powders under the Liquidmetal ArmacorTM Coatingsbrand name. Liquidmetal alloy coatings are used primarily as a protectivecoating for industrial machinery and equipment. Since the inception of thisbusiness in the late 1980s, our proprietary coatings have demonstrated a highdegree of hardness and low coefficient of friction which, when combined withtheir strong adhesion properties, reduce the wear and consequent failure of themachinery and equipment on which they are used. In contrast to our bulk alloys,we sell Liquidmetal coatings primarily in the form of a wire or powderfeedstock that is melted and applied to machinery or equipment through weldingor thermal spray processes.

 

Our Liquidmetal coatings are widely used in theoil drilling industry as a protective coating on drill pipe and casings, and weestimate that our coatings represent a dominant share of annual worldwide salesof hard band coatings for new oil drill pipe. Drilling often places tremendousstress on pipes and casings, especially whenever the drill changes direction.Both the drill pipe and casing experience excessive wear, which leads to higherreplacement costs and greater failure rates. Liquidmetal coatings are used toprovide a protective coating, or hard band, around the outside of the drillpipe and the inside of casings to reduce wear and failure rates and accordinglyreduce operating costs.

 

Liquidmetal coatings have also been sold intothe power generation industry specifically for the purpose of coating boilertubes in coal-burning power plants in order to extend the lives of theseboilers. Boiler tubes are subject to high heat, erosion, and corrosion andoften require costly replacement, both in terms of replacement parts and lengthof downtime for installation. Additionally, residue build-up in boiler tubes ofcoal burning power plants creates operating inefficiencies. Historicperformance and testing of Liquidmetal coatings have demonstrated that our coatingsextend the life of these boiler tubes meaningfully beyond their current averagelife depending on the specific environment. In addition, our coatings havedemonstrated the ability to reduce build-up of residue on boiler tubes, helpingto improve the efficiencies of the boilers. Historically, we have notconcentrated 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 havesuccessfully developed 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 depleted uranium(DU) or tungsten heavy alloys (WHA). From inception of our KEP research programin 2002 through 2008, the KEP program has expended approximately $14 million toreplicate the terminal ballistic performance on depleted uranium in mediumcaliber ammunition.

 

We have also receivedOffice of Naval Research (ONR) funding totaling approximately $2 million forthe development of ductile dendritic composite material as a replacement of Tior Ti-6A-4V material in marine fasteners. In collaboration with the CaliforniaInstitute of Technology, new series of ductile amorphous alloys were designedand successfully produced by a novel semi-solid forging process. Currently, weare manufacturing samples for the

 

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mechanical propertiestesting and are developing material database for the application of thiscomposite material in the military and commercial sectors.

 

In another application ofLiquidmetal amorphous alloys and composites, we are currently working under theSBIR II contract with the Naval Surface Warfare Center, Dahlgren Division onthe development of reactive material for the inert warheads.  In thisapplication, the goal is to replace various warheads inert steel casing withthe Liquidmetal’s reactive material which, while inert during handling,transportation and storage, releases additional energy upon impact on thetarget.   This would allow a munitions designer to either scale-downthe size of a warhead for the same amount of destructive force, or increase thedestructive force while maintaining the original warhead size.

 

We also continue to work with a number of defense-relatedresearch and development agencies and large defense companies to identifyadditional 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 LockheedMartin Missiles and Fire Control.

 

**Going Concern /Liquidity**

 

We have experienced significant operatinglosses since our inception. Our net loss for the fiscal years ended December 31,2008, 2007 and 2006 was $6.6 million, $5.6 million, and $14.5 million,respectively.  In the audit report on our financial statements for ourfiscal years ended December 31, 2008 and 2007, our auditors included agoing-concern qualification indicating that our significant operating lossesand 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.

 

We anticipate that wewill not have sufficient funds to pursue our current operating plan beyond thefirst quarter of 2009 and we will therefore require additional funding. We are actively seeking additional sources of capital and seeking torestructure and/or modify existing indebtedness.  The amount of fundingthat we seek and the timing of such fundraising efforts will depend on the extentto which we are able to increase revenues through obtaining additional purchaseorders for our products and/or the extent to which we can restructure or modifyour debt.  Because we cannot be certain that we will be able to obtainadequate funding from debt, equity, or other traditional financing sources, weare also actively exploring several strategic financing options, including thepossible sale of our manufacturing plant in South Korea (which would then bereplaced with a smaller facility) and additional licensing and outsourcing ofour manufacturing operations.

 

We cannot guarantee that adequate funds will be availablewhen needed, and if we do not receive sufficient capital, we may be required toalter or reduce the scope of our operations.

 

Additionally, we haveapproximately $1.2 million of principal and accrued interest outstanding as of December 31,2008, under the 8% unsecured subordinated notes (the “Bridge Notes”), whichwere due August 17, 2007.  We intend to fully repay the amounts dueunder the Bridge Notes.  However, as of the filing of this report we donot have sufficient funds to repay the Bridge Notes.  As a result,we are currently in default under the Bridge Notes.   Such adefault 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 amended SecurityPurchase Agreement, dated April 23, 2007, between our company and holdersof 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 in defaultunder the January 2010 Notes under the Debt Satisfaction Covenant. Further, we were required, beginning September 30, 2008 and at the end ofeach month thereafter, to redeem 1/32nd of the principal amount of the January 2010Notes.  An aggregate payment equal to $0.6 million was due September 30,2008. However, we did not have sufficient funds to make this payment, and,accordingly, we are in default under the January 2010 Notes.

 

The holders of theJanuary 2010 Notes are entitled to accelerate all principal and interestunder the January 2010 Notes.  As of the filing of this report, we have received a formal notice of default and we are currently working toresolve this matter.  As a result, theoutstanding principal due under the January 2010 Notes of $19.1 million isincluded in current portion of long-term debt and accrued interest and fees of$1.0 million is included in accounts payable and accrued expenses as of December 31,2008.  Such defaults may have material adverse effect on ouroperations, financial 

 

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condition, and resultsof operations.  We are currently workingto resolve this matter with investors holding our January 2010 Notes.

 

Approximately $0.2million of principal and accrued interest became due from our Korean subsidiaryunder a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did not have sufficient fundsto repay the loan and wehave received a formal notice of default. Kookmin Bank has initiated foreclosure proceedings on the loancollateral, which consists of our manufacturing plant facility and certainequipment in South Korea.  Theforeclosure of our manufacturing plant facility and equipment in South Koreawould have material adverse effect on our operations, financial condition, andresults of operations.  We are currently working to resolve this matterwith Kookmin Bank by seeking a forbearance until we are able to obtain fundingto repay this loan, although there is no assurance that we will be able toobtain any such funding.

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $1.4 million, of which $1.2 million is held bycreditors in South Korea, as of December 31, 2008.  We are currently working to resolve thematter with each creditor****by seeking a forbearance until we areable to obtain funding to repay the amounts due, although there is no assurancethat we will be able to obtain any such funding.   If we cannot repay the amounts due or obtainforbearance, the creditors may seek to foreclose on the Company’s assets.  Such a foreclosure would have materialadverse effect on our operations, financial condition, and results ofoperations.

 

**Liquidmetal Golf**

 

From 1997 until September 2001, we wereengaged in the retail marketing and sale of golf clubs through a majority ownedsubsidiary, Liquidmetal Golf. The retail business of Liquidmetal Golf wasdiscontinued in September 2001. Although the retail golf club business hasbeen discontinued, Liquidmetal Golf is engaged in the development of golf clubcomponents for golf original equipment manufacturers that will integrate thesecomponents into their own clubs and then sell them under their respective brandnames. Liquidmetal Technologies owns 79% of the outstanding common stock inLiquidmetal Golf.

 

Our Liquidmetal Golf subsidiary has theexclusive right and license to utilize our Liquidmetal alloy technology forpurposes of golf equipment applications. This right and license is set forth inan intercompany license agreement between Liquidmetal Technologies andLiquidmetal Golf. This license agreement provides that Liquidmetal Golf has aperpetual and exclusive license to use Liquidmetal alloy technology for thepurpose of manufacturing, marketing, and selling golf club components and otherproducts used in the sport of golf. In consideration of this license,Liquidmetal Golf has issued 4,500,000 shares of Liquidmetal Golf common stockto Liquidmetal Technologies.

 

**Our Intellectual Property**

 

Our intellectual property consists of patents,trade secrets, know-how, and trademarks. Protection of our intellectualproperty is a strategic priority for our business, and we intend to vigorouslyprotect our patents and other intellectual property. Our intellectual propertyportfolio includes 40 owned or licensed U.S. patents and numerous patentapplications relating to the composition, processing, and application of ouralloys, as well as various foreign counterpart patents and patent applications.

 

Our initial bulk amorphous alloy technology wasdeveloped by researchers at the California Institute of Technology (“Caltech”).We have purchased patent rights that provide us with the exclusive right tocommercialize the amorphous alloy and other amorphous alloy technology acquiredfrom Caltech through a license agreement (“Caltech License Agreement”) withCaltech.  In addition to the patents andpatent applications that we license from Caltech, we are building a portfolioof our own patents to expand and enhance our technology position. These patentsand patent applications primarily relate to various applications of our bulkamorphous alloys, the composition of our coatings and powders, and theprocessing of our alloys. The patents relating to our coatings expire onvarious dates until 2022 and the patents relating to our bulk amorphous alloysexpire on various dates between 2013 and 2025. Our policy is to seek patentprotection for all technology, inventions, and improvements that are ofcommercial importance to the development of our business, except to the extent thatwe believe it is advisable to maintain such technology or invention as a tradesecret.

 

In order to protect the confidentiality of ourtechnology, including trade secrets, know-how, and other proprietary technicaland business information, we require that all of our employees, consultants,advisors and collaborators enter into confidentiality agreements that prohibitthe use or disclosure of information that is deemed confidential. Theagreements also obligate our employees, consultants, advisors and collaboratorsto assign to us developments, discoveries and inventions made by such personsin connection with their work with us.

 

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**Research and Development**

 

We are engaged in ongoing research and development programs that aredriven by the following key objectives:

 
| · | *Enhance Material Processing and  Manufacturing Efficiencies.* We plan to continue research and development of  processes and compositions that will decrease our cost of making products  from Liquidmetal alloys.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | *Optimize Existing Alloys and  Develop New Compositions.*We believe that the primary technology driver of our  business will continue to be our proprietary alloy compositions. We plan to  continue research and development on new alloy compositions to generate a  broader class of amorphous alloys with a wider range of specialized  performance characteristics. Since 2003, we have successfully expanded our  portfolio of bulk amorphous alloys to include additional zirconium-titanium  alloys, as well as alloys based on other metals, such as gold and  platinum.  Although these various compositions are at different stages  of development and only a few are currently suitable for commercial use, we  believe that a larger alloy portfolio will enable us to increase the  attractiveness of our alloys as an alternative to incumbent materials and, in  certain cases, drive down product costs.  We also believe that our  ability to optimize our existing alloy compositions will enable us to better  tailor our alloys to our customers’ specific application requirements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | *Develop New Applications.*We will continue the  research and development of new applications for Liquidmetal alloys. We  believe the range of potential applications will broaden by expanding 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 11 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 from October 2001through December 2003 and then became a consultant to our company.

 

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 31,2008, 2007 and 2006, were $1.0 million, $1.1 million, and $1.0 million,respectively.

 

**Manufacturing**

 

We currently own and operate a 166,000 square footmanufacturing facility in Pyongtaek, South Korea, which became operational inthe third quarter of 2002.  We believe that the facility will meet ouranticipated manufacturing needs for the foreseeable future, although theseneeds may change depending upon the actual and forecasted orders we receive forour products. We currently intend to develop supplemental research anddevelopment, prototyping and manufacturing capabilities elsewhere, includingthe United States, for purposes of meeting our long-term manufacturing needsand our customers’ requirements.

 

In June 2006, we entered into a joint ventureagreement with SAGA, SpA in Padova, Italy, (‘SAGA”) a specialist precisionparts manufacturer. The joint venture is named Liquidmetal SAGA Italy, Srl(“LSI”), under which LSI is currently acting as a contract manufacturer to ourcompany for the purpose of producing prototypes and certain products inEurope.  In June 2007, we entered into a licensing agreement withLiquidmetal Korea Co. Ltd, a South Korean company,  a 10-year exclusive license to manufactureLiquidmetal alloys for customers whose principal headquarters or majoroperations are based in South Korea.

 

**Raw Materials**

 

Liquidmetal alloy compositions are comprised of manyelements, all of which are available commodity products. We believe that eachof these raw materials is readily available in sufficient quantities frommultiple sources on commercially acceptable terms. However, any substantialincrease in the price or interruption in the supply of these materials couldhave an adverse effect on our profitability.

 

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**Customers**

 

During 2008, two customers, Grant Prideco andLiquidmetal Korea, accounted for 10% or more of our revenues from continuingoperations. During 2007, two customers, Grant Prideco and Liquidmetal Korea,accounted for 10% or more of our revenue from continuing operations. During 2006, one customer, Flextronics Manufacturing LTD, who is a directsupplier to SanDisk, 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.

 

Our Liquidmetal alloycoatings face competition from industrial coatings currently manufactured orsold by other companies. At present, the primary competitors of our coatingsbusiness are Varco International, Inc. and Arnco Technology Trust,Limited. Although we believe, based on market data gathered by us, that ourcoatings compete favorably with these companies’ products and that we continueto maintain the dominant market share with respect to protective coatings foroil drill pipe and casings, these competitors are larger well-establishedbusinesses that have substantially greater financial, marketing, and otherresources than we do.

 

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

 

**Backlog**

 

In our bulk alloy segment, because of the minimallead-time associated with orders of bulk alloy parts, we generally do not carrya significant backlog. In our coatings segment, we typically ship our coatingproducts shortly after receipt of an order, and our coatings backlog istherefore also insignificant. In both our bulk alloy segment and coatingssegment, the backlog as of any particular date gives no indication of actualsales for any succeeding period.

 

**Sales and Marketing**

 

We direct our marketing efforts towards customers thatwill incorporate our components and products into their finished goods. To thatend, we will continue to hire business development personnel who, inconjunction with engineers and scientists, will actively identify potentialcustomers that may be able to benefit from the introduction of Liquidmetalalloys to their products. In some cases, we will develop applications inconjunction with existing or potential customers. By adopting this strategy, weintend to take advantage of the sales and marketing forces and distributionchannels of our customers to facilitate the commercialization of ouralloys.  We also direct business development efforts toward companies whowe believe could be viable candidates for potential partnering transactions,such as licensing relationships, distribution arrangements, joint ventures, andthe like.

 

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**Employees**

 

As of December 31, 2008, we had 52 full-time and21 part-time employees. As of that date, none of our employees were representedby a labor union.  We have not experienced any work stoppages and weconsider 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 mayneed to obtain FDA approval before marketing their medical devices thatincorporate our products. Medical device manufacturers may need to obtainsimilar approvals before marketing these medical device products in foreigncountries.

 

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, asa manufacturer 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.

 

The FDA may find that a510(k) is not appropriate for a medical device that incorporates ourproduct or that substantial equivalence has not been shown and as a result willrequire a PMA. A PMA application must be submitted if a proposed medical devicedoes 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 shorter thanthat required in the United States, and requirements for such approval maydiffer from FDA requirements.

 

**Environmental Law Compliance**

 

Our manufacturing operations are subject to national, state, and localenvironmental laws in each of South Korea and the United States. We believethat we are in material compliance with all applicable environmentalregulations. While we continue to incur costs to comply with environmentalregulations, we do not believe that such costs will have a material effect onour capital expenditures, earnings, or competitive position.

 

**Item 1A.Risk Factors**

 

This report contains forward-looking statements(within the meaning of the Private Securities Litigation Reform Act of 1995)that are based on management’s current expectations, estimates, forecasts, andprojections about the Company and its business. In addition, other written ororal statements which constitute forward-looking statements may be made fromtime to time by or on behalf of Liquidmetal Technologies, Inc. Anystatement 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,” and similar expressions identify forward-looking statements.Forward-looking statements involve risks and uncertainties that could causeactual outcomes and results to differ materially from the anticipated outcomesor result. These statements are not guarantees of future performance, and unduereliance should not 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.

 

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

 

**We haveincurred significant operating losses in the past and may not be able toachieve or sustain profitability in the future.**

 

We have experiencedsignificant operating losses since our inception.  Our net loss for the fiscal years ended December 31,2008, 2007 and 2006, was $6.6 million, $5.6 million, and $14.5 million,respectively.  We had an accumulateddeficit of approximately $162.3 million at December 31, 2008. Of thisaccumulated deficit, $44.5 million was attributable to losses generated by ourdiscontinued equipment manufacturing and retail golf operations.  We anticipate that we may continue to incuroperating losses for the foreseeable future. Consequently, it is possible that we may never achieve positive earningsand, if we do achieve positive earnings, we may not be able to achieve them on asustainable basis.

 

**We mayrequire additional 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, 2008 and2007, 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 anopinion stating that there is substantial doubt about our ability to continueas a going concern, our auditors have indicated that they are uncertain as towhether we have the capability to continue our operations without additionalfunding.

 

Weanticipate that we will not have sufficient funds to pursue our currentoperating plan beyond the first quarter of 2009 and we will therefore require additionalfunding.  We are actively seeking additional sources of capital andseeking to restructure and/or modify existing indebtedness.  The amount offunding that we seek and the timing of such fundraising efforts will depend onthe extent to which we are able to increase revenues through obtainingadditional purchase orders for our products and/or the extent to which we canrestructure or modify our debt.  Because we cannot be certain that we willbe able to obtain adequate funding from debt, equity, or other traditionalfinancing sources, we are also actively exploring several strategic financingoptions, including the possible sale of our manufacturing plant in South Korea(which would then be replaced with a smaller facility) and additional licensingand outsourcing of our manufacturing operations.  We cannot guarantee that adequate funds will beavailable when needed, and if we do not receive sufficient capital, we may berequired to alter or reduce the scope of our operations.  If we raiseadditional funds by issuing equity securities, existing stockholders may bediluted.  In addition, if shares of our common stock or securitiesconvertible 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.”

 

**We have a limited history ofdeveloping, manufacturing, and selling products made from our bulk amorphousalloys.**

 

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 ofproducing bulk amorphous alloy components and products on a mass-productionbasis.  Furthermore, our ability to produce our products in desiredquantities and at commercially reasonable prices is uncertain and is dependenton a variety of factors that are outside of our control, including the natureand design of the component, the customer’s specifications, and requireddelivery timelines.

 

**We rely on assumptions aboutthe markets for our products and components that, if incorrect, may adverselyaffect 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.

 

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**If we cannot establish andmaintain relationships with customers that incorporate our components andproducts into their finished goods, we will not be able to increase our revenueand 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 challenging tomaintain 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 to enterinto these relationships and the subsequent success of these relationships. Ifour products are selected for use in a customer’s products, we still may notrealize significant revenue from that customer if that customer’s products arenot commercially successful.

 

**It may take significant timeand cost for us to develop new customer relationships, which may delay ourability 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 thecustomer to Liquidmetal alloys;

 

·                 work with the customer to select and design theparts to be fabricated from Liquidmetal alloys;

 

·                 make the molds and tooling to be used toproduce the selected part;

 

·                 make prototypes and samples for customertesting;

 

·                 work with our customers to test and analyzeprototypes and samples; and

 

·                 with respect to some types of products, such asmedical devices, to obtain regulatory 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 foundthat customers often proceed very cautiously and slowly before incorporating afundamentally new and unique type of material into their products.

 

**After we develop a customerrelationship, it may take a significant amount of time for that customer todevelop, manufacture, and sell finished goods that incorporate our componentsand products.**

 

Our experience hasshown that our customers will perform numerous tests and extensively evaluateour components and products before incorporating them into their finishedproducts. The time required for testing, evaluating, and designing our componentsand products into a customer’s products, and in some cases, obtainingregulatory approval, can take a significant amount of time, with an additionalperiod of time before a customer commences volume production of productsincorporating our components and products, if ever. Moreover, because of thislengthy development cycle, we may experience a delay between the time we accrueexpenses for research and development and sales and marketing efforts and thetime when we generate revenue, if any. We may incur substantial costs in anattempt to transition a customer from initial testing to prototype and fromprototype to final product. If we are unable to minimize these transitioncosts, or to recover the costs of these transitions from our customers, our operatingresults will be adversely affected.

 

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**A limited number of ourcustomers 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 31,2008, revenues from two customers, Grant Prideco and Liquidmetal Korea,represented approximately 19% of total revenues from continuing operations, forthe year ended December 31, 2007, revenues from two customers, GrantPrideco and Liquidmetal Korea, represented approximately 22% of total revenuesfrom continuing operations, and for the year ended December 31, 2006,revenues from one customer, Flextronics Manufacturing LTD, representedapproximately 13% of total revenues from continuing operations.  Revenuesfrom direct suppliers to SanDisk were approximately 6% and 22% of totalrevenues for the years ended December 31, 2007 and 2006,respectively.  Revenues from direct suppliers to Samsung representedapproximately 0%, 12% and 15% of total revenues from continuing operations forthe years ended December 31, 2008, 2007 and 2006, 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 these customers,they will have the ability to reduce or discontinue their purchases of ourproducts on short notice.

 

**We expect to rely on ourcustomers to market and sell finished goods that incorporate our products andcomponents, a process over which we will have little control.**

 

Our future revenuegrowth and ultimate profitability will depend in part on the ability of ourcustomers to successfully market and sell their finished goods that incorporateour products. We will have little control over our customers’ marketing andsales efforts. These marketing and sales efforts may be unsuccessful forvarious reasons, any of which could hinder our ability to increase revenue orachieve profitability. For example, our customers may not have or devotesufficient resources to develop, market, and sell their finished goods thatincorporate our products. Because we typically will not have exclusive salesarrangements with our customers, they will not be precluded from exploring andadopting competing technologies. Also, products incorporating competingtechnologies may be more successful for reasons unrelated to the performance ofour customers’ products or the marketing efforts of our customers.

 

**Our growth depends on ourability to identify, develop, and commercialize new applications for ourtechnology.**

 

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 or generateadditional revenue. Successful development of new applications for our productsmay require additional investment, including costs associated with research anddevelopment and the identification of new customers. In addition, difficultiesin developing and achieving market acceptance of new products would harm ourbusiness.

 

**We may not be able toeffectively compete with current suppliers of incumbent materials or producersof competing products.**

 

The future growth andsuccess of our bulk amorphous alloy business will depend in part on our abilityto establish and retain a technological advantage over other materials for ourtargeted applications. For many of our targeted applications, we will competewith manufacturers of similar products that use different materials. Thesedifferent materials may include plastics, titanium alloys, or stainless steel,among others. For example, we have targeted the cellular phone component marketas an application for bulk Liquidmetal alloys. In this market, we believe wewill compete with other manufacturers of cellular phone components who useplastics or metal to construct their components. These other manufacturers maybe able to manufacture their cellular phone components, particularly those madefrom plastics, at significantly less cost than our alloys. In other markets, wewill compete directly with suppliers of the incumbent material. In addition, ineach of our targeted markets, our success will depend in part on the ability ofour customers to compete successfully in their respective markets. Thus, evenif we are successful in replacing an incumbent material in a finished product,we will remain subject to the risk that our customer will not competesuccessfully in its own market.

 

**Our bulk amorphous alloytechnology is still at an early stage of commercialization relative to manyother 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 anew materials technology has required the persistent improvement and refiningof the technology over a sometimes lengthy period of time.  Accordingly,we believe that our company’s future success will be dependent on our abilityto 

 

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continue expanding andimproving our technology platform by, among other things, constantly refiningand improving our manufacturing processes, optimizing our existing amorphousalloy compositions for various applications, and developing and improving newbulk amorphous alloy compositions.  Our failure to further expand ourtechnology base could limit our growth opportunities and hamper ourcommercialization efforts.

 

**Future advances in materialsscience 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 mayimpair our ability to compete effectively.

 

**Our growth depends upon ourability to retain and attract a sufficient number of qualified 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 key members ofour management and scientific staff, who are familiar with this technology andthe potential applications and markets for it. For example, as a result oftheir experience and knowledge of our alloy technology, we believe that ourfuture growth and success will depend in large part on the efforts of LarryBuffington, our President and Chief Executive Officer. We do not have “key man”or similar insurance on any of these individuals. If we lose their services orthe services of other key personnel, our financial results or businessprospects may be harmed. Additionally, our future growth and success willdepend in part on our ability to attract, train, and retain scientificengineering, manufacturing, sales, marketing, and management personnel. Wecannot be certain that we will be able to attract and retain the personnelnecessary to manage our operations effectively. Competition for experiencedexecutives and scientists from numerous companies and academic and otherresearch institutions may limit our ability to hire or retain personnel onacceptable terms. In addition, many of the companies with which we compete forexperienced personnel have greater financial and other resources than we do.Moreover, the employment of non-citizens may be restricted by applicable immigrationlaws.

 

**We may not be able tosuccessfully identify, consummate, or integrate strategic partnerships.**

 

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 maypursue transactions that will give us access to new technologies that areuseful in connection with the composition, processing, or application ofLiquidmetal alloys. 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 encounter manufacturingproblems or delays or may be unable to produce high-quality products atacceptable 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.

 

**We expect to derive asubstantial portion of our revenue from sales outside the United States, andproblems associated with international business operations could affect ourability 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 yearsended December 31, 2008, 2007 and 2006, approximately 5%, 27% and 12%, ofour revenues came from customers located in South Korea, respectively.  Asa result, our manufacturing operations and financial results are subject torisks of political instability, 

 

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including the risk ofconflict between North Korea and South Korea and tensions between the UnitedStates and North Korea. In addition, we anticipate that the trend of foreigncustomers accounting for a significant portion of our total revenues maycontinue. Specifically, we expect to continue to derive a significant amount ofrevenue from sales to customers located in Asia. A downturn in the economies ofAsian countries where our products will be sold, particularly South Korea’seconomy, could materially harm 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 the availability and costs of  air and other transportation between our South Korean facility and the United  States;                                                                            |
|   |                                                                                                                                                                                                                                                                 |
| · | political and  economic instability, including instability involving China and North Korea  that may disrupt our operations in South Korea;                                                                                                                          |
|   |                                                                                                                                                                                                                                                                 |
| · | potentially adverse  tax consequences, which may reduce the profitability of products manufactured  overseas or sold to overseas customers;                                                                                                                          |
|   |                                                                                                                                                                                                                                                                 |
| · | burden of complying  with complex foreign laws and treaties, which could limit our ability to  conduct our business as contemplated in South Korea; and                                                                                                              |
|   |                                                                                                                                                                                                                                                                 |
| · | trade protection  laws, policies, and measures and other regulatory requirements affecting  trade and investment that could adversely affect the profitability of our  South Korean Operations, including loss or modification of exemptions for  taxes and tariffs. |

 

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

 

**A substantial increase in theprice or interruption in the supply of raw materials for our alloys could havean 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.

 

**We rely on our suppliersfor mold making and manufacture of our bulk amorphous alloy parts.**

 

We have outsourced muchof our mold making and manufacturing of our bulk amorphous alloy parts.Therefore, our revenue growth is dependent on our ability to obtain sufficientmanufacturing capacity.  Our suppliers may allocate their limited capacityto fulfill the production requirements of other customers.  In the eventof a disruption of the operations of our suppliers, we may not have a secondarymanufacturing source immediately available. Such an event could causesignificant delays in shipments and may adversely affect our cost of goods soldand our results of operations.

 

**Our business is subject to thepotential adverse consequences of exchange rate fluctuations.**

 

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 have amaterial 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 

 

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and could result inexchange losses. The average foreign exchange rates for the years ended December 31,2008, 2007 and 2006 were 1,103, 935 and 967 South Korean Won to the U.S.dollar, respectively. The fluctuations in the exchange rates resulted inforeign currency translation (loss) gains of ($1.8) million, $0.2 million and$0.3 million for the years ended December 31, 2008, 2007 and 2006,respectively.

 

**Our inability to protect our licenses,patents, and proprietary rights in the United States and foreign countriescould harm our business because third parties may take advantage of ourresearch 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 right protectionfor our technologies and products in the United States and other countries. Ifwe are unable to obtain or maintain these protections, we may not be able toprevent third parties from using our proprietary rights. Specifically, we must:

 
| · | protect and enforce  our owned and licensed patents and intellectual property;                 |
|--------|------------------------------------------------------------------------------------------------|
|   |                                                                                           |
| · | exploit our patented  technology (owned and licensed); and                                     |
|   |                                                                                           |
| · | operate our business  without infringing on the intellectual property rights of 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. We continue to hold other coatings related patents; however, if we areunable to protect our proprietary rights prior to the expiration of thesepatents, we may lose the advantage we have established as being the first tomarket 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 maybe challenged, 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 mayindependently develop similar or alternative technologies or design around ourpatented technologies. 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.

 

**Other companies may claim thatwe infringe their intellectual property rights, which could cause us to incursignificant expenses or prevent us from selling our 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 to thirdparties may contain claims that conflict with our patents and that compete withour products and technologies, and third parties could assert infringementclaims against us. Any litigation or interference proceedings, regardless oftheir outcome, may be costly and may require significant time and attention ofour management and technical personnel. Litigation or interference proceedingscould also force us to:

 
| · | stop or delay using  our technology;                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
| · | stop or delay our  customers from selling, manufacturing or using products that incorporate the  challenged intellectual property; |
|   |                                                                                                                               |
| · | pay damages; or                                                                                                                    |
|   |                                                                                                                               |
| · | enter into licensing  or royalty agreements that may be unavailable on acceptable terms.                                           |

 

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**Our level of indebtednessreduces our financial flexibility and could impede our ability to operate.**

 

As of December 31,2008, our long-term debt was $22.7 million, net of debt discount of $7.1million, including the current portion of such debt.  Our long-term debt(including the current portion) includes the following:

 

·                  $0.2 million in principal outstanding under our Koreansubsidiary’s loan from Kookmin Bank of South Korea;

 

·                  $19.1 million in principal outstanding under the 8%Convertible Subordinated Notes due January 2010 (the “January 2010Notes”) issued in our January 3, 2007 private placement, as amended;

 

·                  $1.0 million in principal outstanding under the 8%Unsecured Subordinated Notes issued in May 2006, September 2006, and December 2006private placements;

 

·                  $2.7 million in principal outstanding under the BankMidwest term loan issued in July 2007;

 

·                  $0.1 million in principal outstanding under the BankMidwest capital loans issued in August 2007 and October 2008; and

 

·                  $6.7 million in principal outstanding under the C3Capital Partners Subordinated Promissory Notes due July 2012 issued in July 2007.

 

As of December 31,2008, our short-term debt was $1.2 million.  Our short-term debt includedthe following:

 

·                  $0.6 million in outstanding advances received under afactoring, loan, and security agreement executed in April 2005, asamended, with a financing company; and

 

·                  $0.6 million in outstanding advances received under arevolving loan from Bank 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. As of December 31, 2008 and as of the filing of this report, wehave approximately $0.2 million of principal and accrued interestoutstanding.  Under our January 2010 Notes we are required tomake cash interest payments to the noteholders of $0.6 million per quarteruntil such notes are converted or paid.

 

The $1.0 million inaggregate principal amount under the 8% Unsecured Subordinated Notes became duein August 2007, and $19.1 million in aggregate principal amount under our January 2010Notes became due beginning September 30, 2008 through January 3,2010.

 

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

 

·                  a significant portion of our cash flow from operationsis likely to be dedicated to the payment of the principal of and interest onour indebtedness;

 

·                  we may be unable to refinance our indebtedness onterms acceptable to us or at all;

 

·                  our cash flow may be insufficient to meet our requiredprincipal and interest payments; and

 

·                  we may be unable to obtain additional loans as aresult of covenants and 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 senior to,or on the same rank as, the convertible notes with respect to payment orsecurity.  These covenants may curtailour ability to raise capital in the future or otherwise restrict our ability toenter into a transaction that we believe would be in the best interest of ourstockholders.

 

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**We are in default undervarious debt obligations.**

 

We have approximately$1.2 million of principal and accrued interest outstanding as of December 31,2008, under the 8% unsecured subordinated notes (“Bridge Notes”), which weredue August 17, 2007.  We intend to fully repay the amounts due underBridge Notes.  However, as of the filing of this report we do not havesufficient funds to repay the Bridge Notes.  As a result, we arecurrently in default under the Bridge Notes.  Such defaults may havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working to resolve this matter withinvestors holding our Bridge Notes by seeking a forbearance until we are ableto obtain funding to repay the Bridge Notes, although there is no assurancethat we will be able to obtain any such funding.

 

We were required underour amended Security Purchase Agreement, dated April 23, 2007, between ourcompany and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previouslyissued promissory notes, including the Bridge Notes (“Debt SatisfactionCovenant”) by October 1, 2007.  As we have not yet fully repaid ourBridge Notes, we are in default under the January 2010 Notes under theDebt Satisfaction Covenant.  Further, we were required, beginning September 30,2008 and at the end of each month thereafter, to redeem 1/32nd of the principalamount of the January 2010 Notes.  An aggregate payment equal to $0.6million was due September 30, 2008. However, we did not havesufficient funds to make this payment, and, accordingly, we are in defaultunder the January 2010 Notes.

 

The holders of the January 2010Notes are entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, we have received a formal noticeof default and we are currently working to resolve this matter.  Theoutstanding principal due under the January 2010 Notes of $19.1 million isincluded in current portion of long-term debt and accrued interest and fees of$1.0 million is included in accounts payable and accrued expenses as of December 31,2008.  Such defaults may have material adverse effect on our operations,financial condition, and results of operations.  We are currently workingto resolve this matter with investors holding our January 2010 Notes by acombination of seeking to amend the terms of certain January 2010 Notesheld by persons indicating a willingness to do so and seeking to sell certainassets of our company in order to fund payments under the January 2010Notes.  However, there is no assurance that we will be able to sellsufficient assets or complete such amendments as may be necessary to bring thecompany out of default.

 

Additionally,approximately $0.2 million of principal and accrued interest became due fromour Korean subsidiary under a loan from Kookmin Bank of South Korea in August 2008. However, as of the filing of this report we did not have sufficient funds torepay the loan and we have received a formal notice of default.  KookminBank has initiated foreclosure proceedings on the loan collateral, whichconsists of our manufacturing plant facility and certain equipment in SouthKorea.  The foreclosure of our manufacturing plant facility and equipmentin South Korea would have material adverse effect on our operations, financialcondition, and results of operations.  We are currently working to resolvethis matter with Kookmin Bank by seeking a forbearance until we are able toobtain funding to repay this loan, although there is no assurance that we willbe able to obtain any such funding.

** **

**Evolving regulation ofcorporate governance and public disclosure may result in additional expensesand 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 not beable to comply with some of these new rules. For example, we were not able tocomply with Section 404 of the Sarbanes-Oxley Act of 2002 for our 2005 and2004 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 incur orthe timing of such costs. These new or changed laws, regulations, and standardsare subject to varying interpretations, in many cases due to their lack ofspecificity, and as a result, their application in practice may evolve overtime as new guidance is provided by regulatory and governing bodies. This couldresult in continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices.

 

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 increased generaland administrative expenses and a diversion of management time and attentionfrom

 

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revenue-generatingactivities to compliance activities. If our efforts to comply with new orchanged laws, regulations, and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to practice,regulatory authorities may initiate legal proceedings against us and we may beharmed.

** **

**The time and cost associatedwith complying with government regulations to which we could become subjectcould 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 manufacturersmay be required to obtain similar approvals before marketing these medicaldevices in foreign countries. Any medical device manufacturers with which wejointly develop 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 to beryllium.We are required to comply with certain regulatory requirements and to obtain apermit from the U.S. Environmental Protection Agency or other governmentagencies to process beryllium. Our failure to comply with present or future governmentalregulations related to the processing of beryllium could result in suspensionof manufacturing operations and substantial fines or criminal 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 the U.S.government, as well as other countries. The process of obtaining any requiredU.S. or foreign licenses or approvals could be time-consuming, costly, anduncertain. Failure to comply with import and export regulatory requirements canlead to substantial fines, civil and criminal penalties, and the loss ofgovernment contracting and export privileges.

** **

**The existence of minoritystockholders in our Liquidmetal Coatings and Liquidmetal Golf subsidiariescreates 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 maydevelop between us and the minority members of Liquidmetal Coatings andstockholders of Liquidmetal Golf. To the extent that our officers and directorsare also officers or directors of Liquidmetal Coatings and Liquidmetal Golf,matters may arise that place the fiduciary duties of these individuals inconflicting positions.  John Kang, our Chairman, is also a member of theBoard of Liquidmetal Coatings and of Liquidmetal Golf.

** **

**Our stock price hasexperienced volatility and may continue to experience volatility.**

 

During 2008, thehighest bid price for our common stock was $0.75 per share, while the lowestbid price during that period was $0.06 per share.  The trading price ofour common stock could continue to fluctuate widely due to:

 

·                  quarter-to-quarter variations in results ofoperations;

 

·                  loss of a major customer;

 

·                  announcements of technological innovations by us orour potential competitors;

 

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·                  changes in, or our failure to meet, the expectationsof securities analysts;

 

·                  new products offered by us or our competitors;

 

·                  announcements of strategic relationships or strategicpartnerships; or

 

·                  other events or factors that may be beyond ourcontrol.

 

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 common stock,regardless of our actual operating performance.  If our stock price isvolatile, we could face securities class action litigation, which could resultin substantial costs and a diversion of management’s attention and resourcesand could cause our stock price to fall.

** **

**Our convertible notes and warrantscontain anti-dilution provisions that, if triggered, could cause substantialdilution 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, underour January 2010 Notes, if we issue or grant in the future any rights topurchase any of our common stock, or other security convertible into our commonstock, for an effective per share price less than the conversion price then ineffect, the conversion price of all unconverted January 2010 Notes will bedecreased to equal such lower price.  With regard to the warrants issuedin connection with the January 2010 Notes, if we, in the future, issue orgrant any rights to purchase any of our common stock, or other securityconvertible into our common stock, for a per share price less than theconversion price of the January 2010 Notes then in effect, the exerciseprice of the warrants will be reduced to equal such lower price and the numberof shares of our common stock for which the warrants may be exercised will beincreased so that the total aggregate exercise price remains constant. The foregoing adjustments to the conversion price of the notes and the exerciseprice of the warrants will not apply to certain exempt issuances, includingissuances pursuant to employee stock 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 purchase973,064 shares at an exercise price of $2.58 per share, and warrants topurchase 3,777,714 shares at an exercise price of $2.00 per share, each ofwhich notes and warrants contain weighted-average anti-dilutionprovisions.  Under these provisions, if we issue shares in the future forconsideration below the conversion or exercise prices then in effect, then(with certain exceptions, including the issuance of stock options) theconversion price for our convertible notes would automatically be reduced(allowing the holders of the notes to receive additional shares of common stockupon conversion) and the exercise price of the warrants would automatically bereduced (with a corresponding increase in the number of shares issuablepursuant to such warrants).   To illustrate the impact of theseweighted-average anti-dilution provisions, because of the issuance of the January 2010Notes in January 2007 and the reduction of the conversion price of certainpreviously issued convertible notes in February 2007, the above-describedwarrants outstanding as of December 31, 2006 have been adjusted torepresent warrants to purchase 860,521 shares at an exercise price of $2.07 pershare, and warrants to purchase 4,845,600 shares at an exercise price of $1.72per share as of December 31, 2007.  Thus, an aggregate of 955,343additional shares of our common stock have become issuable pursuant to suchpreviously granted warrants as a result of the operation of theseweighted-average anti-dilution provisions.   It is also possible thata future triggering of the full-ratchet anti-dilution rights in our January 2010Notes could result in a corresponding triggering of the above-describedweighted-average anti-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 substantial additionalfunds in the future to support our working capital requirements and for otherpurposes. If shares of our common stock or securities convertible into orexercisable for our common stock are issued in consideration of such funds atan effective per share price lower than the conversion and exercise prices ofour convertible notes and warrants, then these anti-dilution provisions wouldbe triggered, thus possibly causing substantial dilution to our then-existingstockholders if the notes are converted or the warrants are exercised. Further,subsequent sales of the shares in the public market could depress the marketprice of our stock by creating an excess in supply of shares for sale.

 

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**We have never paid dividendson our common stock, and we do not anticipate paying any cash dividends in theforeseeable 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 paying dividends onour stock. As a result, capital appreciation, if any, of our common stock willbe your sole source of gain for the foreseeable future.

** **

**Antitakeover provisions of ourcertificate of incorporation and bylaws and provisions of applicable corporatelaw 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 stockholderapproval, to issue up to 10,000,000 shares of “blank check” preferred stockthat could be issued by our board of directors to increase the number ofoutstanding shares and prevent a takeover attempt;

 

·                  limit stockholders’ ability to call a special meetingof our stockholders;

 

·                  provide for a classified board of directors; and

 

·                  establish advance notice requirements to nominatedirectors for election to our board of directors or to propose matters that canbe acted on by stockholders at stockholder meetings.

 

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

 

**Item 1B. Unresolved StaffComments**

 

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 is approximately 4,500 square feet, is leased through August 1,2012.

 

In Dothan, Alabama, welease an application facility for our coatings business segment.  This facility, which is approximately 5,000square feet, is leased through 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.

 

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**Item 3. Material LegalProceedings**

 

None

 

**Item 4. Submission ofMatters to a Vote of Security Holders**

 

None

 

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**PART II**

 

**Item 5. Market ForRegistrant’s Common Equity and Related Stockholder Matters**

 

Our common stock is currently quoted onthe OTC Bulletin Board under the symbol “LQMT.” On April 3, 2009, the last reported sales price of our common stockwas $0.27 per share.  As of April 3,2009, we had 248 record holders of our common stock.

 

The following table sets forth, on a per share basis, therange of high and low bid information for the shares of our common stock foreach full quarterly period within the two most recent fiscal years and anysubsequent interim period for which financial statements are included.  These quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission and may not necessarily representactual transactions.

 
| **2008**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 0.33       |    | $          | 0.06 |   |
| Third Quarter  |       | $        | 0.57       |    | $          | 0.20 |   |
| Second Quarter |       | $        | 0.75       |    | $          | 0.50 |   |
| First Quarter  |       | $        | 0.75       |    | $          | 0.53 |   |
|           |       |     |       |    |       |   |   |
| **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 |   |

 

 We have never paid a cash dividend on ourcommon stock. We do not anticipate paying any cash dividends on our commonstock in the foreseeable future, and we plan to retain our earnings to financefuture growth.

 

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**Item 6. SelectedConsolidated Financial Data**

 

The following table shows our selected consolidatedfinancial data as of and for the years ended December 31, 2004 through2008.

 
| ** **                                                                                       | ** ** | **For the Years Ended December 31,**      | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Consolidated Statement of Operations Data:**                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                          |       | $                                                                  | 22,083     |   | $ | 29,022 |   | $ | 27,669 |   | $ | 16,365 |   | $ | 17,429 |   |
| Cost of sales                                                                                    |       | 17,131                                                             |       | 26,459 |   | 22,418 |   | 15,129 |   | 12,168 |   |
| Gross profit                                                                                     |       | 4,952                                                              |       | 2,563 |   | 5,251 |   | 1,236 |   | 5,261 |   |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses                                                     |       | 6,529                                                              |       | 8,921 |   | 9,962 |   | 8,534 |   | 11,591 |   |
| Research and development expenses                                                                |       | 1,022                                                              |       | 1,123 |   | 950 |   | 1,120 |   | 1,467 |   |
| Impairment of long-lived assets                                                                  |       | 132                                                                |       | — |   | — |   | 4,487 |   | — |   |
| Total operating expenses                                                                         |       | 7,683                                                              |       | 10,044 |   | 10,912 |   | 14,141 |   | 13,058 |   |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before interest, other income, income taxes, minority interest  and discontinued operations |       | (2,731                                                             | )          | (7,481 | ) | (5,661 | ) | (12,905 | ) | (7,797 | ) |
| Loss from extinguishments of debt                                                                |       | —                                                             |       | (648 | ) | — |   | (1,247 | ) | (2,941 | ) |
| Change in value of warrants, gain                                                                |       | 1,890                                                              |       | 4,923 |   | 279 |   | 3,985 |   | 747 |   |
| Change in value of conversion feature, gain (loss)                                               |       | 1,987                                                              |       | 6,965 |   | (226 | ) | 9,118 |   | 2,093 |   |
| Other expense                                                                                    |       | (17                                                                | )          | — |   | — |   | — |   | — |   |
| Other income                                                                                     |       | 429                                                                |       | 226 |   | 572 |   | — |   | 302 |   |
| Interest expense                                                                                 |       | (7,712                                                             | )          | (9,364 | ) | (9,509 | ) | (6,021 | ) | (6,577 | ) |
| Interest income                                                                                  |       | 3                                                                  |       | 123 |   | 23 |   | 17 |   | 37 |   |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before income taxes, minority interest and discontinued  operations                         |       | (6,151                                                             | )          | (5,256 | ) | (14,522 | ) | (7,053 | ) | (14,136 | ) |
| Income taxes                                                                                     |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Minority interests                                                                               |       | (421                                                               | )          | (384 | ) | — |   | — |   | — |   |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from continuing operations                                                                  |       | (6,572                                                             | )          | (5,640 | ) | (14,522 | ) | (7,053 | ) | (14,136 | ) |
| Loss from operations of discontinued operations, net                                             |       | —                                                             |       | — |   | — |   | — |   | (749 | ) |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                         |       | $                                                                  | (6,572     | ) | $ | (5,640 | ) | $ | (14,522 | ) | $ | (7,053 | ) | $ | (14,885 | ) |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss per share from continuing operations - basic and diluted                                    |       | $                                                                  | (0.15      | ) | $ | (0.13 | ) | $ | (0.33 | ) | $ | (0.17 | ) | $ | (0.34 | ) |
| Loss per share from discontinued operations                                                      |       | $                                                                  | —     |   | — |   | — |   | $ | — |   | $ | (0.02 | ) |
| Net loss per share                                                                               |       | $                                                                  | (0.15      | ) | $ | (0.13 | ) | $ | (0.33 | ) | $ | (0.17 | ) | $ | (0.36 | ) |
|                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average common shares - basic and diluted                                               |       | 44,735                                                             |       | 44,730 |   | 43,809 |   | 41,833 |   | 41,610 |   |

 

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** **
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**               | ** ** |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**                       |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                  |       | $                                     | 157        |   | $ | 1,180 |   | $ | 144 |   | $ | 1,392 |   | $ | 742 |   |
| Working capital (deficiency)                               |       | (20,755                               | )          | (12,324 | ) | (23,157 | ) | (10,993 | ) | (14,910 | ) |
| Total assets                                               |       | 13,240                                |       | 22,513 |   | 22,244 |   | 21,563 |   | 28,508 |   |
| Long-term debt, including current portion, net of discount |       | 22,693                                |       | 20,724 |   | 14,705 |   | 6,776 |   | 6,628 |   |
| Shareholders’ equity (deficiency)                     |       | (21,031                               | )          | (14,580 | ) | (10,363 | ) | (1,320 | ) | 4,191 |   |
|                                                            |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*This management’s discussion and analysis should be read inthe conjunction with the condensed consolidated financial statements and notesincluded elsewhere in this report on Form 10-K.*

 

*This management’s discussion and analysis, as well as othersections 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 a materials technology company that develops andcommercializes products made from amorphous alloys.  Our Liquidmetal® family of alloys consists ofa variety of proprietary coatings, powders, bulk alloys, and composites thatutilize the advantages offered by amorphous alloy technology. We develop,manufacture, and sell products and components from bulk amorphous alloys tocustomers in various industries, and we also partner with third-party licenseesto develop and commercialize bulk Liquidmetal alloy products. We believe thatour proprietary bulk alloys are the only commercially viable bulk amorphousalloys currently available in the marketplace. In addition to our bulk alloys, we market and sell a line of proprietaryamorphous alloy-based industrial coatings under the Liquidmetal ArmacorTM coatings brand.

 

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms in othermetals and alloys when they solidify. Liquidmetal alloys possess a combinationof performance, processing, and potential cost advantages that we believe canmake them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys such as Ti-6Al-4V, but they also have some of thebeneficial processing characteristics more commonly associated with plastics.We believe these advantages could result in Liquidmetal alloys supplantinghigh-performance alloys, such as titanium and stainless steel, and otherincumbent materials in a wide variety of applications. Moreover, we believethese advantages could enable the introduction of entirely new products andapplications that are not possible or commercially 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 

 

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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, the developmentof improved processing technology, and the identification of new applicationsfor our alloys.

 

Impairment ofLong-Lived Assets consists of a write-down of $0.1 million of idle equipmentheld by our South Korean subsidiary, Liquidmetal Technologies Co., Ltd. While we have actively marketed the idle equipment for ultimate sale sinceearly 2004, we were unable to sell this equipment and determined that thecarrying value of the idle equipment exceeded its fair value in the amount of$0.1 million during the fourth quarter of fiscal year 2008.

 

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 embedded conversionfeature has been accounted for as a separate derivative instrument inaccordance 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. In January 2007 and June 2007, we contributedadditional $0.2 million and $0.1 million, respectively, into LSI as additionalinvestment.  The contribution did not change the Company’s 19.9% interestin LSI.  Under the licensing agreement,at any time following 18 months after the effective date of the agreement, LSImay exercise its option to sell to the Company certain business assetsincluding manufacturing equipment acquired under the joint venture.  During the years ended December 31,2008, 2007 and 2006, the Company recognized revenues of $0, $0.1 million and$0.7 million, respectively, of Liquidmetal alloys sold to SAGA for use in thejoint venture.

 

In a connection to anequipment purchase agreement entered into with Grace Metal, currentlyLiquidmetal Korea Co., Ltd. (“LMK”), a South Korean corporation, effective June 1,2007, we discontinued our post-processing operation in Weihai, China andtransferred our manufacturing staff and equipment in Weihai to LMK under anamendment to the equipment purchase agreement with LMK. Further, we transferredcertain of our manufacturing staff from our South Korean plant to LMK. LMK wasformed by an investor group that includes the former director and officer ofour company, James Kang, who is also the brother of John Kang, Chairman of theBoard of our company.

 

On July 24, 2007,we transferred substantially all of the assets of our Liquidmetal alloyindustrial coatings business to a newly formed, newly capitalized subsidiarynamed Liquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”),and LMC 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 31,2008 and 2007***

 

*Revenue.* Revenue decreased $6.9million to $22.1 million for the twelve months ended December 31, 2008from $29.0 million for the twelve months ended December 31, 2007. The decrease included $5.0 million decrease in sales and 

 

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prototypingof parts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers as a result of increased reliance on licensees to manufacture andsell bulk Liquidmetal alloy parts and a decrease of $1.9 million from sales ofour coating products as a result of decrease in demand from oil drillingapplications.

 

*Cost of Sales.* Cost of sales decreased to$17.1 million, or 78% of revenue, for the twelve months ended December 31,2008 from $26.5 million, or 91% of revenue, for the twelve months ended December 31,2007.  The decreases were a result of a change in revenue mix during thetwelve months ended December 31, 2008 primarily from increased royaltyrevenues.  We also believe that higher manufacturing volumes and greatermix of higher-margin products in the future will cause the gross profit toimprove over time.  The cost to manufacture parts from our bulkLiquidmetal alloys 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 administrative expenses decreased to $6.5 million, or 30% ofrevenue, for the twelve months ended December 31, 2008 from $8.9 million,or 31% of revenue, for the twelve months ended December 31, 2007. Thedecrease was primarily a result of decrease in wages and expenses of $0.4million, decrease in professional and consulting fees of $1.3 million, decreasein bad debt expense of $0.3 million, decrease in depreciation and amortizationexpense of $0.1 million, and decrease in office and equipment rent expense of$0.1 million.

 

*Research and Development Expenses*. Research anddevelopment expenses decreased to $1.0 million, or 5% of revenue, for thetwelve months ended December 31, 2008 from $1.1 million, or 4% of revenue,for the twelve months ended December 31, 2007. The decrease was primarilydue to decrease in wages and related expenses. We continue to perform research and development of new Liquidmetalalloys and related processing capabilities, develop new manufacturingtechniques, and contract with consultants to advance the development ofLiquidmetal alloys.

 

*Impairment of Long-Lived Assets*. Impairment oflong-lived assets was $0.1 million, or 1% of revenue, for the twelve monthsended December 31, 2008 from of a write-down of idle equipment held by our SouthKorean subsidiary, Liquidmetal Technologies Co., Ltd. While we haveactively marketed the idle equipment for ultimate sale since early 2004, wewere unable to sell this equipment and determined that the carrying value ofthe idle equipment exceeded its fair value in the amount of $0.1 million duringthe fourth quarter of fiscal year 2008.  There was noimpairment of long-lived assets recognized during the twelve months ended December 31,2007.

 

*Loss from Extinguishments of Debts*. Loss fromextinguishments of debt decreased to $0 for the twelve months ended December 31,2007 from $0.6 million, or 2% of revenue, for the twelve months ended December 31,2007.  The $0.6 million loss wasrecognized from the extinguishment of certain of our convertible andsubordinated notes in 2007.

 

*Changein Value of Warrants.*  Changein value of warrants decreased to a gain of $1.9 million, or 9% of revenue,during the twelve months ended December 31, 2008 from a gain of $4.9million, or 17% of revenue, during the twelve months ended December 31,2007.  The change in value of warrantsconsisted of warrants issued from convertible notes and subordinated notesfunded between 2004 and 2007 primarilyas a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature*.  Change in the value of our conversion featureliability from our convertible notes funded between 2004 and 2007 resulted ingain of $2.0 million, or 9% of revenue, during the twelve months ended December 31,2008 from a gain of $7.0 million, or 24% of revenue, during the twelve monthsended December 31, 2007 primarily as a result of fluctuation in our stockprices.

 

*Other Expense.*  Other expense was $17 thousand for the twelvemonths ended December 31, 2008, primarily from loss on disposal ofassets.  There was no other expenserecognized for the twelve months ended December 31, 2007.

 

*Other Income.*  Other income was $0.4 million, or 2% ofrevenue, for the twelve months ended December 31, 2008, primarily fromgain $0.2 million recognized from deferred gain on sale of equipment from 2007and $0.2 million from write off accounts payables.  Other income was $0.2 million, or 1% of revenue, for the twelve monthsended December 31, 2007, primarily from gain recognized from sale ofequipment.

 

*Interest Expense*. Interest expense was $7.7million, or 35% of revenue, for the twelve months ended December 31, 2008and was $9.4 million, or 32% of revenue, for the twelve months ended December 31,2007.  Interest expense consistsprimarily of debt amortization and interest accrued on outstanding convertibleand subordinated notes, borrowings under the April 2005 factoring, loan,and security agreement, the Kookmin loan, the Bank Midwest loans, and lateregistration and late filing fee penalties.

 

*Interest Income.* Interest income was $3 thousand for the twelvemonths ended December 31, 2008 and $0.1 million for the twelve monthsended December 31, 2007, from interest earned on cash deposits.

 

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

 

*Revenue.* Revenue increased $1.4million to $29.0 million for the twelve months ended December 31, 2007from $27.7 million for the twelve months ended December 31, 2006. The increase included $3.6 million decrease in sales and prototyping ofparts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers as a result of increased reliance on licensees to manufacture andsell bulk Liquidmetal alloy parts to customers based in South Korea, offset byan increase of $5.0 million from sales of our coating products as a result ofincrease in demand from oil drilling applications.

 

*Cost of Sales.* Cost of sales increased to$26.5 million, or 91% 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 administrative expenses decreased to $8.9 million, or 31% ofrevenue, for the twelve months ended December 31, 2007 from$10.0 million, or 36% of revenue, for the twelve months ended December 31,2006. This decrease was primarily a result of decreases in wages and expensesof $1.2 million and decreases in travel expenses of $0.2 million, offset byincreases in professional and consulting fees of $0.3 million.

 

*Research and Development Expenses*. Research anddevelopment expenses increased to $1.1 million, or 4% of revenue, for thetwelve months ended December 31, 2007 from $1 million, or 3% ofrevenue, for the twelve months ended December 31, 2006. The increase wasprimarily due to increase in professional fees. We continue to perform research and development of new Liquidmetalalloys and related processing capabilities, develop new manufacturingtechniques, and contract with consultants to advance the development ofLiquidmetal alloys.

 

*Loss from Extinguishments of Debts*. Loss fromextinguishments of debt increased to $0.6 million, or 2% of revenue, for thetwelve months ended December 31, 2007 from $0 for the twelve months ended December 31,2006.  The $0.6 million loss wasrecognized from the extinguishment of certain of our convertible andsubordinated notes in 2007.

 

*Changein Value of Warrants.*  Changein 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 gain of $0.3million, or 1% of revenue, during the twelve months ended December 31,2006.  The change in value of warrantsconsisted of warrants issued from convertible notes and subordinated notesfunded between 2004 and 2007 primarilyas a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature*.  Change in the value of our conversion featureliability from our convertible notes funded between 2004 and 2007 resulted ingain of $7.0 million, or 24% of revenue, during the twelve months ended December 31,2007 from a loss of $0.2 million, or 1% of revenue, during the twelve monthsended December 31, 2006 primarily as a result of fluctuation in our stockprices.

 

*Other Income.*  Other income was $0.2 million, or 1% ofrevenue, for the twelve months ended December 31, 2007, primarily fromgain recognized from sale of equipment.  Other income for the twelve months ended December 31, 2006 was$0.6 million, or 2% of revenue, as result of $0.1 million gain recognized fromdisposal of idle equipment and $0.5 million gain recognized from termination ofa distribution agreement with a Japanese sporting goods distributor originallyentered into in March 1996.

 

*Interest Expense*. Interest expense was $9.4million, or 32% of revenue, for the twelve months ended December 31, 2007and was $9.5 million, or 34% of revenue, for the twelve months ended December 31,2006.  Interest expense consistsprimarily of debt amortization and interest accrued on outstanding convertibleand subordinated notes, borrowings under the April 2005 factoring, loan,and security agreement, the Kookmin loan and late registration and late filingfee 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.

 

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##### ** **

##### **QUARTERLYRESULTS**

 

The followinginformation presents our unaudited quarterly operating results for 2008 and2007. The data has been prepared by Liquidmetal Technologies, Inc. on abasis consistent with the Consolidated Financial Statements included elsewherein this Form 10-K, and includes all adjustments, consisting of normalrecurring accruals, that we consider necessary for a fair presentation thereof.These operating results are not necessarily indicative of our futureperformance.

 
| ** **                                                                                                             | ** ** | **For the Three Months Ended**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **12/31/08**                                                       | ** ** | **09/30/08** | ** ** | **06/30/08** | ** ** | **03/31/08** | ** ** |
| ** **                                                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**                                                    | ** ** |
| **Consolidated Statements of Operations Data:**                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                                |       | $                                                                  | 4,605      |   | $ | 5,041 |   | $ | 5,669 |   | $ | 6,768 |   |
| Cost of sales                                                                                                          |       | 3,806                                                              |       | 3,791 |   | 4,633 |   | 4,901 |   |
| Gross profit                                                                                                           |       | 799                                                                |       | 1,250 |   | 1,036 |   | 1,867 |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Operating expenses                                                                                                     |       |                                                               |       |   |   |   |   |   |   |
| Selling, general, and administrative                                                                                   |       | 1,912                                                              |       | 1,417 |   | 1,326 |   | 1,874 |   |
| Research and development                                                                                               |       | 207                                                                |       | 279 |   | 278 |   | 258 |   |
| Impairment of long-lived assets                                                                                        |       | 132                                                                |       | — |   | — |   | — |   |
| Total operating expenses                                                                                               |       | 2,251                                                              |       | 1,696 |   | 1,604 |   | 2,132 |   |
| Loss from operations                                                                                                   |       | (1,452                                                             | )          | (446 | ) | (568 | ) | (265 | ) |
| Change in value of warrants, (loss) gain                                                                               |       | (495                                                               | )          | 989 |   | 1,290 |   | 106 |   |
| Change in value of conversion feature, (loss) gain                                                                     |       | (117                                                               | )          | 642 |   | 1,240 |   | 222 |   |
| Other expense                                                                                                          |       | —                                                             |       | — |   | — |   | (17 | ) |
| Other income                                                                                                           |       | 182                                                                |       | — |   | 247 |   | — |   |
| Interest expense                                                                                                       |       | (2,432                                                             | )          | (1,860 | ) | (1,717 | ) | (1,703 | ) |
| Interest income                                                                                                        |       | —                                                             |       | — |   | 1 |   | 2 |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income before minority interests                                                                                |       | (4,314                                                             | )          | (675 | ) | 493 |   | (1,655 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Minority interests                                                                                                     |       | (80                                                                | )          | (115 | ) | (65 | ) | (161 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| (Loss) income from operations before income taxes                                                                      |       | (4,394                                                             | )          | (790 | ) | 428 |   | (1,816 | ) |
| Income taxes                                                                                                           |       | —                                                             |       | — |   | — |   | — |   |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income                                                                                                      |       | (4,394                                                             | )          | (790 | ) | 428 |   | (1,816 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Net (loss) income per share from continuing operations - basic and  diluted                                            |       | $                                                                  | (0.10      | ) | $ | (0.02 | ) | $ | 0.01 |   | $ | (0.04 | ) |
|                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |
| Weighted average common shares used to compute (loss) income per  share from continuing operations - basic and diluted |       | 44,759                                                             |       | 44,726 |   | 44,726 |   | 44,726 |   |

 

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| ** **                                                                                                             | ** ** | **For the Three Months Ended**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **12/31/07**                                                       | ** ** | **09/30/07** | ** ** | **06/30/07** | ** ** | **03/31/07** | ** ** |
| ** **                                                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**                                                    | ** ** |
| **Consolidated Statements of Operations Data:**                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 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) income per  share from continuing operations - basic and diluted |       | 44,711                                                             |       | 44,652 |   | 44,632 |   | 44,925 |   |

 

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**LIQUIDITY AND 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 provided by(used for) operating activities was $0.4 million and ($10.2) million for theyears ended December 31, 2008 and 2007, respectively.  Our workingcapital deficit increased from $12.3 million at December 31, 2007 to $20.8million at December 31, 2008.  Our working capital deficit increaseof $8.5 million was primarily attributable to a decrease in cash and cashequivalents of $1.0 million, decrease in trade accounts receivables of $2.9million, decrease in inventories of $1.5 million, an increase in accountspayable and accrued expenses of $0.5 million, increase in current portion oflong-term debt of $8.0 million, offset by decrease in deferred revenue of $0.3million, decrease in short-term debt of $1.0 million, decrease in warrantliabilities of $1.9 million, decrease in conversion feature liabilities of $1.9million, and decrease of current portion of other liabilities of $0.3 million.

 

Our cash used forinvesting activities was $1.2 million for the year ended December 31, 2008primarily from purchase of property and equipment.

 

Our cash used forfinancing activities was $1.2 million for the year ended December 31, 2008primarily from repayment of borrowings and distributions made to minorityinterest holders of our subsidiary, Liquidmetal Coatings, LLC.  As of December 31, 2008, we had cash of$0.2 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, theresources we devote to develop and support our Liquidmetal alloy products, thesuccess 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, 2008, 2007 and 2006 was $6.6 million, $5.6million, and $14.5 million, respectively.  In the audit report on ourfinancial statements for our fiscal years ended December 31, 2008 and2007, 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.

 

Weanticipate that we will not have sufficient funds to pursue our currentoperating plan beyond the first quarter of 2009 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.

 

We cannot guarantee that adequate funds will be availablewhen needed, and if we do not receive sufficient capital, we may be required toalter or reduce the scope of our operations.

 

Additionally,we have approximately $1.2 million of principal and accrued interestoutstanding as of December 31, 2008, under the 8% unsecured subordinatednotes (the “Bridge Notes”), which were due August 17, 2007.  Weintend to fully repay the amounts due under the Bridge Notes.  However, asof the filing of this report we do not have sufficient funds to repay theBridge Notes.  As a result, we are currently in default under theBridge Notes.   Such a default may have material adverse effect onour operations, financial condition, and results of operations. We havenot received a formal notice of default and we are currently working to resolvethis matter with investors holding our Bridge Notes.

 

We were required underour amended Security Purchase Agreement, dated April 23, 2007, between ourcompany and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previouslyissued promissory notes, including the Bridge Notes (“Debt SatisfactionCovenant”) by October 1, 2007.  As we have not yet fully repaid ourBridge Notes, we are in default under the January 2010 Notes under theDebt Satisfaction Covenant.  Further, we were required, beginning September 30,2008 and at the end of each month thereafter, to redeem 1/32nd of the principalamount of the January 2010 Notes.  An aggregate payment equal to $0.6million was due September 30, 2008. However, we did not havesufficient funds to make this payment, and, accordingly, we are in defaultunder the January 2010 Notes.

 

The holders of the January 2010 Notes are entitled to accelerateall principal and interest under the January 2010 Notes.  As of thefiling of this report, we have received a formal notice of default and we are currently working toresolve this matter.  As a result, 

 

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the outstandingprincipal due under the January 2010 Notes of $19.1 million is included incurrent portion of long-term debt and accrued interest and fees of $1.0 millionis included in accounts payable and accrued expenses as of December 31,2008.  Such defaults may havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working toresolve this matter with investors holding our January 2010 Notes.

 

Approximately$0.2 million of principal and accrued interest became due from our Koreansubsidiary under a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did nothave sufficient funds to repay the loan and we have received a formalnotice of default.  Kookmin Bank hasinitiated foreclosure proceedings on the loan collateral, which consists of ourmanufacturing plant facility and certain equipment in South Korea.  The foreclosure of our manufacturing plantfacility and equipment in South Korea would have material adverse effect on ouroperations, financial condition, and results of operations.  We arecurrently working to resolve this matter with Kookmin Bank by seeking aforbearance until we are able to obtain funding to repay this loan, althoughthere is no assurance that we will be able to obtain any such funding.

 

We have outstanding liens and judgments on ourassets by various creditors for past-due trade payables totaling $1.4 million,of which $1.2 million is held by creditors in South Korea, as of December 31,2008.  We are currently working toresolve the matter with each creditor****by seekingforbearance until we are able to obtain funding to repay the amounts due,although there is no assurance that we will be able to obtain any suchfunding.   If we cannot repay the amountsdue or obtain forbearance, the creditors may seek to foreclose on the Company’sassets.  Such a foreclosure would havematerial adverse effect on our operations, financial condition, and results ofoperations.

##### ** **

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

 

Pursuant to our Registration Statement on Form S-1(Registration No. 333-73716), as amended, initially filed with theSecurities and Exchange Commission on November 20, 2001 and declaredeffective May 21, 2002, we closed an initial public offering of 5,000,000shares of common stock on May 28, 2002, plus an additional 229,000 shareson June 10, 2002 pursuant to an over allotment option, at a price of$15.00 per share (which sale is referred to herein as the “Offering”). TheOffering generated aggregate cash proceeds during the second quarter 2002 of$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 ofConvertible Notes and Bridge Notes**

 

The following privateplacement of convertible notes and bridge notes are outstanding as of December 31,2008.

 

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 issuedto the placement agent in the transaction. The warrants have an exercise priceof $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 substantialnumber of 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

 

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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).

 

Beginning July 31,2008 and at the end of each month thereafter, we were required to redeem 1/36thof the principal amount of the January 2010 Notes in cash or, at ourelection, with shares of our common stock. On July 31, 2008, we obtainedan agreement with the majority of the January 2010 Note holders to deferthe amortization date of the principal to September 30, 2008 and to amendthe redemption amount at each amortization date to be 1/32nd of the principalamount.  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 January 3, 2010, although we will have the rightat 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 SEC coveringthe 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, 2008, an aggregate of $0.7 million in monetarypenalties under the Registration Rights Agreement had already been paid toinvestors, while an additional $0.3 million in such penalties were accrued butunpaid.

 

On October 1, 2007, we issued$1.0 million of additional January 2010 Notes for accrued interest andlate registration fees.

 

On December 28, 2007, we 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.

 

During 2008, we issued $0.4 million, $0.5 million, and $0.5million of additional January 2010 Notes, dated April 1, 2008, July 1,2008, and October 1, 2008, respectively, for accrued interest due underthe notes in lieu of cash payments.

 

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As of December 31, 2008, $19.1 million in aggregate principal amountof January 2010 Notes were still outstanding with accrued but unpaidinterest and late registration fees in the amount of approximately $1.0million, and $1.0 million in aggregate principal amount of Bridge Notes werealso outstanding with accrued but unpaid interest in the amount ofapproximately $0.2 million.

 

**Loan from Kookmin Bank**

 

Our Liquidmetal Technologies Co., Ltd.subsidiary has an outstanding loan from Kookmin Bank in the Republic ofKorea.  As of December 31, 2008, theoutstanding balance under this loan was $0.2 million.  The loan was payable in monthly installmentsof $0.11 million per month through February 2008.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

An off-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (1) made guarantees, (2) a retained or a contingentinterest in transferred assets, (3) an obligation under derivativeinstruments classified as equity, or (4) any obligation arising out of amaterial variable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to our company, or that engagesin leasing, hedging, or research and development 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 named Liquidmetal SAGA Italy, Srl (“LSI”).  We alsoentered into an exclusive manufacturing license agreement for the eyewearindustry with LSI.  Under the joint venture agreement, we have the optionto buy ownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we have purchased 19.9% interest in the joint venture.  Under thelicensing agreement, at any time following 18 months after the effective dateof the agreement, LSI may exercise its option to sell us certain businessassets including manufacturing equipment acquired under the jointventure.  During the years ended December 31, 2008, 2007 and 2006, werecognized revenues of $0, $0.1 million and $0.7 million, respectively, of Liquidmetalalloys sold to SAGA for use in the joint venture.  We anticipate thealloys to be fully utilized by the joint venture prior to the 18 month period.

 

##### **CONTRACTUALOBLIGATIONS**

 

The followingtable summarizes our company’s obligations and commitments as of December 31,2008:

 
| ** **                                    | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual Cash Obligations**    | ** ** | **Total**                                                          | ** ** | **Less Than**

**1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt (2)                            |       | $                                                                  | 20,273     |   | $ | 20,273 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt of consolidated subsidiary (2) |       | 9,549                                                              |       | 1,028 |   | 1,792 |   | 6,729 |   | — |   |
| Short-term debt (3)                           |       | 580                                                                |       | 580 |   | — |   | — |   | — |   |
| Short-term debt of consolidated subsidiary    |       | 597                                                                |       | 597 |   | — |   | — |   | — |   |
| Interest payments (4)                         |       | 7,536                                                              |       | 1,740 |   | 4,824 |   | 972 |   | — |   |
| Operating leases and rents                    |       | 1,059                                                              |       | 324 |   | 617 |   | 118 |   | — |   |
| Consulting services payable                   |       | 126                                                                |       | 126 |   | — |   | — |   | — |   |
| Foster Wheeler                                |       | 150                                                                |       | 150 |   | — |   | — |   | — |   |
| Dongyang                                      |       | 9                                                                  |       | 9 |   | — |   | — |   | — |   |
| Nichimen                                      |       | 315                                                                |       | 315 |   | — |   | — |   | — |   |
| Totals (1)                                    |       | $                                                                  | 40,194     |   | $ | 25,142 |   | $ | 7,233 |   | $ | 7,819 |   | $ | — |   |

 

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(1)          Contractual cashobligations include Long-term debt comprised of $1,009 of UnsecuredSubordinated Notes issued in 2006, $19,113 of Convertible Unsecured Notesoriginally issued in 2007, and $151 of Kookmin Bank Loan; Long-term debt of consolidatedsubsidiary comprised of $2,729 of Bank Midwest Term Loan, $6,690 of C3 CapitalPartners Subordinated Notes, and $129 of Bank Midwest Promissory Notes;Short-term debt comprised of $580 outstanding advances received underfactoring, loan, and security agreement; Short-term debt of consolidatedsubsidiary comprised of $597 of Bank Midwest revolving loan; future minimumlease payments under capital and operating leases; purchase commitments fromconsultants; payments due from assets purchased from Foster Wheeler thermalspray coatings business;

 

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paymentsdue from our discontinued equipment manufacturing business; and minimumpayments due under a distribution agreement.

(2)          Does not includeaccrued and scheduled interest payments of $7,536; and un-amortized cashdiscount and discounts for conversion feature and warrants of $7,128 of ourconvertible notes.

(3)          Does not includeminimum interest and fee payments of $30.

(4)          Interestpayments include accrued and scheduled payments due on long-term debt andlong-term debt of consolidated subsidiary with annual interest rates between 8%to 14%.  Interest payments also includeestimated interest on short-term debt and short-term debt of majority ownedsubsidiary with annual interest rates between 6.5% to 8.48% with expectedmaturity of approximately 1 year.

##### ** **

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

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires us to make estimates and assumptions that affectreported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. These estimatesand assumptions are based on historical experience and various other factorsthat are believed to be reasonable under the circumstances. Actual resultscould differ materially from these estimates under different assumptions orconditions.

 

We believe that the following accountingpolicies are the most critical to our consolidated financial statements sincethese policies require significant judgment or involve complex estimates thatare important to the portrayal of our financial condition and operatingresults:

 

·      Our earnings and cash flows are subject tofluctuations due to changes in non-U.S. currency exchange rates. We are exposedto non-U.S. exchange rate fluctuations as the financial results of non-U.S.subsidiary in Korea are translated into U.S. dollars. As exchange rates vary,those results, when translated, may vary from expectations and adversely impactoverall expected profitability. The cumulative translation effects forsubsidiaries using functional currencies other than the U.S. dollar areincluded in accumulated foreign exchange translation in stockholders’ equity.Movements in non-U.S. currency exchange rates may affect our competitiveposition, as exchange rate changes may affect business practices and/or pricingstrategies of non-U.S. based competitors.

 

·      We record an accrual for potential product warrantycosts. Due to the lack of historical information for warranty expense relatedto bulk alloy products, management estimates product warranties as a percentageof bulk alloy product sales earned during the period. In the event in futureperiods the actual product warranty costs consistently exceed the estimate forproduct warranty costs, an adjustment would be made and income would decreasein the period of such determination. Likewise, in the event we determine thatactual product warranty costs are consistently lower than the estimate forproduct warranty costs, an adjustment would be made and income would increasein the period of such determination.

 

·      We record an allowance for doubtful accounts as acontra-asset to our trade receivables for estimated uncollectible accounts.Management estimates the amount of potentially uncollectible accounts byreviewing significantly past due customer balances relative to historicalinformation 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 suchdetermination. Likewise, in the event, in future periods, actual uncollectibleaccounts are lower than the estimate for uncollectible accounts, an adjustmentwould be made and income would increase in the period of such determination.

 

·      We value inventories at lower of cost or netrealizable value. Management has determined net realizable value to be equal tothe selling price of the products to be produced and sold less the cost ofdisposal. In the event, in future periods, the actual selling prices exceed theestimate for selling prices less cost to sell, an adjustment would be made andincome would increase in the period of such determination. Likewise, in theevent, in future periods, actual selling prices are lower than the estimate forselling prices, an adjustment would be made and income would decrease in theperiod of such determination.

 

·      We value our assets at lower of cost or fair marketvalue. Management has determined fair market to be equal to the selling priceof the assets to be sold less the cost of disposal. In the event, in futureperiods, actual selling prices are lower than the estimate for selling prices,an adjustment would be made and income would decrease in the period of suchdetermination.

 

·      We record valuation allowances to reduce the deferredtax assets to the amounts estimated to be realized. While we consider taxableincome in assessing the need for a valuation allowance, in the event wedetermine we would be able to realize our deferred tax assets in the future inexcess of the net recorded amount, an adjustment would be made and incomeincreased in the period of such determination. Likewise, in the event wedetermine

 

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we would not be able torealize all or part of our deferred tax assets in the future, an adjustmentwould be made and charged to income in the period of such determination.

 

·      We account for the warrants and the embeddedconversion feature of our senior convertible notes as derivatives in accordancewith Statement of Financial Accounting Standards No. 133, Accountingfor Derivative Instruments and Hedging Activities, and Emerging Issues TaskForce Issue No. 00-19, Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock.  Fair values of warrants and embeddedconversion features are measured at each period end using Black-Scholes pricingmodels and changes in fair value during the period are reported in our earnings

##### ** **

·      We adopted Statement of Financial AccountingStandards No. 123, Share-Based Payment (“SFAS 123R”), on January 1,2006. This new standard requires companies to expense the fair value ofemployee stock options and similar awards. We adopted SFAS 123R using themodified prospective transition method. Therefore, stock based compensationexpense measured in accordance with SFAS 123R was recorded starting with thefirst quarter of 2006, but the prior year consolidated statement of income wasnot restated. The adoption of SFAS 123R resulted in incremental expense of $0.6million, $0.6 million and $1.1 million for the years ended December 31,2008, 2007 and 2006.

##### ** **

##### **RECENTACCOUNTING PRONOUNCEMENTS**

 

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (“SFAS 141R”). SFAS 141R amends the requirements foraccounting for business combinations.  SFAS 141R will be effective afterthe beginning of the first annual reporting period beginning on or after December 15,2008.  We are currently evaluating the potential impact of the adoption ofSFAS 141R on our company’s consolidated financial statements.

 

In December 2007, theFASB issued SFAS No. 160, Noncontrolling Interests in ConsolidatedFinancial Statements, an amendment of ARB No. 51 (“SFAS 160”). Thisstatement establishes accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Minorityinterests will be recharacterized as noncontrolling interests and classified asa component of shareholders’ equity separate from the parent’s equity. Inaddition, SFAS 160 establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. This statement iseffective prospectively, except for certain retrospective disclosurerequirements, for fiscal years beginning after December 15, 2008.Accordingly, we will adopt SFAS 160 in 2009. The presentation and disclosurerequirements of this standard must be applied retrospectively for all periodspresented and will impact how we present and disclose noncontrolling interestsand income from noncontrolling interests in our company’s consolidatedfinancial statements.

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities — An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks toimprove financial reporting for derivative instruments and hedging activitiesby requiring enhanced disclosures regarding the impact on financial position,financial performance, and cash flows. SFAS 161 will be effective for financialstatements issued for fiscal years beginning after November 15, 2008. Weare currently evaluating the potential impact of the adoption of SFAS 161 onour company’s consolidated financial statements.

 

In April 2008, the FASBissued FASB Staff Position No. 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.”The intent of FSP 142-3 is to improve the consistency between the useful lifeof a recognized intangible asset under SFAS 142 and the period of expectedcash flows used to measure the fair value of an asset under SFAS 141(R) andother U.S. generally accepted accounting principles FSP 142-3 applies tointangible assets that are acquired individually or with a group of otherassets acquired in business combinations and asset acquisitions. FSP 142-3 alsorequires expanded disclosure related to the determination of intangible assetuseful lives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. We are currently evaluating the potential impact of FSP 142-3 on ourcompany’s consolidated financial statements.

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1,“Accountingfor Convertible Debt Instruments That May Be Settled in Cash uponConversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) which clarifiesthat convertible debt instruments that may be settled in cash or other assetsupon conversion are not addressed by APB No. 14, “Accounting forConvertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally,FSP APB 14-1 requires an entity to separately account for the liability andequity components of a convertible instrument to reflect an entity’snonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. FSP APB 14-1 also expands the disclosure requirementsregarding convertible debt instrument terms and how the instrument is reflectedin an entity’s financial statements. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. We are currently evaluating thepotential impact of FSP APB14-1 on our company’s consolidated financialstatements.

 

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In May 2008, the FASBissued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS 162”). SFAS 162 is intended to improve financialreporting by identifying a consistent framework, or hierarchy, for selectingaccounting principles to be used in preparing financial statements that arepresented in conformity with U.S. generally accepted accounting principles fornongovernmental entities. SFAS 162 will become effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight BoardAuditing amendments to AU Section 411, “The Meaning of Present Fairly inConformity with Generally Accepted Accounting Principles.” We are currentlyevaluating the impact of SFAS 162.

 

Other recentaccounting pronouncements issued by the FASB (including its EmergingIssues  Task Force), the AICPA and theSEC did not or are not believed by management to have a material impact on ourcompany’s present or future consolidated financial statements.

 

**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risks**

 

We are exposed tovarious market risks in conducting the business of the company, and weanticipate that this exposure will increase as a result of our planned growth.In an effort to mitigate losses associated with these risks, we may at timesenter into derivative financial instruments, although we have not historicallydone so. These may take the form of forward sales contracts, option contracts,foreign currency exchange contracts, and interest rate swaps. We have not, anddo not intend to, engage in the practice of trading derivative securities forprofit.

 

*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. Fluctuations in exchange rates resultedin foreign currency translation (loss) gains of ($1.8) million, $0.2 millionand $0.3 million for the years ended December 31, 2008, 2007 and 2006,respectively.

 

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

 

The financial statementsrequired by this item are located in Consolidated Financial Statements in Item15 of this report. The supplementary financial information required by thisitem is located under the caption “QUARTERLY RESULTS” in Item 7 of thisreport.

 

**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosures**

 

None

 

**Item 9A. Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures.  Basedon an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) as of December 31, 2008, 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.

 

Changes in Internal Controls.  During the quarter ended December 31,2008, there was no change in our internal controls over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

Management’sReport on Internal Control over Financial Reporting.  Thecompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting. Internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsin accordance with generally accepted accounting principles and includes thosepolicies and procedures that (1) pertain to the 

 

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maintenance of records that,in reasonable detail, accurately and fairly reflect the transactions anddispositions of the company’s assets, (2) provide reasonable assurance thattransactions 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 404of the Sarbanes-Oxley Act of 2002 and the related rule of the SEC,management assessed the effectiveness of the company’s internal control overfinancial reporting using the Internal Control-Integrated Framework developedby the Committee 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, 2008. Management has notidentified any material weaknesses in the company’s internal control overfinancial reporting as of December 31, 2008.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

**** ****

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

 

OnNovember 28, 2008, we issued $0.5 million of new 8% ConvertibleSubordinated Notes Due January 2010 (the “New Notes”).  The NewNotes were dated October 1, 2008 and were issued in satisfaction ofaccrued interest due under (i) the original 8% ConvertibleSubordinated Notes issued by the Company in January 2007 (the “OriginalNotes”) and (ii) 8% Convertible Subordinated Notes that weresubsequently issued by the Company in satisfaction of interestdue under the Original Notes through July 1, 2008 (the “InterestNotes”).   The New Notes become due in January 2010 withmonthly payments of 1/36th of the principal amount beginning on October 31,2008.  The New Notes and the Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5.0 million (excluding sales of inventory inthe ordinary course).  In addition, the New Notes and the Interest Notes(but not the Original Notes), may be redeemed by the holder if the Companyreceives financing involving an amount of $25.0 million or more in net proceedsat any time.  The New Notes bear interest at 8% per annum withinterest payable quarterly in arrears in cash and are subordinate to certainsecured financing from commercial lenders incurred by us in the future.

 

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**PART III**

 

**Item 10. Directors and Executive Officers of theRegistrant**

 

Set forth below is a table identifying ourdirectors and executive officers as of April 3, 2009:

 
| **Name**         | ** ** | **Age** | ** ** | **Position**                           | ** ** |
|------------------|------------|---------|------------|----------------------------------------|------------|
|             |       |    |       |                                   |       |
| Larry Buffington |       | 62      |       | President and Chief  Executive Officer |       |
|             |       |    |       |                                   |       |
| Tony Chung       |       | 39      |       | Chief Financial Officer                |       |
|             |       |    |       |                                   |       |
| John Kang        |       | 45      |       | Chairman of the Board                  |       |
|             |       |    |       |                                   |       |
| Dean Tanella     |       | 47      |       | Director                               |       |
|             |       |    |       |                                   |       |
| Robert Biehl     |       | 63      |       | Director                               |       |
|             |       |    |       |                                   |       |
| CK Cho           |       | 52      |       | Director                               |       |

 

*Larry Buffington* was elected byour Board of Directors to serve as the President and Chief Executive Officer inOctober 2006.  Mr. Buffingtonhas been serving as full-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.

 

*Tony Chung*was elected by our Board ofDirectors to serve as the Chief Financial Officer in December 2008.  Mr. Chung previously served the Companyin various capacities between May of 2004 and January of 2007including as the Company’s Vice President of Finance, Vice President of Legaland Administration and Director of Finance.  Between November of 2004and April of 2005, Mr. Chung was the Company’s principal financialofficer.  Mr. Chung most recently served as Chief Financial Officerat BETEK Corporation, a real estate and investment subsidiary of SK Engineeringand Construction, and as Chief Financial Officer of Solar City, a companyproviding advanced solar technology and installation services.  From September 1992to May 2004, Mr. Chung served in a variety of senior financecapacities at various companies including Everdream Corporation, a startupventure specializing in IT outsourcing, and MAI Systems Corporation, a publiclytraded company that developed and licensed hotel management software.  Mr. Chungis a Certified Public Accountant and served eight years at KPMG as an Audit andConsulting Manager for several large multinational companies.  He receivedhis B.S. degree in Business Administration from University of California atBerkeley, Haas School of Business in 1992.  Mr. Chung also holds aJ.D. degree from Pacific Coast University School of Law which he received in June of2006.

 

*John Kang* was re-electedas 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.

 

*DeanTanella* was re-elected as a director in November 2007. Mr. Tanellahas served as a director of our company since 2004.  Mr. Tanella is a 20-year veteran of theinstitutional investment business and has worked for such leading firms asRaymond James & Associates, CS First Boston Corp., Adams Harkness &Hill, Drexel Burnham Lanbert, Inc., Kidder Peabody & Co. and 

 

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the Vanguard Group.  Since 1999, Mr. Tanella has served asPresident of Safe Harbor Capital, LLC and, since 2003, as President ofHarborLight Capital, LLC, both of which are private investment firms.  Mr. Tanella received his bachelorsdegree from Princeton University and his MBA from the Harvard Graduate Schoolof Business Administration.  In December 2004,Mr. Tanella was also named Executive Vice President — Capital MarketsGroup and a member of the Board of Directors at GunnAllen Financial Inc., aleading independent brokerage firm headquartered in Tampa, Florida.

 

*RobertBiehl* was re-elected as a director in November 2007. Mr. Biehl hasserved as a director since 2005.  Mr. Biehlfounded the Masterplanning Group International and as President, personallyconsulted over 400 clients and mentored over 2,500 executives and worldleaders.  Prior to startingMasterplanning Group, Mr. Biehl was an executive staff of World VisionInternational where he designed and developed the Love Loaf Program, which hasraised millions of dollars worldwide.  Hehas also published many books in the area of personal and organizationaldevelopment.  Mr. Biehl received hisB.A. degree in Psychology and a Masters Degree in Counseling from Michigan StateUniversity.

 

*CK Cho* was re-electedas a director in November 2007. Mr. Cho has served as a directorsince 2005.  Mr. Cho has over 18years of experience with Samsung Electronics and managed over $700 millionannual procurement budget responsible for semi-conductor and telecommunicationequipment and other electronic components. He also served as CEO and President of Winvest Venture Partners Inc. andis currently serving as President and CEO of ATIC, an IT Venture CapitalCompany based in Korea.  Mr. Cho receivedhis bachelor’s degree majoring in Business Administration and Material Sciencesfrom the Korea University of Seoul.

 

**Change in Principal Financial Officer**

 

On December 1, 2008 Gerald Morrow ceasedto be our company’s Chief Financial Officer upon appointment of Tony Chung asour Chief Financial Officer by our Board of Directors.  Mr. Morrow was previously elected toserve as our Chief Financial Officer on January 13, 2008 by our Board ofDirectors.  Additional informationregarding Mr. Chung is set forth above in this Item 10.

 

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

 

**Terms of Directors**

 

**Our board of directors is divided into three classes(designated “CLASS I,” “CLASS II,” and “CLASS III”), as nearlyequal in number as possible, with each class serving three-year terms expiringat the third annual meeting of stockholders after their elections or untiltheir respective successors have been elected and qualified.  CLASS I currently consist of thefollowing directors whose term is scheduled to expire at the 2009 annual meetingof stockholders or the first annual meeting thereafter: Robert Biehl and JohnKang.  CLASS II currently consistsof the following directors whose term is scheduled to expire at the 2010 annualmeeting of stockholders:  Dean Tanellaand CK Cho.  CLASS III consisted ofdirectors whose term was to expire at the 2008 annual meeting ofstockholders:  There are no directorsunder this class as of April 3, 2009.**

** **

**Audit Committee**

 

Our board of directors has an AuditCommittee that is currently comprised of Mr. Tanella and Mr. Biehl. The Audit Committee is responsible for reviewing the independence,qualifications, and activities of our independent certified accountants and ourfinancial policies, control procedures, and accounting staff.  The AuditCommittee is also responsible for the review of transactions between us and anyofficer, director, or entity in which an officer or director of our company hasa material interest.  Our board of directors has determined that Mr. Tanellaqualifies as “audit committee financial expert” as defined by the regulationsof the Securities and Exchange Commission.   In addition, our board of directors hasdetermined that Mr. Tanella is an “independent” director within themeaning of Rule 10A-3(b)(i) under the Securities Exchange Act of1934.  The Audit Committee is governed bya written charter approved by the board of directors.

 

**Compensation Committee**

 

The Compensation Committee is comprisedof Mr. Cho and Mr. Biehl. All of the members of the CompensationCommittee are “independent directors,” as defined by the rules applicableto members of the Compensation Committee. The Compensation Committee isresponsible for establishing the compensation of our senior management,including salaries, bonuses, termination arrangements, and other executiveofficer benefits. The Compensation Committee also administers our equityincentive plans.

 

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**CorporateGovernance and Nominating Committee**

 

A Corporate Governance and NominatingCommittee (“the Committee”) was formed on February 18, 2003, and iscomprised of Mr. Tanella and Mr. Biehl.  All members of theCommittee 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.

 

The Corporate Governance Committee’sprincipal functions include:

 

·                  developing andmaintaining our corporate governance policy guidelines;

 

·                  developing andmaintaining our 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;

 

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

 

·                  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.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

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

** **

**Limitation of Liability and Indemnification ofOfficers and Directors**

 

Our by-laws provide that our directors, officers and employees shall beindemnified by us to the fullest extent authorized by Delaware law, as it nowexists or may in the future be amended, against all expense, liability and lossreasonably incurred or suffered by them in connection with their service for oron behalf of us.  In addition, we have entered into separateindemnification agreements with our directors and executive officers. Webelieve that these provisions and agreements are necessary to attract andretain qualified persons as directors and executive officers. Theseindemnification agreements may require us to indemnify our directors andexecutive officers for related expenses, including attorneys’ fees, judgments,fines and amounts paid in settlement that were actually and reasonably incurredor suffered by a director or executive officer in an action or proceedingarising out of his or her service as one of our directors or executiveofficers.  In order to cover the foregoing potential expenses andliability, we have obtained insurance that insures our directors and officersagainst specified losses.

 

**Code of Ethics**

 

Our board of directors has adopted a Codeof Ethics that is applicable to its principal executive officer, principalfinancial officer, principal accounting officer or controller, and personsperforming similar functions.  The Codeof Ethics is attached as Exhibit 14 to our Annual Report on Form 10-Kfiled on November 10, 2004.  Inaddition, we intend to promptly disclose (1) the nature of any amendmentto our Code that applies to our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions and (2) the nature of any waiver, includingan implicit waiver, from a provision of our Code that is granted to one ofthese specified officers, the name of such person who is granted the waiver andthe date of the waiver on our website in the future. You may also request acopy of the Code by sending the request to information@liquidmetal.com.

 

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**Item 11. Executive Compensation**

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

This compensation discussion describes the material elements ofcompensation awarded to, earned by, or paid to each of our executive officerswho served as named executive officers during the last completed fiscal year.This compensation discussion focuses on the information contained in thefollowing tables and related footnotes and narrative for primarily the lastcompleted fiscal year, but we also describe compensation actions taken beforeor after the last completed fiscal year to the extent it enhances theunderstanding of our executive compensation disclosure.

 

The compensation committee currently oversees the design andadministration of our executive compensation program.

 

The principal elements of our executive compensation program are basesalary, annual cash incentives, long-term equity incentives in the form ofstock options, 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.

 

**CompensationProgram Objectives and Philosophy**

 

The objectives of our compensation programs are to:

 

·                  attract, motivate and retain talented and dedicatedexecutive officers;

 

·                  provide our executive officers with both cash andequity incentives to further the interests of us and our stockholders; and

 

·                  provide employees with long-term incentives so we canretain them and provide stability during our growth stage.

 

Generally, the compensation of our executive officers is composed of abase salary, an annual incentive compensation award and equity awards in theform of stock options. In setting base salaries, the compensation committeereviewed the individual contributions of the particular executive. Themanagement incentive program for 2008 is a discretionary award determined bythe compensation committee based on company performance. In addition, stockoptions are granted to provide the opportunity for long-term compensation basedupon the performance of our common stock over time.

 

For each of our named executive officers, the compensation committeereviews and approves all elements of compensation taking into considerationrecommendations from our principal executive officer (for compensation otherthan his own), as well as competitive market guidance provided at the requestof the compensation committee.

 

We have designed our management incentive program so that bonuses paidthereunder will 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.

 

**BaseSalaries**

 

We provide the opportunity for our named executive officers and otherexecutives to earn a competitive annual base salary. We provide thisopportunity to attract and retain an appropriate caliber of talent for theposition, and to provide a base wage that is not subject to our performancerisk. We review base salaries 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.

 

**CashIncentives**

 

We provide the opportunity for our named executive officers and otherexecutives to earn cash incentive award. We provide this opportunity to attractand retain an appropriate caliber of talent for the position and to motivateexecutives to achieve our annual business goals. We plan to review cashincentive awards for our named executive officers and other executives annuallyin March to determine award payments for the last completed fiscal year,as well as to establish award opportunities for the current fiscal year.

 

Awards are subject to the compensation committee’s discretion and maytake into account corporate performance measures, including, but not limitedto, revenues, EBITDA and net income. The compensation committee establishesaward criteria, generally, as a percentage of annual growth.

 

For the year ended December 31, 2008, John Kang, our chairman ofthe board is eligible to receive cash awards under the 2008 managementincentive program based on revenue and profit growth.  The awards are subject to final approval bythe compensation committee based on overall performance of the company.   There were no such awards declared or paidto our named executive officers during 2008.

 

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In setting the target bonus amounts, our Board took into considerationthat our named executive officers have significant equity interests in usthrough direct ownership of shares or prior option grants, which alreadyprovide them with performance incentives.

 

**Equity-BasedCompensation.**

 

Our equity-based awards to our executive officers consist principallyof stock options granted from time to time under our 2002 Equity Incentive Planand our 1996 Stock Option Plan.  Stock option grants are based on variousfactors, including the executive officer’s position, responsibility and tenure,each executive officer’s ability to contribute to our future success, and theother elements of such executive officer’s compensation. Generally, we use equity-basedcompensation to better align the interests of our executive officers with thoseof our stockholders.

 

For our named executive officers, our stock option program is based ongrants that are individually negotiated in connection with employment agreementsand other grants to our executives. We have traditionally used stock options asits form of equity compensation because stock options provide a relativelystraightforward incentive for our executives, result in less immediate dilutionof existing shareholders’ interests and, prior to our adoption of SFAS 123(R),resulted in less compensation expense for us relative to other types of equityawards. During 2008, all grants of stock options to our employees were grantedwith exercise prices equal to or greater than the fair market value of ourcommon stock on the respective grant dates. For a discussion of thedetermination of the fair market value of these grants, see Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—CriticalAccounting Policies”.

 

We do not time stock option grants to executives in coordination withthe release of material non-public information. Our stock options have a10-year contractual exercise term or 5-year contractual term if the optioneeowns more than 10% of voting power of the company. In general, the optiongrants are also subject to the following post-termination and change in controlprovisions:

 
| **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) Options grantedunder the 2002 Non-employee Director Option Plan will continue to vest and beexercisable for 12 months following the termination.

 

(2) The Board ofDirectors may, at its discretion, amend vesting rights including additionalgrant additional shares in case of mergers or reorganizations for anti-dilutionpurposes.

 

The vesting of certain of our named executive officers’ stock optionsmay be accelerated pursuant to the terms of their employment agreements incertain termination and/or change in control events. These terms are more fullydescribed in “—Employment Agreements” and “—Potential Payments upon Terminationor Change in Control.”

 

**ExecutiveBenefits and Perquisites**

 

We provide the opportunity for our named executive officers and otherexecutives to receive certain perquisites and general health and welfarebenefits. We also offer participation in our defined contribution 401(k) savingsplan. We do not match employee contributions under our 401(k) plan.Participation in general health and welfare benefits and the 401(k) planare voluntary and are 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, CKCho, our director, and Larry Buffington, our chief executive officer andpresident.

 

Set forth below is information regarding compensation earned by or paidor awarded to the following executive officers of the company during the yearended December 31, 2008: (i) Larry Buffington, our president andchief executive officer; (ii) Tony Chung, our chief executive officer; (iii) JohnKang, our chairman of the board, which persons are our principal executiveofficer, principal financial officer, and our most highly compensated executivewhose total compensation exceeded $200,000 other than our principal executiveofficer, who were serving as executive officers at December 31, 2008.  These persons are hereafter referred to asour 

 

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“named executive officers.”  Theidentification of such named executive officers is determined based on theindividual’s total compensation for the year ended December 31, 2008, asreported below in the Summary Compensation Table.

 

**Summary Compensation Table**

 

The following table sets forth for eachof the named executive officers: (i) the dollar value of base salary andbonus earned during the year ended December 31, 2008; (ii) theaggregate grant date fair value of stock and option awards granted during theyear, computed in accordance with SFAS 123 (R); (iii) the dollar value ofearnings for services pursuant to awards granted during the year undernon-equity incentive plans; (iv) the change in pension value andnon-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                               |       | 2008     |       | $          | 250,000    |      | —     |                  | —     |                            | —     |                                                      | —     |                                                                                                            | —     |                                 | $          | 9,600     | (2)        | $ | 259,600 |   |
|                                           |       | 2007     |       | $          | 250,000    |      | —     |                  | —     |                            | $          | 161,171                                                   |       | —                                                                                                          |       | —                               |       | —    |       | $ | 411,171 |   |
|                                           |       |     |       |       |       |      |       |                  |       |                            |       |                                                      |       |                                                                                                            |       |                                 |       |      |       |
| Tony Chung                                     |       | 2008     |       | $          | 12,500     |      | —     |                  | —     |                            | $          | 9,027                                                     |       | —                                                                                                          |       | —                               |       | —    |       | $ | 21,527 |   |
|                                           |       | 2007     |       | —     |       | —    |       | —                |       | —                          |       | —                                                    |       | —                                                                                                          |       | —                               |       | —    |       |
|                                           |       |     |       |       |       |      |       |                  |       |                            |       |                                                      |       |                                                                                                            |       |                                 |       |      |       |
| John Kang                                      |       | 2008     |       | $          | 300,000    |      | —     |                  | —     |                            | —     |                                                      | —     |                                                                                                            | —     |                                 | $          | 14,163    | (2)        | $ | 314,163 |   |
|                                           |       | 2007     |       | $          | 300,000    |      | —     |                  | —     |                            | $          | 161,171                                                   |       | —                                                                                                          |       | —                               |       | $         | 13,110     | (2) | $ | 474,281 |   |
|                                           |       |     |       |       |       |      |       |                  |       |                            |       |                                                      |       |                                                                                                            |       |                                 |       |      |       |
| Ricardo Salas                                  |       | 2008     |       | $          | 20,000     |      | —     |                  | —     |                            | —     |                                                      | —     |                                                                                                            | —     |                                 | $          | 220,000   | (3)        | $ | 240,000 |   |
|                                           |       | 2007     |       | —     |       | —    |       | —                |       | —                          |       | —                                                    |       | —                                                                                                          |       | $                                    | 180,000    | (4)       | $          | 180,00 |   |

 

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(1)          Amount represent the fair value of stock optionsgranted in 2008 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 and use ofa company car.

 

(3)          Amount represents compensation earned for consultingservices provided to the company from January 2008 through November 2008.

 

(4)          Amount represents compensation earned for consultingservices provided to the company from January 2007 through December 2007.

 

For a description of the material termsof employment agreements with our named executive officers, see “—EmploymentAgreements.”

 

**Grants of Plan-based Awards**

 

The following table sets forthinformation regarding all incentive plan awards that were made to the namedexecutive officers during 2008, including incentive plan awards (equity-basedand 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 suchawards.  Equity incentive-based awardsare subject to a performance condition or a market condition as those terms aredefined by SFAS 123(R).  Non-equityincentive plan awards are awards that are not subject to SFAS 123(R) andare intended to serve as an incentive for performance to occur over a specifiedperiod.

 

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| ** **       | ** ** | **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 |       | —    |       | —                                                                                             |       | —                                                                                         |       | —                                                                |       | —                                                                      |       | —                                            |       | — |   | — |   | — |   | — |   |
|             |       |      |       |                                                                                               |       |                                                                                           |       |                                                                  |       |                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |
| Tony Chung       |       | 12/01/08  |       | —                                                                                             |       | —                                                                                         |       | —                                                                |       | —                                                                      |       | —                                            |       | — |   | — |   | 200,000 |   | $ | 0.086 |
|             |       |      |       |                                                                                               |       |                                                                                           |       |                                                                  |       |                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |
| John Kang        |       | —    |       | —                                                                                             |       | —                                                                                         |       | —                                                                |       | —                                                                      |       | —                                            |       | — |   | — |   | — |   | — |   |
|             |       |      |       |                                                                                               |       |                                                                                           |       |                                                                  |       |                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |
| Ricardo Salas    |       | —    |       | —                                                                                             |       | —                                                                                         |       | —                                                                |       | —                                                                      |       | —                                            |       | — |   | — |   | — |   | — |   |
|                  |            |           |            |                                                                                                    |            |                                                                                                |            |                                                                       |            |                                                                             |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

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**Outstanding Equity Awards at Fiscal Year-End**

** **

The following table sets forthinformation on outstanding option and stock awards held by the named executiveofficers at December 31, 2008, including the number of shares underlyingboth exercisable and unexercisable portions of each stock option as well as theexercise price and expiration date of each outstanding option.

 
| ** **       | ** ** | **Option Awards**                                                        | ** ** | **Stock Awards**                                                           | ** ** |
|------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards  Number of  Securities  Underlying  Unexercised  Unearned  Options** | ** ** | **Option  Exercise  Price** | ** ** | **Option**

**Expiration  Date** | ** ** | **Vesting**

**Commencement  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 |       | 100,000                                                                       |       | 400,000                                                                         |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008(1) |   | — |   | — |   | — |   | — |   |
|             |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tony Chung       |       | —                                                                        |       | 200,000                                                                         |       | — |   | $ | 0.086 |   | 11/30/2018 |   | 12/01/2009(1) |   | — |   | — |   | — |   | — |   |
|             |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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) |   |   |   |   |   |   |   |   |   |
|             |       | 30,000                                                                        |       | 20,000                                                                          |       | — |   | $ | 2.326 |   | 12/31/2014 |   | 01/01/2006(1) |   |   |   |   |   |   |   |   |   |
|             |       | 596                                                                           |       | 1,192                                                                           |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008(1) |   |   |   |   |   |   |   |   |   |
|             |       | 99,404                                                                        |       | 398,808                                                                         |       | — |   | $ | 0.772 |   | 09/19/2017 |   | 09/20/2008(1) |   | — |   | — |   | — |   | — |   |
|             |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ricardo Salas    |       | —                                                                        |       | —                                                                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |

 

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(1)                                  Theshares underlying this option vest 20% per year starting with the vestingcommencement date and thereafter.

 

(2)                                  The shares underlying this option vest 100% immediately ongrant date.

 

**Option Exercises and Stock Vested**

 

There were no exercise of stock options and vesting of restricted stockduring 2008.

 

**Employment Agreements**

** **

We have entered into the followingemployment agreements with the named executive officers identified above.

 

***Larry Buffington***. On October 8, 2006 we elected Larry Buffington asour President and Chief Executive Officer who received an initial base salaryof $200,000 for serving as President and Chief Executive Officer of ourcompany.  Effective January 1, 2007,the Compensation Committee approved an increase in the base salary to$250,000.  On July 24, 2007, wetransferred substantially all of 

 

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the assets of its Liquidmetal alloyindustrial coatings business to a newly formed, newly capitalized subsidiarynamed Liquidmetal Coatings, LLC, a Delaware limited liability company (“LMC”),and LMC assumed substantially all of the liabilities of the coatings business,in which we hold a 69.25% ownership interest. In conjunction to the transfer, LMC entered into an employment agreementwith Mr. Buffington as its President and Chief Executive Officer.  The employment agreement has an initial5-year term (“Initial Term”), provides for an annual base salary of $250,000per year with an opportunity for an annual performance bonus of up to 50% ofhis salary based on meeting certain target goals.  In addition, Mr. Buffington has a 10%ownership in LMC which vests evenly over five years.  Mr. Buffington’s employment willterminate upon the earlier of his death, resignation, disability, ortermination by the board of directors for any reason, provided that if hisemployment is terminated without cause, he will continue to receive theEmployee’s base salary (as then in effect) through the later of one year afterthe date of the termination or the end of the Initial Term.  He will also forfeit the unvested portion ofhis interest in LMC if he terminates prior to the completion of his five yearsof employment with LMC.

 

***JohnKang.*** On December 31,2000, we entered into an employment agreement with John Kang that, as amended,provides for his employment as our Chief Executive Officer and President, andon August 22, 2003, Mr. Kang was named Chairman of our Board ofDirectors. On December 30, 2005, Mr. Kang ceased to serve as ourPresident and Chief Executive Officer, and Mr. Kang’s employment agreementhas an expiration date of December 31, 2005, although the agreementautomatically renews on a year-to-year basis until Mr. Kang resigns or hisemployment is terminated by us with or without cause. Mr. Kang receives anannual base salary equal to $300,000 per year, and his employment willterminate 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.

 

***Tony Chung***, who was elected as our Chief Financial Officer onDecember 1, 2008, receives an initial base salary of $150,000.  In connection with the commencement of hisemployment, Mr. Chung was granted an option to purchase up to 200,000 shares ofCompany common stock under the Company’s 2002 Equity Incentive plan. The optionwas granted at an exercise price equal to $0.09 per share, which was the fairmarket value of the Company’s common stock on the option grant date, and theoption vests to the extent of 40,000 shares on each anniversary of the optiongrant date beginning in 2009.  We and Mr.Chung have not entered into an employment agreement relating to Mr. Chung’semployment with us, but we may determine to do so in the future.

 

***Ricardo Salas,***who previously served as ourChief Executive Officer and President from December 30, 2005 through October 8,2006, began serving as our Executive Vice President on December 1,2008.  Mr. Salas will receive an initial base salary of $240,000.  We and Mr. Salas have not entered into anemployment agreement relating to Mr. Salas’ employment with us, but we maydetermine to do so in the future.

 

**401(k) Savings Plan**

 

We have adopted a tax-qualified employeesavings and retirement plan, or 401(k) plan, that covers all of ouremployees. Pursuant to our 401(k) plan, participants may elect to reducetheir current compensation, on a pre-tax basis, by up to 15% of their taxablecompensation or of the statutorily prescribed annual limit, whichever is lower,and have the amount of the reduction contributed to the 401(k) plan. The401(k) plan permits us, in our sole discretion, to make additionalemployer contributions to the 401(k) plan. However, we do not currentlymake employer contributions to the 401(k) plan and may not do so in thefuture. As such, contributions by employees or by us to the 401(k) plan,and the income earned on plan contributions, are not taxable to employees untilwithdrawn from the 401(k) plan, and we can deduct our contributions, ifany, at the time they are made.

 

**Pension Benefits**

 

We do not sponsor any qualified or non-qualified defined benefit plans.

 

**Nonqualified Deferred Compensation**

** **

We do not maintain any non-qualified defined contribution or deferredcompensation plans. The compensation committee, which is comprised solely of “outsidedirectors” as defined for purposes of Section 162(m) of the Code, mayelect to 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.

 

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** **

**Potential Payments upon Termination or Change in Control**

** **

Potential payments payable to our executive officers upon terminationof employment following a change in control of us is discussed under “—EmploymentAgreements”. The compensation committee of our board of directors may, at theirdiscretion, amend or add benefits to these arrangements as they deem advisable.

 

The table below presents estimate presents estimates of the amounts ofcompensation payable to each named executive officer upon a change in controland termination of the executive.  Theamounts shown assume that such a change in control and termination were botheffective as of December 31, 2008. The actual amounts to be paid can only be determined at the time of achange in control or executive’s termination.

 
| ** **                                                | ** ** | **Larry Buffington**       | ** ** | **John Kang** | ** **  | **Tony Chung**         | ** ** | **Ricardo Salas** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|--------------------|-------------|-----------------------------|------------|------------------------|------------|
| **Benefit**                                               | ** ** | **Change**

**in**

**Control** | ** ** | **Termination**    | ** **  | **Change in  Control** | ** ** | **Termination**        | ** ** | **Change in  Control** | ** ** | **Termination** | ** ** | **Change in  Control** | ** ** | **Termination** | ** ** |
| UNEARNED COMPENSATION (payment contingent on termination) |       |                            |       |               |        |                        |       |                   |       |   |   |   |   |   |   |   |   |
| Cash Severance (a)                                        |       | —                          |       | $                  | 896,000     |                        | $          | 600,000                |       | $ | 600,000 |   | — |   | — |   | — |   | — |   |
| Equity                                                    |       |                            |       |               |        |                        |       |                   |       |   |   |   |   |   |   |   |   |
| Unexercisable Options                                     |       | —                          |       | —             |        | —                      |       | —                 |       | — |   | — |   | — |   | — |   |
| Benefits                                                  |       |                            |       |               |        |                        |       |                   |       |   |   |   |   |   |   |   |   |
| Health                                                    |       | —                          |       | $                  | 11,593      |                        | —     |                   | —     |   | — |   | — |   | — |   | — |   |
| **Total**                                                 | ** ** | **—**                      | ** ** | **$**              | **907,593** | ** **                  | **$**      | **600,000**            | ** ** | **$** | **600,000** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |

 

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(a)          For Mr. Buffington,reflects approximately 3.6 times his annual base pay for a termination.  Mr. Buffington will receive annual basesalary through the later of one year or his initial 5 year term.  For Mr. Kang, reflects two times hisannual base pay for a change of control or termination.

 

**DirectorCompensation**

** **

The following table sets forth information regarding the compensationreceived by each of our directors during the year ended December 31, 2008;

 
| **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 (9) |       | —                                                   |       | —                |       | $                               | 2,904      | (3)                                                       | —     |                                                                                                    | —     |                                 | $          | 60,000     | (8)        | $ | 62,904 |   |
|                |       |                                                     |       |                  |       |                            |       |                                                      |       |                                                                                                    |       |                                 |       |       |       |
| Dean Tanella        |       | $                                                        | 75,000     |                  | —     |                            | $          | 8,712                                                     | (4)        | —                                                                                                  |       | —                               |       | —     |       | $ | 83,712 |   |
|                |       |                                                     |       |                  |       |                            |       |                                                      |       |                                                                                                    |       |                                 |       |       |       |
| Robert Biehl        |       | $                                                        | 47,500     |                  | —     |                            | $          | 62,638                                                    | (5)        | —                                                                                                  |       | —                               |       | —     |       | $ | 110,138 |   |
|                |       |                                                     |       |                  |       |                            |       |                                                      |       |                                                                                                    |       |                                 |       |       |       |
| CK Cho              |       | $                                                        | 40,000     |                  | —     |                            | $          | 2,904                                                     | (6)        | —                                                                                                  |       | —                               |       | $          | 8,995      |   | $ | 51,899 |   |
|                |       |                                                     |       |                  |       |                            |       |                                                      |       |                                                                                                    |       |                                 |       |       |       |
| Patrick Caruana (9) |       | $                                                        | 10,000     |                  | —     |                            | $          | 2,904                                                     | (7)        | —                                                                                                  |       | —                               |       | —     |       | $ | 12,904 |   |

 

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(1)                                    Amounts represent the fair value of stockoptions granted in 2008 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 wereoutstanding as of December 31, 2008.

 

(3)                                   90,000 shares of options were outstandingas of December 31, 2008.

 

(4)                                   150,000 shares of options wereoutstanding as of December 31, 2008.

 

(5)                                   308,031 shares of options wereoutstanding as of December 31, 2008. Amount includes fair value of stock options issued for consultingservices provided during 2008 totaling $59,734 .

 

(6)                                   80,000 shares of options were outstandingas of December 31, 2008.

 

(7)                                   70,000 shares of options were outstandingas of December 31, 2008.

 

(8)                                  Amount represents amount incurred forconsulting services provided during 2008.

 

(9)                                  Messrs. Johnson and Caruana resignedas directors of our company effective March 31, 2009.

 

Our non-employee directors receive anannual fee of $10,000 for their service to our board and are reimbursed forexpenses incurred in attending board and committee meetings.  Non-employee directors are also entitled toreceive a $10,000 annual cash stipend for each standing board committee(excluding the Audit Committee) on which the director serves.  For Audit Committee service, the AuditCommittee chairman is entitled to a $35,000 annual stipend, and the othermembers of the Audit Committee are entitled to a $27,500 annual stipend.  In addition to the annual stipends, eachnon-employee director is entitled to receive a per-meeting fee of $1,000 foreach meeting of the board of directors or any board committee attended inperson.  Effective December 30,2005, Dean Tanella was elected as the lead independent director of ourcompany.  The lead independent directoris entitled to a $30,000 annual stipend.

 

We also have a2002 Non-employee Director Stock Option Plan pursuant to which our non-employeedirectors are entitled to receive stock options.  Under this plan, when a director is firstelected or appointed to our board of directors, the non-employee director isentitled to receive an initial stock option grant to purchase 50,000 shares ofour common stock.  Thereafter, on thefirst business day of January of each year in which the director continuesto serve as a member of our board, the director is entitled to an annual stockoption grant to purchase 10,000 shares of our common stock.  All options granted under the plan have anexercise price equal to the fair market value of our common stock on the dateof the grant.  These stock options have a10-year term, vest, and are exercisable pursuant to an equal 5-year vestingschedule, and remain exercisable for certain periods of time after a person isno longer a director.

 

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

 

**Compensation Committee Report**

 

The compensation committee of the boardof directors has reviewed and discussed the above Compensation Discussion &Analysis with management and, based on such review and discussion, hasrecommended to the board of directors that the Compensation Discussion &Analysis be included in the company’s Annual Report on Form 10-Kstatement.

 

CK Cho

Robert Biehl

 

December 31, 2008

 

Compensation Committee of the Board of Directors

 

The report of theCompensation Committee shall not be deemed incorporated by reference by anygeneral statement incorporating by reference this Annual Report on Form 10-Kinto any filing under the Securities Act of 1993 or under the SecuritiesExchange Act of 1934, except to the extent that we specifically incorporatethis information by reference, and shall not otherwise be deemed filed undersuch acts.

 

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**Item 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The following table sets forth certain information regardingthe beneficial ownership of our common stock as of April 3, 2009 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 April 3, 2009 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 44,825,402 shares of ourcommon stock were issued and outstanding as of April 3, 2009.  Unless otherwise indicated, the address of alldirectors and named executive officers is 30452 Esperanza, Rancho SantaMargarita, CA 92688.

 

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| **Name of Beneficial Owner (PENDING)**                         | ** ** | **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              |       | 6,591,685  |       | 15                             | %          |
|                                                                               |       |       |       |                           |       |
| 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)                                                                       |       | 5,134,973  |       | 12                             | %          |
|                                                                               |       |       |       |                           |       |
| Dean Tanella(5)                                                                    |       | 121,620    |       | *                              |       |
|                                                                               |       |       |       |                           |       |
| Robert Biehl(6)                                                                    |       | 483,544    |       | 1                              | %          |
|                                                                               |       |       |       |                           |       |
| CK Cho(7)                                                                          |       | 1,056,539  |       | 2                              | %          |
|                                                                               |       |       |       |                           |       |
| Larry Buffington(8)                                                                |       | 100,000    |       | —                         |       |
|                                                                               |       |       |       |                           |       |
| Tony Chung(9)                                                                      |       | —     |       | —                         |       |
|                                                                               |       |       |       |                           |       |
| All directors and executive officers as a group (8 persons)                   |       | 6,896,676  |       | 15                             | %          |

 

----

*  Less than one percent.

 

(1)           Includes 3,874,585 shares are held ofrecord by a revocable grantor trust established by Mr. Tjoa for himselfand his family members.  Mr. Tjoacontinues to beneficially own all such shares.

 

(2)           Includes 1,588,637 shares issuablepursuant to currently exercisable warrants and 2,458,749 shares issuablepursuant to currently convertible notes held by Atlantic Realty Group, Inc.,Carlyle Liquid, 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. Chitayatcontinues to beneficially own all such shares.

 

(3)           Includes 84,542 shares issuablepursuant to currently exercisable warrants and 2,877,420 shares issuablepursuant to outstanding stock options that are exercisable currently or within60 days of April 3, 2009 and includes 969 shares held by James Kang’sminor children.  Does not include the1,700,000 shares that Mr. Kang has agreed to personally purchase on October 31,2006 from Innometal Co., Ltd. as an inducement for Innometal to enter into aSettlement Agreement with us.  Innometalagreed to accept these shares in full satisfaction of all of our obligations tothem under January 2004 settlement agreement.

 

(4)           Includes 182,400 shares held by Mr. Kang’sminor children and 1,752,905 shares issuable pursuant to outstanding stockoptions that are exercisable currently or within 60 days of April 3,2009.  Does not include 410,000 sharesthat are issuable pursuant to outstanding stock options that are notexercisable currently or within 60 days of April 3, 2009.

 

(5)           Includes 16,130 shares held by Mr. Tanella’sinvestment firm, HarborLight Diversified Fund, LP; 2,890 shares held by Mr. Tanella’sfamily; and 94,000 shares issuable pursuant to outstanding stock options thatare exercisable currently or within 60 

 

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daysof April 3, 2009. Does not include 86,000 shares that are issuablepursuant to outstanding stock options that are not exercisable currently orwithin 60 days of April 3, 2009.

 

(6)           Includes 280,031 shares issuablepursuant to outstanding stock options that are exercisable currently or within60 days of April 3, 2009. Does not include 38,000 shares that are issuablepursuant to outstanding stock options that are not exercisable currently orwithin 60 days of April 3, 2009.

 

(7)           Includes 305,918 shares issuablepursuant to currently exercisable warrants and 457,023 shares issuable pursuantto currently convertible notes; and 52,000 shares issuable pursuant tooutstanding stock options that are exercisable currently or within 60 days of April 3,2009.  Does not include 38,000 sharesthat are issuable pursuant to outstanding stock options that are notexercisable currently or within 60 days of April 3, 2009.

 

(8)           Includes 100,000 shares issuablepursuant to outstanding stock options that are exercisable currently or within60 days of April 3, 2009.  Does notinclude 400,000 shares that are issuable pursuant to outstanding stock optionsthat are not exercisable currently or within 60 days of April 3, 2009.

 

(9)           Does not include 200,000 shares thatare issuable pursuant to outstanding stock options that are not exercisablecurrently or within 60 days of April 3, 2009.

 

**Equity Incentive / EquityCompensation Plans**

 

Our executive officers, directors, and all of our employeesare allowed to participate in our equity incentive plans.  We believe that providing them with theability to participate in such plans provides them with a further incentivetowards ensuring our success and accomplishing our corporate goals.

 

Securities authorized forissuance under equity compensation plans as of December 31, 2008 were asfollows:

 
| **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     |       | 7,975,782                                                                                                                                              |       | $                                                                                                                 | 3.81       |                                                                                                                                                                                                                  | 7,908,579  |   |
| Equity compensation plans not approved by stockholders |       | 14,443,183                                                                                                                                             |       | $                                                                                                                 | 1.64       |                                                                                                                                                                                                                  | —     |   |
| Total                                                  |       | 22,418,965                                                                                                                                             |       |                                                                                                              |       | 7,908,579                                                                                                                                                                                                             |       |

 

Equity compensation plans not approved by stockholdersconsist of:

 

**·**                  Warrants to purchase up to 1,039,255shares issued on June 13, 2005 with an exercise price of $1.72 per share andan 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;

** **

**·**                  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;

 

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**·**                  Warrants to purchase up to 25,000 sharesissued on May 6, 2008 with an exercise price of $1.75 per share and anexpiration date of May 17, 2011.

** **

The number of securities and type of plans available forfuture issuance of stock options as of December 31, 2008 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 |   | 3,039,198 |   | — |   |
| 2002 Equity Incentive Plan                    |       | 10,000,000                                                          |       | — |   | 2,621,421 |   | 7,378,579 |   |
| 2002 Non-employee Director  Stock Option Plan |       | 1,000,000                                                           |       | — |   | 470,000 |   | 530,000 |   |
| Total Stock Options                           |       | 23,903,226                                                          |       | 1,974,365 |   | 6,130,619 |   | 7,908,579 |   |

 

**1996 Stock Option Plan**

 

Our 1996 Stock Option Plan provides for the grant of stockoptions to employees, directors, and consultants of our company and itsaffiliates. The purpose of the plan is to retain the services of existingemployees, directors, and consultants; to secure and retain the services of newemployees, directors, and consultants; and to provide incentives for suchpersons to exert maximum efforts for our success. The plan provides for the grantingto employees of incentive stock options within the meaning of Section 422of the Internal Revenue Code of 1986, as amended, and for the granting toemployees and consultants of nonstatutory stock options. Our board of directorsterminated the 1996 Stock Option Plan on April 4, 2002. The terminationwill not affect any outstanding options under the plan, and all such optionswill continue to remain outstanding and be governed by the plan.

 

Options granted under the 1996 Stock Option Plan aregenerally not transferable by the optionee except by will or the laws ofdescent and distribution, and each option is exercisable, during the lifetimeof the optionee, only by the optionee. Options generally must be exercisedwithin 90 days after the optionee’s termination for cause, three monthsfollowing the end of the optionee’s status as an employee or consultant, otherthan for cause or for death or disability, or within six months after theoptionee’s termination by disability or twelve months following the optionee’stermination by death. However, in no event may an option be exercised laterthan the earlier of the expiration of the term of the option or ten years fromthe date of the grant of the option or, where an optionee owns stockrepresenting more than 10% of the voting power, five years from the date of thegrant of the option in the case of incentive stock options.

 

As of December 31, 2008, options to purchase 3,039,198shares of common stock were outstanding at a weighted average price of $5.76per share under the 1996 Stock Option Plan. As of December 31, 2008,options to purchase 1,974,365 shares had been issued upon exercise of optionsunder the plan. There were 3,224,683 options exercisable under the 1996 StockOption Plan as of December 31, 2007.

 

**2002 Equity Incentive Plan**

 

Our 2002 Equity Incentive Plan, which was adopted by ourboard of directors and approved by our stockholders in April 2002,provides for the grant of stock options to officers, employees, consultants,and directors of our company and its subsidiaries. The purpose of the plan isto advance the interests of our stockholders by enhancing our ability toattract, retain, and motivate persons who make or are expected to makeimportant contributions to our company and its subsidiaries by providing suchpersons with equity ownership opportunities and performance-based incentives,thereby better aligning their interests with those of our stockholders. Theplan provides for the granting to employees of incentive stock options withinthe 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 is administered by our board of directors or acommittee appointed by our board of directors. All members of such a committeemust be a non-employee director and an outside director, as defined in theplan. Subject to the limitations set forth in the plan, the administrator hasthe authority to select the persons to whom grants are to be made, to designatethe number of shares to be covered by each stock award, to determine whether anoption is to be an incentive stock option or a nonstatutory stock option, to 

 

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establish vesting schedules, to specify the option exerciseprice and the type of consideration to be paid upon exercise, and, subject tosome restrictions, to specify other terms of stock awards.

 

The administrator establishes the option exercise price,which in the case of incentive stock options, must be at least the fair marketvalue of the common stock on the date of the grant or, with respect tooptionees who own at least 10% of our outstanding common stock, 110% of fairmarket value. If our common stock is listed and traded on a registered nationalor regional securities exchange, or quoted on the National Association ofSecurities Dealers’ Automated Quotation System, fair market value is theaverage closing price of a share of our common stock on such exchange orquotation system for the five trading days prior to the date of grant. If ourcommon stock is not traded on a registered securities exchange or quoted insuch a quotation system, fair market value is determined in good faith by theadministrator.

 

Options granted under the plan are generally nottransferable by the optionee except by will or the laws of descent anddistribution, and to certain related individuals with the consent of theadministrator. Options generally must be exercised within three months afterthe optionee’s termination of employment for any reason other than disabilityor death, or within 12 months after the optionee’s termination by disability.Options granted under the plan vest at the rate specified in the optionagreement. However, in no event may an option be exercised later than theearlier of the expiration of the term of the option or 10 years from the dateof the grant of the option, or when an optionee owns stock representing morethan 10% of the voting power, five years from the date of the grant of theoption in the case of incentive stock options.

 

Any incentive stock options granted to an optionee which,when combined with all other incentive stock options becoming exercisable forthe first time in any calendar year that are held by that person, would have anaggregate fair market value in excess of $0.1 million, shall automatically betreated as nonstatutory stock options.

 

The plan may be amended, altered, suspended or terminatedby our board of directors at any time, but no such amendment, alteration,suspension or termination may adversely affect the terms of any optionpreviously granted without the consent of the affected optionee. Unless terminatedsooner, the plan will terminate automatically in September 2012.  As of December 31, 2008, there were2,621,421 outstanding options or stock awards at a weighted average price of$1.55 under the plan.  There were1,218,021 options exercisable under the 2002 Equity Incentive Plan as of December 31,2008.

 

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

 

Our 2002 Non-employee Director Stock Option Plan wasadopted by our board of directors and by our stockholders in April 2002.We have reserved a total of one million shares of our common stock for issuanceunder the plan. The option grants under the plan are automatic andnondiscretionary, and the exercise price of the options is equal to 100% of thefair market value of our common stock on the grant date.

 

Only non-employee directors are eligible for grants underthe plan. The plan will provide for an initial grant to a new non-employeedirector of an option to purchase 50,000 shares of our common stock. Subsequentto the initial grants, each non-employee director will be automatically grantedon the first business day of January commencing January 1, 2003, anoption to purchase 10,000 shares of our common stock.

 

The term of the options granted under the plan is 10 years,but the options expire 12 months after the termination of the optionee’s statusas a director or three months if the termination is due to the voluntaryresignation of the optionee. The option grants will vest and become exercisableas to one-fifth of the shares on the date that is one year after the date ofgrant and an additional one-fifth of the shares subject to the option on acumulative basis will vest and become exercisable annually thereafter.

 

As of December 31, 2008, options to purchase 470,000shares of common stock were outstanding at a weighted average price of $1.85per share under the 2002 Non-employee Director Stock Option Plan. There were200,000 options exercisable under the 2002 Non-employee Director Stock OptionPlan as of December 31, 2008.

 

The plan will terminate in October 2012, unless ourboard of directors terminates it sooner.

 

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**Item 13. CertainRelationships and Related Transactions**

 

We are a partyto a consulting agreement with William Johnson, a former director of ourcompany, on a month-to-month basis starting from 2005.  During each of the years ended December 31,2008, 2007 and 2006, the Company incurred approximately $0.1 million consultingfees from Mr. Johnson.

 

Soo Buchanan, thesister of John Kang, the our Chairman of the Board, provides services us aconsultant.  During the years ended December 31,2008, 2007 and 2006, we incurred approximately $0.1 million, $0 and $0, respectively,for her services as a consultant. Additionally, Otis Buchanan, the husband of Ms. Buchanan, wasemployed by us and was paid aggregate compensation of approximately $0.1million during each of the years ended December 31, 2008, 2007 and 2006.

 

On December 23,2008, John Kang advanced us $0.2 million to be used to repay our company’soutstanding borrowings made under the Factoring, Loan and Security Agreement(the “Factoring Agreement”), dated April 21, 2005, with a financingcompany.  Further, Mr. Kang enteredinto a Continuing Guarantee Agreement, dated January 5, 2009, with thefinancing company to personally guarantee repayment of the outstandingborrowings made under the Factoring Agreement. Subsequently in January 2009, the $0.2 million advance was offsetwith $0.2 million outstanding receivable from Mr. Kang arising fromliabilities incurred from certain stock transactions in August 2002.

 

As of December 31,2008 and 2007, CK Cho, a member of our Board of Directors, held approximately$0.5 million of the convertible subordinated notes and held 305,918 exercisablewarrants for both periods.

 

As of December 31,2008 and 2007, Ricardo Salas, the our former Chief Executive Officer, heldapproximately $0.4 million of the convertible unsecured subordinated notes andapproximately $0.3 million of the unsecured subordinated notes.  He also held a total of 377,691 ofexercisable warrants as of December 31, 2008 and 2007.

 

On June 1, 2007, we entered into atransaction with Grace Metal (currently Liquidmetal Korea Co., Ltd. “LMK”),under which (i) LMK agreed to purchase various equipments (including diecasting machines and vacuum induction melters) used in our bulk amorphous alloybusiness segment and (ii) we granted LMK a 10-year exclusive license tomanufacture products made from bulk Liquidmetal alloys for customers whoseprincipal headquarters or whose major operations are located in SouthKorea.  LMK was formed by an investorgroup that includes the former director and officer of our company, James Kang,who is also the brother of John Kang, our Chairman of the Board.  Under an equipment purchase agreement betweenus and LMK, LMK agreed to buy the purchased equipment for a total purchaseprice of $2.0 million, of which $0.8 million were received as of December 31,2008.  The equipment purchase agreementprovides that delivery of the equipment can be delayed to accommodate ourcontinuing manufacturing needs, and it also provides that we will retain asecurity interest in the purchased equipment until full payment of the purchaseprice.

 

In consideration of the license agreement withLMK, we will be entitled to royalty of 10% of LMK’s net sales of licensedproducts (unless LMK’s margin on the products falls below specified levels, inwhich case a new royalty will be negotiated in good faith).  Effective June 1, 2008, the royalty ratewas adjusted to 5%.  The agreementprovides that we may convert the license to a non-exclusive in the event thatthe net sales in the second year of the contract or thereafter are notsufficient to result in royalties of $0.5 million or more per year.  The agreement also provides that LMK will berequired to purchase all alloy feedstock from us, and we will have the right tocontinue to manufacture Liquidmetal alloy products for South Korean customersuntil all purchased equipment has been commissioned.

 

Additionally, effective June 1, 2007, wediscontinued our post-processing operation in Weihai, China and transferred themanufacturing staff and equipment in Weihai to LMK under an amendment to theequipment purchase agreement with LMK. Further, we transferred certain of our manufacturing staff from itsSouth Korean plant to LMK.  As a result,LMK assumed $0.4 million of accrued severance liability for the transferredemployees.  The equipment purchaseagreement and the transfer agreement regarding our Weihai operations resultedin a total net gain of $0.2 million, which is recorded as other income duringthe year ended December 31, 2007.

 

Wepurchased production supplies and outsourced production of certain bulk alloyproduction with LMK, Lead Metal, and SDM, which are controlled by James Kang, aformer director and officer of our company and the brother of our currentChairman of the Board.  In June 2008,we began sharing the use of our manufacturing facility and production equipmentin Pyongtaek, South Korea, with LMK as we began significant outsourcing of ourbulk alloy parts production. We incurred expenses for purchase of productionsupplies and outsourcing fees of $2.1 million, $0.7 million and $0.5 millionduring the years ended December 31, 2008, 2007 and 2006,respectively.  We recognized revenue fromsales of raw materials and royalties for a total of $2.0 million and $3.4million during the years ended December 31, 2008 and 2007,respectively.  Approximately, $0.2million and $0.4 million is included in accounts receivables as of December 31,2008 and 2007, respectively for outstanding trade receivables due.

 

EffectiveOctober 20, 2006, James Kang began providing services us as a consultant,which would have continued through December 31, 2009.  On December 31, 2007, the terms of theconsulting agreement were accelerated whereby the remaining two years of Mr. Kang’sconsulting fees were settled for $435.

 

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In December 2007,we entered into agreements with two holders of our convertible subordinatednotes (the “January 2010 Notes”) and LMK, a South Korean company formed byinvestor groups including our former director and officer of our company, JamesKang, and the two former noteholders, whereby LMK would assume the liabilitiesdue under the January 2010 Notes, including principal, interest, and feesdue by our company to the two noteholders totaling $0.4 million and we releasedobligations due from LMK for outstanding trade accounts receivables.  In connection with the assumption of the liabilitiesby LMK, warrants to purchase 179,620 shares of our common stock held by theholders were cancelled.

 

We believe that each of the foregoing transactions wasconsummated on terms at least as favorable to us as we would expect tonegotiate 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**       | ** ** | **2007 ** | ** ** | **2008** | ** ** |
|----------------|------------|----------------|------------|----------|------------|
| Audit Fees (1) |       | $              | 406,000    |     | $          | 297,000 |   |
|                |            |                |            |          |            |  |  |

 

----

(1) *Audit Fees.*

 

Feesfor audit services billed in 2008 consisted of:

·                  Audit of the Company’s financial statementsfor 2007;

·                  Review of the Company’s quarterly financialstatements for 2008;

·                  Review of the Company’s internal controls inaccordance with Section 404 of the Sarbanes-Oxley Act of 2002 for 2007;

 

Feesfor audit services billed in 2007 consisted of:

·                  Audit of the Company’s financial statementsfor 2006;

·                  Review of the Company’s quarterly financialstatements for 2007;

·                  Review of the Company’s internal controls inaccordance with Section 404 of the Sarbanes-Oxley Act of 2002 for 2007;

·                  Review of the Company’s S-1 filing for 2007.

 

**PART IV**

 

**Item 15. Exhibits andFinancial Statement Schedules**

 

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

 

1. *Financial Statements*.

 

2. *Financial Statement Schedules*. See thelast page of Consolidated Financial Statements.

 

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

 

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

 

(c)   *FinancialStatement Schedules*. See Item 15(a)(2) above.

 

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**EXHIBITINDEX**

 
| **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)).*                                                                                                                                                                 |

 

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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 *(incorporated by reference from Exhibit 10.34  to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.35               |       | Form of  Convertible Subordinated Note, dated December 28, 2007*(incorporated by reference from Exhibit 10.35  to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.36               |       | Form of  Common Stock Purchase Warrant, dated December 28, 2007*(incorporated by reference  from Exhibit 10.36 to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.37               |       | Form of  Letter dated, October 31, 2007, to extend 8% Unsecured Subordinated Note  due date *(incorporated by reference*                                                                                                                                                                                                                                                       |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                           |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       | * *                                                                                                                                                                                                                                                                           |
|                |       | *from  Exhibit 10.37 to the Form 10-K filed on April 3, 2008)**.*                                                                                                                                                                                                   |
|                |       | * *                                                                                                                                                                                                                                                                           |
| 10.38               |       | 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 22, 2008)**.*                                                           |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.39               |       | Form of  Convertible Subordinated Note, dated April 1, 2008 *(incorporated by reference from Exhibit 10.1  to the Form 10-Q filed on August 19, 2008)**.*                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.40               |       | Form of  Convertible Subordinated Note, dated July 1, 2008*(incorporated  by reference from Exhibit 10.2 to the Form 10-Q filed on  August 19, 2008)**.*                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.41               |       | Form of  letter dated, July 31, 2008, to extend to change the first redemption  date and amount of the Convertible Subordinated Notes due January 2010 *(incorporated by reference  from Exhibit 10.3 to the Form 10-Q filed on August 19, 2008)**.* |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.42               |       | Promissory Note,  dated October 21, 2008, between Liquidmetal Coatings, LLC and Bank  Midwest N.A.                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.43               |       | Form of  Convertible Subordinated Note, dated October 1, 2008.                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.44               |       | Form of  Convertible Subordinated Note, dated January 1, 2009.                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.45               |       | Continuing Guarantee  Agreement, dated January 5, 2009, between John Kang and Hana Financial, Inc.                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 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 compensatory plan orarrangement required to be filed as an exhibit this Form 10-K.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                       |   | Liquidmetal Technologies, Inc.    |
|----------------------------|--------|----------------------------------------|
|                       |   |                                   |
|                       |   |                                   |
|                       | By:    | /s/ Larry E. Buffington                |
|                       |   | Larry E. Buffington                    |
|                       |   | President and Chief  Executive Officer |
|                       |   |                                   |
| Date: April 15,  2009 |   |                                   |
|                       |   |                                   |
|                       | By:    | /s/ Tony Chung                         |
|                       |   | Tony Chung                             |
|                       |   | Chief Financial Officer                |
|                       |   |                                   |
| Date: April 15,  2009 |   |                                   |

 

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**POWEROF ATTORNEY**

 

KNOWALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints Larry Buffington and Tony Chung and each ofthem, jointly and severally, his attorneys-in-fact, each with full power ofsubstitution, for him in any and all capacities, to sign any and all amendmentsto this Report on Form 10-K, and to file the same, with exhibits theretoand other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each saidattorneys-in-fact or his substitute or substitutes, may do or cause to be doneby virtue hereof.

 

Pursuantto the requirements 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 andin the capacities and on the dates indicated:

 
| **Signature**           | ** ** | **Title**                         | ** ** | **Date**            |
|-------------------------|------------|-----------------------------------|------------|---------------------|
|                    |       |                              |       |                |
| /s/ John Kang      |       | Chairman of the Boardand Director |       | April 15, 2009 |
| John Kang               |       |                              |       |                |
|                    |       |                              |       |                |
| /s/ Robert Biehl   |       | Director                          |       | April 15, 2009 |
| Robert Biehl            |       |                              |       |                |
|                    |       |                              |       |                |
| /s/  Dean Tanella  |       | Director                          |       | April 15, 2009 |
| Dean  Tanella           |       |                              |       |                |
|                    |       |                              |       |                |
| /s/  CK Cho        |       | Director                          |       | April 15, 2009 |
| CK  Cho                 |       |                              |       |                |

 

 

Certificationsprovided as Exhibits.

 

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                             | ** ** | **Page** |
|------------------------------------------------------------------------|------------|----------|
|                                                                   |       |     |
| Report of Independent  Registered Public Accounting Firm               |       | 68       |
| Consolidated Financial  Statements:                                    |       |     |
| Consolidated Balance Sheets                                            |       | 69       |
| Consolidated Statements of  Operations and Comprehensive Income (Loss) |       | 70       |
| Consolidated Statements of  Shareholders’ Equity (Deficiency)     |       | 71       |
| Consolidated Statements of  Cash Flows                                 |       | 72       |
| Notes to  Consolidated Financial Statements                            |       | 74       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of Liquidmetal Technologies, Inc.

 

Wehave audited the accompanying consolidated balance sheets of LiquidmetalTechnologies, Inc. and subsidiaries (the “Company”) as of December 31,2008 and 2007, and the related consolidated statements of operations andcomprehensive loss, shareholders’ equity (deficiency), and cash flows for theyears ended December 31, 2008, 2007, and 2006.  Our audits also included the financialstatement schedules listed at index in Item 15(a) as of and for the yearsended December 31, 2008, 2007, and 2006. Our responsibility is to express an opinion on the financial statementsand financial statement schedules based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Liquidmetal Technologies, Inc.and subsidiaries as of December 31, 2008 and 2007, and the results oftheir operations and cash flows for the years ended December 31, 2008,2007, and 2006, in conformity with accounting principles generally accepted inthe United States of America.  Also, inour opinion, such financial statement schedules, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairlyin all material respects the information set forth therein.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 2 to theconsolidated financial statements, the Company’s significant operating lossesand working capital deficit raise substantial doubt about its ability tocontinue as a going concern. Management’s plans regarding those matters alsoare described in Note 2. The consolidated financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

 

/s/Choi, Kim & Park LLP

 

LosAngeles, California

CertifiedPublic Accountants

 

April 13,2009

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                            |       |                  |       |                  |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Current assets:                                                                                                                                                       |       |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 157        |                  | $          | 1,180 |   |
| Trade accounts receivables, net of allowance for doubtful accounts of  $121 and $89                                                                                   |       | 2,237                 |       | 5,165                 |       |
| Inventories                                                                                                                                                           |       | 820                   |       | 2,298                 |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 967                   |       | 708                   |       |
| Total current assets                                                                                                                                                  |       | 4,181                 |       | 9,351                 |       |
| Property, plant and equipment, net                                                                                                                                    |       | 7,021                 |       | 9,730                 |       |
| Idle equipment                                                                                                                                                        |       | —                |       | 178                   |       |
| Other intangibles, net                                                                                                                                                |       | 1,069                 |       | 1,142                 |       |
| Investment in joint venture                                                                                                                                           |       | 306                   |       | 306                   |       |
| Other assets                                                                                                                                                          |       | 663                   |       | 1,806                 |       |
| Total assets                                                                                                                                                          |       | 13,240                |       | 22,513                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIENCY**                                                                                                                     |       |                  |       |                  |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Current liabilities:                                                                                                                                                  |       |                  |       |                  |       |
| Accounts payable and accrued expenses                                                                                                                                 |       | 8,563                 |       | 8,056                 |       |
| Deferred revenue                                                                                                                                                      |       | 40                    |       | 316                   |       |
| Short-term debt                                                                                                                                                       |       | 1,176                 |       | 2,138                 |       |
| Long-term debt, current portion, net of debt discounts of $7,128 and  $838                                                                                            |       | 14,172                |       | 6,101                 |       |
| Warrant liabilities                                                                                                                                                   |       | 692                   |       | 2,583                 |       |
| Conversion feature liabilities                                                                                                                                        |       | 147                   |       | 2,083                 |       |
| Other liabilities, current portion                                                                                                                                    |       | 146                   |       | 398                   |       |
| Total current liabilities                                                                                                                                             |       | 24,936                |       | 21,675                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Long-term debt, net of current portion and debt discounts of $0 and  $9,634                                                                                           |       | 8,521                 |       | 14,623                |       |
| Other long-term liabilities, net of current portion                                                                                                                   |       | 163                   |       | 411                   |       |
| Total liabilities                                                                                                                                                     |       | 33,620                |       | 36,709                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Minority interests                                                                                                                                                    |       | 651                   |       | 384                   |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Shareholders’ deficiency:                                                                                                                                        |       |                  |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares authorized and  44,825,402 and 44,726,295 issued and outstanding at December 31, 2008  and 2007, respectively |       | 45                    |       | 45                    |       |
| Additional paid-in capital                                                                                                                                            |       | 140,204               |       | 137,293               |       |
| Accumulated deficit                                                                                                                                                   |       | (162,307              | )          | (154,710              | )          |
| Accumulated other comprehensive income                                                                                                                                |       | 1,027                 |       | 2,792                 |       |
| Total shareholders’ deficiency                                                                                                                                   |       | (21,031               | )          | (14,580               | )          |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Total liabilities and shareholders’ deficiency                                                                                                                   |       | $                     | 13,240     |                  | $          | 22,513 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

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

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

 
| ** **                                                               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                  |       | $                                           | 22,083     |   | $ | 29,022 |   | $ | 27,669 |   |
| Cost of sales                                                            |       | 17,131                                      |       | 26,459 |   | 22,418 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Gross profit                                                             |       | 4,952                                       |       | 2,563 |   | 5,251 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Operating expenses                                                       |       |                                        |       |   |   |   |   |
| Selling, general, and administrative                                     |       | 6,529                                       |       | 8,921 |   | 9,962 |   |
| Research and development                                                 |       | 1,022                                       |       | 1,123 |   | 950 |   |
| Impairment of long-lived assets                                          |       | 132                                         |       | — |   | — |   |
| Total operating expenses                                                 |       | 7,683                                       |       | 10,044 |   | 10,912 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before interest, other income, income taxes, and minority  interest |       | (2,731                                      | )          | (7,481 | ) | (5,661 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss from extinguishments of debt                                        |       | —                                      |       | (648 | ) | — |   |
| Change in value of warrants, gain                                        |       | 1,890                                       |       | 4,923 |   | 279 |   |
| Change in value of conversion feature, gain (loss)                       |       | 1,987                                       |       | 6,965 |   | (226 | ) |
| Other expense                                                            |       | (17                                         | )          | — |   | — |   |
| Other income                                                             |       | 429                                         |       | 226 |   | 572 |   |
| Interest expense                                                         |       | (7,712                                      | )          | (9,364 | ) | (9,509 | ) |
| Interest income                                                          |       | 3                                           |       | 123 |   | 23 |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before income taxes and minority interest                           |       | (6,151                                      | )          | (5,256 | ) | (14,522 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Income taxes                                                             |       | —                                      |       | — |   | — |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss before minority interest                                            |       | (6,151                                      | )          | (5,256 | ) | (14,522 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Minority interests                                                       |       | (421                                        | )          | (384 | ) | — |   |
|                                                                     |       |                                        |       |   |   |   |   |
| Loss from continuing operations                                          |       | (6,572                                      | )          | (5,640 | ) | (14,522 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                 |       | (6,572                                      | )          | (5,640 | ) | (14,522 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Other comprehensive income (loss):                                       |       |                                        |       |   |   |   |   |
| Foreign exchange translation (loss) gain during the period               |       | (1,765                                      | )          | 183 |   | 339 |   |
| Comprehensive income (loss)                                              |       | $                                           | (8,337     | ) | $ | (5,457 | ) | $ | (14,183 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Per common share basic and diluted:                                      |       |                                        |       |   |   |   |   |
| Loss per share basic and diluted                                         |       | $                                           | (0.15      | ) | $ | (0.13 | ) | $ | (0.33 | ) |
|                                                                     |       |                                        |       |   |   |   |   |
| Number of weighted average shares - basic and diluted                    |       | 44,735                                      |       | 44,730 |   | 43,809 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

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

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

** **
| ** **                                        | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| **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         |                             | $          | 136,032                  |       | $                                                         | (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 | ) |
| Common stock issued in lieu of cash               |       | 99,107             |       | —            |       | 69                               |       | —                   |       | —                                                    |       | 69         |       |
| Stock-based compensation                          |       | —             |       | —            |       | 578                              |       | —                   |       | —                                                    |       | 578        |       |
| Foreign exchange translation loss                 |       | —             |       | —            |       | —                           |       | —                   |       | (1,765                                                    | )          | (1,765     | )          |
| Cash distribution to minority interests           |       | —             |       | —            |       | —                           |       | (1,025                   | )          | —                                                    |       | (1,025     | )          |
| Preferred units capital account of subsidiary     |       | —             |       | —            |       | 2,264                            |       | —                   |       | —                                                    |       | 2,264      |       |
| Net loss                                          |       | —             |       | —            |       | —                           |       | (6,572                   | )          | —                                                    |       | (6,572     | )          |
| **Balance, December 31, 2008**               |       | 44,825,402         |       | $                 | 45         |                             | $          | 140,204                  |       | $                                                         | (162,307   | )          | $          | 1,027 |   | $ | (21,031 | ) |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands, except share data)**

 
| ** **                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating activities:**                                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                  |       | $                                           | (6,572     | ) | $ | (5,640 | ) | $ | (14,522 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Adjustments to reconcile loss from operations to net cash used for operating  activities: |       |                                        |       |   |   |   |   |
| Impairment of long-lived assets                                                           |       | 132                                         |       | — |   | — |   |
| Gain on disposal of asset                                                                 |       | (15                                         | )          | (226 | ) | — |   |
| Minority interests in income of consolidated subsidiary                                   |       | 421                                         |       | 384 |   | — |   |
| Depreciation and amortization                                                             |       | 1,275                                       |       | 3,102 |   | 3,574 |   |
| Loss on extinguishment of debt                                                            |       | —                                      |       | 648 |   | — |   |
| Amortization of debt discount                                                             |       | 3,883                                       |       | 5,350 |   | 6,158 |   |
| Stock-based compensation                                                                  |       | 578                                         |       | 642 |   | 1,075 |   |
| Bad debt expense (recovery)                                                               |       | (83                                         | )          | 7 |   | 47 |   |
| Warranty expense                                                                          |       | 184                                         |       | 169 |   | 46 |   |
| Gain from change in value of warrants                                                     |       | (1,890                                      | )          | (4,923 | ) | (279 | ) |
| (Gain) loss from change in value of conversion feature                                    |       | (1,987                                      | )          | (6,965 | ) | 225 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Changes in operating assets and liabilities:                                              |       |                                        |       |   |   |   |   |
| Trade accounts receivable                                                                 |       | 3,012                                       |       | (1,061 | ) | (1,621 | ) |
| Inventories                                                                               |       | 1,479                                       |       | 1,467 |   | (2,017 | ) |
| Prepaid expenses and other current assets                                                 |       | (259                                        | )          | (1 | ) | (221 | ) |
| Other assets                                                                              |       | 654                                         |       | (2,211 | ) | 142 |   |
| Accounts payable and accrued expenses                                                     |       | 393                                         |       | (1,545 | ) | 3,371 |   |
| Deferred revenue                                                                          |       | (276                                        | )          | 114 |   | (1,073 | ) |
| Other liabilities                                                                         |       | (501                                        | )          | 450 |   | (171 | ) |
| Net cash provided by (used for) operating activities                                      |       | 428                                         |       | (10,239 | ) | (5,266 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Investing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                       |       | (1,087                                      | )          | (1,171 | ) | (932 | ) |
| Proceeds from the sale of property and equipment                                          |       | (17                                         | )          | 400 |   | 104 |   |
| Investment in patents and trademarks                                                      |       | (51                                         | )          | (103 | ) | (104 | ) |
| Investment in joint venture                                                               |       | —                                      |       | (303 | ) | (3 | ) |
| Net cash used for investing activities                                                    |       | (1,155                                      | )          | (1,177 | ) | (935 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| **Financing Activities:**                                                                 |       |                                        |       |   |   |   |   |
| Proceeds from borrowings                                                                  |       | 16,438                                      |       | 45,863 |   | 23,620 |   |
| Repayment of borrowings                                                                   |       | (18,707                                     | )          | (33,166 | ) | (18,117 | ) |
| Proceeds from issuance of preferred units of subsidiary                                   |       | 2,500                                       |       | — |   | — |   |
| Redemption of preferred units of subsidiary                                               |       | (237                                        | )          | — |   | — |   |
| Repayment of other liabilities                                                            |       | —                                      |       | — |   | 69 |   |
| Cash distributions                                                                        |       | (1,178                                      | )          | (23 | ) | — |   |
| Net cash provided by (used for) financing activities                                      |       | (1,184                                      | )          | 12,674 |   | 5,572 |   |
| Effect of foreign exchange translation                                                    |       | 888                                         |       | (222 | ) | (619 | ) |
| Net (decrease) increase in cash and cash equivalents                                      |       | (1,023                                      | )          | 1,036 |   | (1,248 | ) |
|                                                                                      |       |                                        |       |   |   |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 1,180                                       |       | 144 |   | 1,392 |   |
| Cash and cash equivalents at end of period                                                |       | $                                           | 157        |   | $ | 1,180 |   | $ | 144 |   |
|                                                                                      |       |                                        |       |   |   |   |   |
| Supplemental cash flow information                                                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                             |       | $                                           | 2,007      |   | $ | 2,874 |   | $ | 1,970 |   |
| Taxes paid                                                                                |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.****AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)**

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

 

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, theCompany fulfilled its settlement payable to Innometal (formerly known asGrowell Metal) of $3,450, net of foreign exchange translation loss, throughstock issuance of 1,700,000 shares of the company’s common stock.

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

**1. Description of Business**

 

LiquidmetalTechnologies, Inc. (“Liquidmetal Technologies”) and its subsidiaries(collectively “the Company”) are in the business of developing, manufacturing,and marketing products made from amorphous alloys. Liquidmetal Technologiesmarkets and sells Liquidmetal® alloy industrial coatings and also manufactures,markets and sells products and components from bulk Liquidmetal alloys that canbe incorporated into the finished goods of its customers across a variety ofindustries.   The Company also partnerswith third-party licensees and distributors to develop and commercializeLiquidmetal alloy products.

 

TheCompany classifies operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys. Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal-burning power plants. Bulk Liquidmetal alloys includepotential market opportunities to manufacture and sell products and componentsfor electronic devices, medical devices, defense applications, and sportinggoods.  In addition, such alloys are usedto generate research and development services revenue for developing usesrelated primarily to defense and medical applications as well as potentiallicense fees, royalties, and other compensation from strategic partneringtransactions.

 

OnJuly 24, 2007, the Company transferred substantially all of the assets ofits 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.  The transferincluded the thermal spray coatings assets and liabilities acquired under apurchase agreement with Foster Wheeler Energy Services in June 2007. The Company holds a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

**2. Liquidity**

 

TheCompany has experienced losses from continuing operations during the last threefiscal years and has an accumulated deficit of $162,307 as of December 31,2008.  Net cash provided by continuingoperations for the year ended December 31, 2008 was $426.  At December 31, 2008, working capitaldeficit was $20,755.  As of December 31,2008, the Company’s principal source of liquidity is $157 of cash and $2,237 oftrade 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 a significant strain on thefinancial resources of the Company.  The ability of the Company toovercome these challenges depends on its ability to correct its productioninefficiencies, reduce its operating costs, generate higher revenue, achievepositive cash flow from continuing operations and continued sources of debt andequity financing.  The consolidated financial statements do not includeany adjustments that might result from the outcome of these uncertainties.

 

Weanticipate that we will not have sufficient funds to pursue our currentoperating plan beyond the first quarter of 2009 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.

 

We cannot guarantee that adequate funds will be availablewhen needed, and if we do not receive sufficient capital, we may be required toalter or reduce the scope of our operations.

 

Additionally,we have approximately $1,210 of principal and accrued interest outstanding asof December 31, 2008, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  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, financial condition,and results of operations. We have not received a formal notice of defaultand we are currently working to resolve this matter with investors holding ourBridge Notes.

 

We were required underour amended Security Purchase Agreement, dated April 23, 2007, between ourcompany and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previously

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and2006**

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

 

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 in defaultunder the January 2010 Notes under the Debt Satisfaction Covenant. Further, we were required, beginning September 30, 2008 and at the end ofeach month thereafter, to redeem 1/32nd of the principal amount of the January 2010Notes.  An aggregate payment equal to $0.6 million was due September 30,2008. However, we did not have sufficient funds to make this payment, and,accordingly, we are in default under the January 2010 Notes.

 

The holders of the January 2010 Notes are entitled to accelerateall principal and interest under the January 2010 Notes.  As of thefiling of this report, we have received a formal notice of default and we are currently working toresolve this matter.  As a result, theoutstanding principal due under the January 2010 Notes of $19,113 isincluded in current portion of long-term debt and accrued interest and fees of$1,037 is included in accounts payable and accrued expenses as of December 31,2008.  Such defaults may havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working toresolve this matter with investors holding our January 2010 Notes.

 

Approximately$188 of principal and accrued interest became due from our Korean subsidiaryunder a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did nothave sufficient funds to repay the loan and we have received a formalnotice of default.  Kookmin Bank hasinitiated foreclosure proceedings on the loan collateral, which consists of ourmanufacturing plant facility and certain equipment in South Korea.  The foreclosure of our manufacturing plantfacility and equipment in South Korea would have material adverse effect on ouroperations, financial condition, and results of operations.  We arecurrently working to resolve this matter with Kookmin Bank by seeking aforbearance until we are able to obtain funding to repay this loan, althoughthere is no assurance that we will be able to obtain any such funding.

 

We have outstanding liens and judgments on ourassets by various creditors for past-due trade payables totaling $1,404, ofwhich $1,173 is held by creditors in South Korea, as of December 31,2008.  We are currently working toresolve the matter with each creditor****by seekingforbearance until we are able to obtain funding to repay the amounts due,although there is no assurance that we will be able to obtain any suchfunding.   If we cannot repay the amountsdue or obtain forbearance, the creditors may seek to foreclose on the Company’sassets.  Such a foreclosure would havematerial adverse effect on our operations, financial condition, and results ofoperations.

 

**3. Summary of Significant Accounting Policies**

 

*Principles of Consolidation.*Theconsolidated financial statements include the accounts of LiquidmetalTechnologies, Inc. and its wholly-owned subsidiaries, LiquidmetalTechnologies Co., Ltd., formerly Liquidmetal Korea Co., Ltd., (“LMT Korea”),located in South Korea, Liquidmetal Golf and its subsidiaries, which includedthe retail golf segment, now accounted for as a discontinued operations, andits majority-owned subsidiary, Liquidmetal Coatings, LLC, located in Texas. Allintercompany balances and transactions have been eliminated. A minorityinterest in Liquidmetal Golf is included in the consolidated financialstatements as a component of the loss from operations of the discontinued retailgolf segment (see Note 14).

 

*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.

 

TheCompany applies the percentage of completion method to recognize revenue earnedfrom government contracts that have cost-plus-fixed-fee arrangements.  These arrangements provide the Company withfull reimbursement on the actual cost incurred, plus a fixed fee that theCompany is entitled to.  Thesearrangements are covered by the American Institute of Certified PublicAccountants Statement of Position 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts*(SOP 81-1) and Accounting Research Bulletin No. 45, *Long-term Construction-Type Contracts* (ARB45). In addition, cost-reimbursable contracts are also specifically covered byAccounting Research Bulletin No. 43, Chapter 11, Section A, *Government Contracts, Cost-Plus-Fixed Fee Contracts*(ARB43). Substantially all of our cost-reimbursable and time and material contractsare 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.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

Saleson cost-reimbursable plus fixed fee type contracts are recognized as allowablecosts are incurred on the contract and become billable to the customer, at anamount equal to the allowable costs plus the estimated profit on thosecosts.  The estimated profit on acost-reimbursable contract is generally fixed or variable based on the contractfee arrangement.

 

*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 Company considers all cash and cashequivalents held under restrictive accounts as restricted 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 investment securitiesas available -for-sale. Available-for-sale securities are carried at fairvalue, 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 31,2008, one customer represented 18%, or $411, of the total outstanding tradeaccounts receivable.  As of December 31,2007, two customers represented 22%, or $1,148, of the total outstanding tradeaccounts receivable.

 

Theallowance for doubtful accounts reflects management’s best estimate of probablelosses inherent in the trade accounts receivable.  Management primarilydetermines the allowance based on the aging of accounts receivable balances,historical write-off experience, customer concentrations, customercreditworthiness and current industry and economic trends.  The Company’sprovisions for uncollectible receivables are included in selling, general andadministrative expense in the accompanying consolidated statements ofoperations 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 stated at cost less accumulated depreciation andamortization. Additions and major renewals are capitalized. Repairs andmaintenance are charged to expense as incurred. Upon disposal, the related costand accumulated depreciation are removed from the accounts, with the resultinggain or loss included in operating income. Depreciation is provided principallyon the straight-line method over the estimated useful lives of the assets,which range from two to twenty years.

 

Leasedproperty meeting certain criteria is capitalized and the present value of therelated lease payments is recorded as a liability. Amortization of capitalizedleased assets is provided on the straight-line method over the estimated usefullives of the assets, which is five 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 Company adoptedStatement 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-lived Assets*. The Company reviews long-livedassets to be held and used in operations for impairment whenever events orchanges in circumstances indicate that the carrying value of an asset may beimpaired. An impairment loss is recognized when the estimated fair value of theassets is less than the carrying value of the assets.  The Company recognized $132, $0, and $0during the years ended December 31, 2008, 2007 and 2006, respectively, forimpairment of long-lived assets.

 

*Fair Value of Financial Instruments.*Theestimated fair value of amounts reported in the consolidated financialstatements have been determined using available market information andvaluation methodologies, as applicable. The carrying amount of cash and cashequivalents, accounts receivable, accounts payable, and all other currentassets and liabilities approximate their fair value because of their short termmaturities at December 31, 2008 and 2007, unless otherwise stated. Thefair value of non-current 

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

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 Development Expenses.*Researchand development 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.

 

*Advertising and Promotion Expenses.*Advertisingand promotion expenses are expensed when incurred. Advertising and promotionexpenses were $22, $1, and $10, for the years ended December 31, 2008,2007 and 2006, 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 accounts for share-basedcompensation in accordance with the fair value recognition provisions of SFAS No. 123(R),*Share-based Payment*, whichrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the consolidated financial statements basedon their fair values. The fair value of stock options is calculated by usingthe Black-Scholes option pricing formula that requires estimates for expectedvolatility, expected dividends, the risk-free interest rate and the term of theoption. If any of the assumptions used in the Black-Scholes model changesignificantly, share-based compensation expense may differ materially in thefuture from that recorded in the current period. See additional informationrelated to share-based compensation in Note 13.

 

*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 31,2008.

 

*Translation of Foreign Currency*.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 expensesduring the reported periods. Actual results could differ from those estimates.These management estimates are primarily related to impairment of long-livedassets, inventory valuation, product warranty, and the allowance for bad debtaccount balances.

 

*Reclassifications.*Certain amounts from prior years have been reclassified to conform to thecurrent year’s presentation.

 

*New Accounting Pronouncements.*

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations”(“SFAS 141R”). SFAS 141R amends the requirements for accounting for businesscombinations.  SFAS 141R will be effective after the beginning of thefirst annual 

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

reportingperiod beginning on or after December 15, 2008.  The Company iscurrently evaluating the potential impact of the adoption of SFAS 141R on theCompany’s consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 160, Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS160”). This statement establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. Minority interests will be recharacterized as noncontrollinginterests and classified as a component of shareholders’ equity separate fromthe parent’s equity. In addition, SFAS 160 establishes reporting requirementsthat provide sufficient disclosures that clearly identify and distinguishbetween the interests of the parent and the interests of the noncontrollingowners. This statement is effective prospectively, except for certainretrospective disclosure requirements, for fiscal years beginning after December 15,2008. Accordingly, the Company will adopt SFAS 160 in 2009. The presentationand disclosure requirements of this standard must be applied retrospectivelyfor all periods presented and will impact how the Company presents anddiscloses noncontrolling interests and income from noncontrolling interests inour consolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — An Amendment of SFAS No. 133”(“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivativeinstruments and hedging activities by requiring enhanced disclosures regardingthe impact on financial position, financial performance, and cash flows. SFAS161 will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. The Company is currently evaluating thepotential impact of the adoption of SFAS 161 on the Company’s consolidatedfinancial statements.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill andOther Intangible Assets.” The intent of FSP 142-3 is to improve theconsistency between the useful life of a recognized intangible asset underSFAS 142 and the period of expected cash flows used to measure the fairvalue of an asset under SFAS 141(R) and other U.S. generally acceptedaccounting principles FSP 142-3 applies to intangible assets that are acquiredindividually or with a group of other assets acquired in business combinationsand asset acquisitions. FSP 142-3 also requires expanded disclosure related tothe determination of intangible asset useful lives. FSP 142-3 is effective forfiscal years beginning after December 15, 2008. The Company is currentlyevaluating the potential impact of FSP 142-3 on its consolidated financialstatements.

 

In May 2008, the FASBissued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May BeSettled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB14-1”) which clarifies that convertible debt instruments that may be settledin cash or other assets upon conversion are not addressed by APB No. 14, “Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants.”Additionally, FSP APB 14-1 requires an entity to separately account for theliability and equity components of a convertible instrument to reflect anentity’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. FSP APB 14-1 also expands the disclosure requirementsregarding convertible debt instrument terms and how the instrument is reflectedin an entity’s financial statements. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Company is currently evaluatingthe potential impact of FSP APB14-1 on its consolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. generallyaccepted accounting principles for nongovernmental entities. SFAS 162 willbecome effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board Auditing amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The Company is currently evaluating the impact of SFAS 162.

 

Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues  Task Force), the AICPA and theSEC did not or are not believed by management to have a material impact on ourcompany’s present or future consolidated financial statements.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

**4. Trade accounts receivable**

 

Tradeaccounts receivables from continuing operations were comprised of thefollowing:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Trade accounts receivable             |       | $                     | 2,358      |   | $ | 5,254 |   |
| Less: Allowance for doubtful accounts |       | (121                  | )          | (89 | ) |
| Trade accounts receivable, net        |       | $                     | 2,237      |   | $ | 5,165 |   |

 

**5. Inventories**

 

Inventorieswere comprised of the following:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Raw materials     |       | $                     | 426        |   | $ | 1,216 |   |
| Work in process   |       | 184                   |       | 536 |   |
| Finished goods    |       | 210                   |       | 546 |   |
| Total inventories |       | $                     | 820        |   | $ | 2,298 |   |

 

TheCompany analyzes inventory held for any excess or obsolescence issues.  Any amounts considered excess or obsolete arewritten off.  Further, as significantamount of sales of Liquidmetal bulk alloy parts are used primarily in consumerelectronics components, our inventory is subject to fluctuations in demand forthose consumer electronics goods. Accordingly, the Company reduces the carryingvalue of raw materials held by its subsidiaries, by the amounts considered tobe excess or obsolete.  During the yearended December 31, 2008, total write downs of excess or obsolete inventoryincluded in “Cost of sales” in the accompanying Statement of Operations andComprehensive Loss was $199 primarily from discontinued Liquidmetal bulk alloyparts used in our customer’s certain cell phone models.  There were no such write downs as of December 31,2007 and 2006.

 

**6. Property, Plant and Equipment**

 

Property,plant and equipment consists of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                            |       |                  |       |   |   |
| Machinery and equipment                         |       | $                     | 11,719     |   | $ | 13,951 |   |
| Computer equipment                              |       | 750                   |       | 1,234 |   |
| Office equipment, furnishings, and improvements |       | 1,002                 |       | 1,422 |   |
| Buildings                                       |       | 8,042                 |       | 10,870 |   |
| Construction in progress                        |       | —                |       | 369 |   |
| Total                                           |       | 21,513                |       | 27,846 |   |
| Accumulated depreciation                        |       | (14,492               | )          | (18,116 | ) |
| Total property, plant and equipment, net        |       | $                     | 7,021      |   | $ | 9,730 |   |

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

Depreciationexpense is classified as follows:

 
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                                        |       |   |   |   |   |
| Cost of sales                       |       | $                                           | 1,065      |   | $ | 2,831 |   | $ | 3,229 |   |
| Selling, general and administrative |       | 86                                          |       | 153 |   | 225 |   |
| Research and development            |       | 1                                           |       | — |   | — |   |
| Total depreciation expense          |       | $                                           | 1,152      |   | $ | 2,984 |   | $ | 3,454 |   |

 

**7. Idle Equipment**

 

Idleequipment consists of certain equipment held by the Company for use inexpansion of bulk alloy parts manufacturing.  While the equipment may beused internally to meet future capacity requirements, considering our currentrevenue and foreseeable production requirements, the Company does notanticipate utilizing this equipment internally in the near future.Additionally, the Company demined to write down the carrying value of the idleequipment during the fourth quarter of 2008 as the carrying value exceeded itsfair value.  The write-down amounted to$132 and is included as “Impairment of long-lived assets” in the accompanyingConsolidated Statement of Operations and Comprehensive Loss for the year ended December 31,2008. Total amount of idle equipment remaining was $0 and $178 as of December 31,2008 and 2007, respectively.

 

Duringthe year ended December 31, 2007, the Company disposed of $7 of idleequipment as part of the equipment purchase agreement and transfer agreementregarding Weihai operations with Grace Metal (see Note 21).

 

**8. Other Intangible Assets**

 

Intangible assets consist of the following:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                 |       |                  |       |   |   |
| Purchased and licensed patent rights |       | $                     | 566        |   | $ | 566 |   |
| Internally developed patents         |       | 1,357                 |       | 1,404 |   |
| Trademarks                           |       | 91                    |       | 85 |   |
| Total                                |       | 2,014                 |       | 2,055 |   |
| Accumulated amortization             |       | $                     | (945       | ) | $ | (913 | ) |
| Total intangible assets, net         |       | $                     | 1,069      |   | $ | 1,142 |   |

 

Amortizationexpense was $123, $123, and $119 for the years ended December 31, 2008,2007 and 2006, respectively.   Theestimated aggregate amortization expense for each of the five succeeding yearsis as follows:

 
| **December 31,** | ** ** | **Aggregate Amortization Expense** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| 2009                  |       | 122                                          |       |
| 2010                  |       | 120                                          |       |
| 2011                  |       | 118                                          |       |
| 2012                  |       | 108                                          |       |
| 2013                  |       | 94                                           |       |

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

AccumulatedAmortization for the years ended December 31, 2008 and 2007 is as follows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Purchased and licensed patent rights |       | $                     | (324       | ) | $ | (289 | ) |
| Internally developed patents         |       | (567                  | )          | (579 | ) |
| Trademarks                           |       | (54                   | )          | (45 | ) |
| Total                                |       | $                     | (945       | ) | $ | (913 | ) |

 

The weighted average amortization periods foreach of the years ended December 31, 2008, 2007, and 2006, is as follows:

 
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| 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.

 

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.

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued severance                                  |       | $                     | 255        |   | $ | 745 |   |
| Accrued operating lease costs                      |       | 54                    |       | 64 |   |
| Accrued capital lease costs                        |       | —                |       | — |   |
| Total                                              |       | 309                   |       | 809 |   |
|                                               |       |                  |       |   |   |
| Imputed interest                                   |       | —                |       | — |   |
| Total                                              |       | 309                   |       | 809 |   |
| Less current portion                               |       | (146                  | )          | (398 | ) |
| Other long term liabilities, less current  portion |       | $                     | 163        |   | $ | 411 |   |

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

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 $54 and $64 as of December 31, 2008 and 2007, respectively.

 

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 31,2008, the cost recorded for SEM Microscope and the JSM 6360 Electron Microscopeunder the capital lease was $47 and $320, respectively, and the accumulateddepreciation was $41 and $320, respectively. At December 31, 2007, the cost recorded for the office furnitureand furnishings, the SEM Microscope and the JSM 6360 Electron Microscope underthe capital lease was $112, $47 and $320, respectively, and the accumulateddepreciation was $112, $36 and $269, respectively.

 

**10. Product Warranty**

 

Management estimates product warranties as apercentage of certain bulk alloy product sales earned during the period. As of December 31,2008 and 2007, the Company used 5% of bulk alloy product sales as an estimateof warranties to be claimed.  As of December 31,2008, the Company used 1% of coatings applications sales as estimate ofwarranties to be claimed.  During theyears ended December 31, 2008 and 2007, the Company’s product warrantyaccrual balance had the following activity:

 
| Balance, December 31, 2006 |   | $      | 738    |   |
|---------------------------------|--------|--------|--------|--------|
| Accrual reduction               |   | (107   | )      |
| Warranty charges                |   | — |   |
| Balance, December 31, 2007 |   | $      | 631    |   |
| Expense accrual                 |   | 26     |   |
| Warranty charges                |   | (343   | )      |
| Balance, December 31, 2008 |   | $      | 314    |   |

 

The product warranty accrual balance wasincluded in accounts payable and accrued expenses at December 31, 2008 andDecember 31, 2007.

 

**11. Notes Payable**

 

Unsecured Subordinated Note

 

OnMay 17, 2006, September 21, 2006, andDecember 1, 2006, the Company issued 8% Unsecured Subordinated Notes due August 2007in the aggregate principal amount of $4,584 (the “August 2007 SubordinatedNotes”).  The August 2007Subordinated Notes are unsecured and became due August 2007.

 

As part of a privateplacement offer in January 2007, $925 of August Subordinated 2007Notes and $45 of accrued interest was exchanged for 8% ConvertibleSubordinated Notes due January 2010 (see Secured Convertible SubordinatedNotes below).  Additionally, as of December 31,2007, $900 of August Subordinated 2007 Notes and $46 of accrued interestwas retired.

 

As of December 30,2008 and December 31, 2007, the Company’s gross outstanding loan balanceof the August 2007 Subordinated Notes totaled $1,009 and $2,659, respectively,and are included in current portion of long-term debt.  The Company intends to fully repay theamounts due under the August 2007 Subordinated Notes.  However, as ofthe filing of this report, the Company does not have sufficient funds to repay theAugust 2007 Subordinated Notes.  As a result, the Company iscurrently in default under the August 2007 Notes.  The Company has not received a formal noticeof default and is currently working to resolve this matter with investorsholding the August 2007 Subordinated Notes.

 

Interest expense forthe amortization of discount on the note was $0, $630 and $434 for the yearsended December 31, 2008, 2007 and 2006, respectively.  As of December 31, 2008, 2007 and 2006,the effective interest rate for the August 2007 Subordinated Notes was 8%,33% and 33%, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

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, 2008, the exerciseprice of the warrants was reduced to $1.72 and $2.07 per share, respectively,and total amount of warrants was increased to 1,313,380.  The warrants will expire on May 17,2011.

 

Secured Convertible Subordinated Notes

 

On January 3,2007, the Company completed a private placement of 8% Convertible SubordinatedNotes due January 2010 (the “January 2010 Notes”).  Under theprivate placement, as amended, the Company issued $16,300 in principal amountof January 2010 Notes.  The January 2010 Notes were issued foraggregate cash in the amount of $12,850, in payment of a total of $3,377 inprincipal and accrued but unpaid interest under our previously issued 7% SeniorSecured Convertible notes due August 2007 (“August 2007 Notes”) andour 8% Unsecured Subordinated notes (the “August 2007 Subordinated Notes”),and $73 cash discount.   The January 2010Notes are subordinate to certain secured financing from commercial lendersincurred by the Company in the future.

 

The payment of thepreviously issued notes was treated as an extinguishment of the debt inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accountingfor a Modification or Exchange of Debt Instruments.”  The placementresulted in a $648 loss from extinguishment of debt, which consisted of writedown of $64 of deferred issue costs, $733 of debt discount, and decrease of$149 in conversion feature liability as a result of the change in carryingvalue of exchanged notes.

 

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

 

In April 2007, theCompany entered into an amendment to the Securities Purchase Agreement, dated January 3,2007, between the Company and the purchasers of the January 2010 Notes (“April 2007Amendment”) providing that the Company will have until October 1, 2007 torepay approximately $15,461 of the Company’s outstanding debt under previouslyissued promissory notes, including the August 2007 Subordinated Notes (“DebtSatisfaction Covenant”).  The Company hasnot fully repaid $1,009 principal due under the August 2007 SubordinatedNotes as of December 31, 2008.  As aresult, the Company is not in compliance with the Debt Satisfaction Covenant.  As of the filing of this report, the Companyhas received a formal notice of default under this covenant and is currentlyworking to resolve this matter.

 

The April 2007Amendment also finalized the schedule of investors in the Private Placement toshow a total of $16,300 in principal amount of Notes; decreased the conversionprice of the January 2010 Notes to $1.10, decreased the warrant exerciseprice for the warrants issued to $1.55, increased the number of shares subjectto such warrants issued to equal 7,657,591, and the purchasers of the Notesconsented 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 January 2010 Notes.

 

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

 

In December 2007,the Company entered into agreements with two holders of the January 2010Notes and Liquidmetal Korea Co., Ltd. (“LMK”), formerly Grace Metal, a SouthKorean company formed by investor groups including our former Founder anddirector, James Kang, and the two holders, whereby LMK would assume theliabilities due under the January 2010 Notes, including principal,interest, and fees due to the two holders totaling $434.  In connection with the assumption of theliabilities by LMK, warrants to purchase 179,620 shares of our common stockheld by the holders were cancelled (see Note 21).

 

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). The 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. 

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

From and after an eventof default 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). During 2007, the Company issued $971 of additional January 2010Notes for accrued interest and late registration fees.  During 2008, the Company issued $1,315 ofadditional January 2010 Notes for accrued interest.

 

The Company wasrequired, beginning July 31, 2008 and at the end of each month thereafter,to redeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of our common stock.  On July 31, 2008, the Company obtainedan agreement with the majority of the January 2010 Note holders to changethe amortization date of the principal to September 30, 2008 and to changethe redemption amount at each amortization date to be 1/32nd of the principalamount. As a result of this amendment, the Company was required to make anaggregate payment equal to $583 on September 30, 2008.  However, theCompany did not have sufficient funds to make this payment, and, accordingly,the Company is in default under the January 2010 Notes.  The holders of the January 2010 Notesare entitled to accelerate all principal and interest under the January 2010Notes.  The Company has received a formal notice of default under thiscovenant and is currently working to resolve this matter.  As a result, the outstanding principal dueunder the January 2010 Notes of $19,113 is included in current portion oflong-term debt as of December 31, 2008.

 

In connection with the January 2007private placement, the Company entered into a Registration Rights Agreementwith the purchasers of the January 2010 Notes under which the Company issubject to monetary penalties up to a maximum amount of 18% of the aggregateamount of Notes sold in the Private Placement if the registration statement isnot filed or does not become effective on a timely basis. The monetarypenalties will accrue at the rate of 1% per month of the then-outstandingprincipal amount of the January 2010 Notes. As of December 31, 2008,an aggregate of $698 in monetary penalties under the Registration RightsAgreement had already been paid to investors in the form of additional notes,while an additional $256 in such penalties was accrued but unpaid.

 

Pursuant to Statementof Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” EITF 00-27, “Application of Issue No. 98-5 to Certain ConvertibleInstruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible DebtInstrument’ in EITF Issue No. 00-19,” the original fair value of theembedded conversion feature of $6,205 have been recorded as conversion featureliability as the debt is considered nonconventional convertible debt. Theoriginal fair value was computed using the Black-Scholes model under thefollowing assumptions: (1) expected life of 1.6 to 3 years; (2) volatilityof 55%; (3) risk free interest of 4.69% to 4.76% and dividend rate of0%.  The original fair value of the additional embedded conversion featureof $1,005 resulting from reduced conversion price under the amended SecuritiesPurchase Agreement, have been recorded as conversion feature liability. Thevalue was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.3 to 2.7 years; (2) volatility of55%; (3) risk free interest of 4.6% to 4.9% and dividend rate of 0%. In addition, 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 fairvalue of the conversion feature liability resulted in gains of $1,987 and$5,393 for years ended December 31, 2008 and 2007, respectively.  The fair value of conversion featureoutstanding at December 31, 2008 and 2007 was $147 and $2,083,respectively.   The fair value conversionfeature outstanding at December 31, 2008 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 0 to 1.01years; (2) volatility of 113%, (3) risk free interest of 0.11% to0.37% and dividend rate of 0%.

 

Pursuant to EITF 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock”, the original fair values of the warrants of$3,964 have been recorded as warrant liability, which was computed using theBlack-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%.

 

The original fair valueof the embedded conversion feature of $7,210 was recorded as discounts of theconvertible note.  The original fair value of the 7,408,881 warrantsissued to investors of $4,372, the original fair value of 248,710 warrantsissued to Placement Agents of $200, and $73 cash discount were recorded asdiscounts of the convertible note.  In addition, $2,069 direct costsincurred relating to issuance of the convertible note was recorded as debtissuance cost in other assets.

 

The Company’s grossoutstanding loan balance of the January 2010 Notes totaled $19,113 and$17,797 as of December 31, 2008 and December 31, 2007,respectively.  As of December 31, 2008 and 2007, un-amortizeddiscounts for conversion feature, warrants, and cash discount totaled $7,128 and$10,471, respectively, and other asset debt issuance costs totaled $655 and$967, 

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

respectively. Interest expense for the amortization of debt issuance cost and discount onnote was $3,707 and $2,177 for the years ended December 31, 2008 and 2007,respectively.  The effective interest rate of the January 2010 Noteswas 65% as of December 31, 2008 and 2007.

 

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** | ** ** |
|                             |       |         |       |
| 2009                             |       | $            | 9,556      |   |
| 2010                             |       | 9,557        |       |
|                             |       |         |       |
| Total                            |       | $            | 19,113     |   |

 

Factoring Agreement

 

The Company entered into aFactoring, Loan, and Security Agreement (the “Agreement”) with a financingcompany on April 21, 2005.  Theagreement will continue until February 1, 2008 and will renew annuallythereafter.  All borrowings are securedby outstanding receivables specifically assigned to the financing company.  Further, pursuant to a Continuing GuarantyAgreement, dated January 5, 2009, the outstanding borrowings arepersonally guaranteed by John Kang, the Company’s Chairman (see Note 22).  Assigned receivables are considered “Approved”or “Non-Approved” by the financing company. Borrowings made against non-approved receivables assigned are limited to$1,000 and total borrowings made on approved and non-approved receivablesassigned are limited to $5,000.

 

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 31,2008, the Company borrowed $5,360 and repaid $5,788 under the Agreement.  The total outstanding advance made under theagreement is $580 and $1,008 as of December 31, 2008 and 2007,respectively, which is presented as short-term debt.  The weighted average rate of interest forborrowings made under the Agreement was 6.85% and 8.95% for the years ended December 31,2008 and 2007.

 

Kookmin Note

 

On February 4, 2003, theCompany’s Korean subsidiary received 6,500,000 in South Korean Won, orapproximately $5,488, under a loan from Kookmin Bank of South Korea.  The loan bears interest at an annual rate of7.1%.  In the event of delayed repayment,the interest increases to a maximum of 21%, depending on the length of time therepayment is delayed.  As of December 31,2008, 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.

 

The Company is required to makeequal monthly installments of principal and interest to repay the loan balancethrough August 2008.  For the yearended December 31, 2008, principal payments made to Kookmin totaled $300,which includes $66 of foreign exchange translation gain. The outstanding loanbalance totaled $151 and $451, as of December 31, 2008 and 2007,respectively, and are included in current portion of long-term debt.   The Companyintends to fully repay the amounts due under the loan.  However, as of thefiling of this report the Company does not have sufficient funds to repay theloan.  As a result, the Company is currently in default under theloan.  The Company hasreceived a formal notice of default and Kookmin Bank has initiated foreclosureproceedings on the loan collateral, which consists of manufacturing plantfacility and certain equipment in South Korea. The foreclosure of the Company’s manufacturing plant facility andequipment in South Korea would have material adverse effect on the Company’soperations, financial condition, and results of operations.  The Companyis currently working to resolve this matter with Kookmin Bank by seeking aforbearance until the Company is able to obtain funding to repay this loan,although there is no assurance that the Company will be able to obtain any suchfunding.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

The notes payable from Kookmin Loan as of December 31,2008 and 2007 and the activity for the year ended December 31, 2008 isshown in the following table:

 
| ** **                          | ** ** | **December 31,** | ** ** | ** **     | ** ** | ** **     | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **Borrowings** | ** ** | **Repayments** | ** ** | **2008**              | ** ** |
| Kookmin Loan 9.2%, principal $5,488 |       | $                     | 451        |           | $          | —         |       | $                     | (300       | ) | $ | 151 |   |
|                                     |            |                       |            |                |            |                |            |                       |            |  |  |  |  |

 
| **Kookmin Repayment Schedule** | ** ** | **Minimum**  | ** ** |
|------------------------------------------|------------|--------------|------------|
| **December 31,**                    | ** ** | **Payments** | ** ** |
|                                     |       |         |       |
| 2009                                     |       | $            | 151        |   |
| Total                                    |       | $            | 151        |   |

 

Debtof Majority Owned Subsidiary

 

OnJuly 24, 2007, the Company completed an $11,500 financing transaction (the “Transaction”)that provided funding to repay convertible notes previously issued by us thatwere scheduled to become due in July and August 2007.  In the Transaction, the Company transferredsubstantially all of the assets of the Company’s Liquidmetal Coatings divisionto a newly formed, newly capitalized subsidiary named Liquidmetal Coatings,LLC, a Delaware limited liability company (“LMC”), and LMC assumedsubstantially all of the liabilities of the division.

 

LMCwas capitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners (“C3”) 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 $176 and $83 for the years endedDecember 31, 2008 and 2007, respectively.

 

TheCompany retains a 69.25% ownership interest in LMC, C3 holds a 19% ownershipinterest, Larry Buffington, the Company’s President and CEO, (who also servesas the President and CEO of LMC) holds a 10% ownership interest, and CRESOCapital Partners (“CRESO”), the Company’s financial advisor in the Transaction,holds a 1.75% ownership interest.  Theequity interests acquired by C3 and issued to CRESO were not considered adiscount to debt, as the unconsolidated net assets of LMC were deemed to havean initial value of $0 upon closing of the Transaction for financial accountingpurposes.  Further, LMC is fullyresponsible for the repayment of debt obligations.

 

*MidwestDebt*

 

Inconnection with the Transaction, LMC entered into a Loan Agreement, dated July 24,2007 (the “Loan Agreement”), with Bank Midwest, N.A. (“Midwest”).  TheLoan Agreement provides for total loan availability of $5,500, consisting of a$4,000 term loan with an annual interest rate of 8.48% and a revolving loan ofup to $1,500 with a variable interest equal to prime rate as published in theWall Street Journal. Interest payments are due monthly.  The term loan has a maturity date of July 20,2011.  The revolving loan 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.

 

OnSeptember 23, 2008, the Loan Agreement was amended to extend the revolvingloan maturity to September 24, 2009, reduce the revolving loan limit to$1,350, and provided for a minimum rate of interest of 6.5%. LMC’s obligationsunder the Loan Agreement are secured by a blanket security interest in all ofLMC’s assets and the Company’s equity interest in LMC, and pursuant to anintercreditor agreement between the C3 and Midwest.  Midwest’s security interest in the assets issenior to C3’s security interest in the same assets.

 

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

 

As of December 31, 2008 and2007, the gross outstanding loan balance under the term loan totaled $2,729 and$3,688, respectively, and the gross outstanding loan balance under therevolving loan totaled $597 and $1,130, respectively. The loans are

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

presented as long-term debt andshort-term debt on the Company’s consolidated balance sheet, respectively.  Interest expense incurred under the term loanand revolving loan totaled $276 and $52 for the year ended December 31,2008, respectively.  Interest expenseincurred under the term loan and revolving loan totaled $143 and $37 for theyear ended December 31, 2007, respectively.

 
| **Term Loan**          | ** ** | ** **   | ** ** |
|-----------------------------|------------|--------------|------------|
| **Repayment Schedule** | ** ** | **Minimum**  | ** ** |
| **December 31,**       | ** ** | **Payments** | ** ** |
|                        |       |         |       |
| 2009                        |       | $            | 1,000      |   |
| 2010                        |       | 1,104        |       |
| 2011                        |       | 625          |       |
| Total                       |       | $            | 2,729      |   |

 

Additionally, LMC entered intoPromissory Notes, dated August 29, 2007 and October 21, 2008 (the “CapitalLoan”), with Midwest to provide for $45 and $105 to be used towards thepurchase of a company truck and HVOF spray equipment, respectively, with annualinterest rate of 8.25%.  The Capital Loanhas maturity dates of September 1, 2012 and November 1, 2013.  LMC is required to make monthly principal andinterest payments of $3 per month.  As ofDecember 31, 2008 and 2007, the gross outstanding loan balance under theCapital Loan totaled $129 and $44, respectively, which is presented aslong-term debt on the Company’s consolidated balance sheet.  Interest expense incurred under the CapitalLoan totaled $6 and $1 for the years ended December 31, 2008 and 2007,respectively.

 
| **Capital Loan  Repayment Schedule  December 31,** | ** ** | **Minimum  Payments** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
|                                                              |       |                  | ** ** |
| 2009                                                              |       | $                     | 28         | ** ** |
| 2010                                                              |       | 30                    | ** ** |
| 2011                                                              |       | 32                    | ** ** |
| 2012                                                              |       | 26                    | ** ** |
| 2013                                                              |       | 13                    | ** ** |
| Total                                                             |       | $                     | 129        | ** ** |

 

*C3 Debt*

 

In the Transaction, LMC alsoentered into a Securities 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 amaturity date of July 20, 2012 with no required principal payments beforematurity other than upon specified triggering events, such as a change incontrol of LMC.  Interest accrues at an annual rate of 14%, with 12%interest being payable monthly beginning September 2007 and the remaining2% interest being payable at maturity.  In connection with the SecuritiesPurchase Agreement and the Subordinated Notes, the Company and LMC entered intopledge agreements with the C3 entities in which the Company pledged itsmembership interest in LMC to secure the obligations under the notes and LMCpledged its membership interests in LMCS to secure its obligations under thenotes.  LMC and LMCS also granted to C3 a blanket security interestin all of their assets to secure their obligations under the SubordinatedNotes.

 

The gross outstanding loan balance including accrued interest payable upon maturity of the Subordinated Note totaled$6,690 and $6,557 as of December 31, 2008 and 2007, respectively. Interest expense incurred under the Subordinated Notes totaled $926 and $344for the years ended December 31, 2008 and 2007, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 
| **C3 Notes  Repayment Schedule  December 31,** | ** ** | **Minimum  Payments** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    |       |                  | ** ** |
| 2009                                                          |       | $                     | —     | ** ** |
| 2010                                                          |       | —                | ** ** |
| 2011                                                          |       | —                | ** ** |
| 2012                                                          |       | 6,690                 | ** ** |
| Total                                                         |       | $                     | 6,690      | ** ** |

 

**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.

 

*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

 

As of December 31, 2008, outstanding warrantsto acquire shares of the Company’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     |                |
| 25,000                         |       | 1.75                    |       | May 17,  2011       |                |
| 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  |                |
| 14,443,183                     |       |                    |       |                     |                |
|                                |            |                         |            |                          |                     |  |

** **

**Pursuant to EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock”, the Company isrequired to report a value of the warrant as a fair value and record thefluctuation to the fair value of the**

** **

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** **

**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

** **

**warrant liability to current operations. The change in the fair value of the warrants resulted in gains of$1,890, $4,923 and $279 for the years ended December 31, 2008, 2007 and2006.  The fair value of warrantsoutstanding at December 31, 2008 of $692 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.21 to 3.99 years; (2) volatility of 113%, (3) risk free interest of0.11% to 1.55%, and dividend rate of 0%. The fair value of warrants outstanding at December 31, 2007 of$2,583 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.21 to 4.99 years; (2) volatilityof 63%, (3) risk free interest of 3.07% to 3.45%, and dividend rate of 0%.**

 

**13. Stock Compensation Plan**

 

Under the Company’s 1996 Stock Option Plan (“1996Company Plan”) the Company could grant to employees, directors or consultantsoptions to purchase up to 12,903,226 shares of common stock as adjusted for thereverse stock split. The stock options are exercisable over a period determinedby the Board of Directors or the Compensation Committee, but no longer than10 years.

 

On April 4, 2002, our shareholders andboard of directors adopted the 2002 Equity Incentive Plan (“2002 Equity Plan”).The 2002 Equity Plan provides for the grant of stock options to officers,employees, consultants and directors of the Company and its subsidiaries. Inaddition, the plan permits the granting of stock appreciation rights with, orindependently of, options, as well as stock bonuses and rights to purchaserestricted stock. A total of 10,000,000 shares of our common stock may begranted under the 2002 Equity Plan.  Asof December 31, 2008, there are 2,621,421 options outstanding under the2002 Equity Plan.

 

Certain of our current and former non-employeedirectors and our former Chief Executive Officer were given the opportunity toreceive stock under the 2002 Equity Pan in lieu of past-due director andconsulting fees that were due to them. During 2008, 2007 and 2006, the Company issued 99,107, 49,072 and138,397 shares of stock, respectively, at prices ranging from $0.70 to $1.50per share under the 2002 Equity Plan for such fees that were due to them.

 

Prior to the approval of the 2002 Equity Plan,options were primarily granted under the Company’s 1996 Stock Option Plan (“1996Company Plan”). On April 4, 2002, our board of directors terminated the1996 Company Plan. The termination will not affect any outstanding optionsunder the 1996 Company Plan and all such options will continue to remainoutstanding and be governed by the Plan. No additional options may be grantedunder the 1996 Company Plan. As of December 31, 2008, there were 3,039,198options outstanding under the 1996 Company Plan.

 

On April 4, 2002, our shareholders and boardof directors adopted the 2002 Non-employee Director Stock Option Plan (“2002Director Plan”). Only non-employee directors are eligible for grants under the2002 Director Plan. A total of 1,000,000 shares of the Company’s Common Stockmay be granted under the 2002 Director Plan. There are 470,000 optionsoutstanding under the 2002 Director Plan as of December 31, 2008.

 

Additionally, the Company has 1,845,163 optionsoutstanding at December 31, 2008 which were granted outside the 1996Company Plan, 2002 Equity Plan and 2002 Director Plan.

 

The Company previously applied AccountingPrinciples Board (“APB”) Opinion No. 25 for options when the exerciseprice of options granted to employees is less than the fair value of theunderlying stock on the date of grant. As permitted, the Company had previously elected to adopt provisions ofStatement of Financial Accounting Standard (“SFAS”) No. 123, Accountingfor Stock-Based Compensation for options granted to non-employees who performservices for the Company and the disclosure-only provisions of options grantedto employees.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123,Accounting for Stock-Based Compensation, (“SFAS 123”) and supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”).SFAS 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values. Under SFAS 123R, the Company is required to measure thecost of employee services received in exchange for stock options and similarawards based on the grant-date fair value of the award and recognize this costin the income 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 $578, $643 and $1,075 for the years ended December 31,2008, 2007 and 2006, respectively, of non-cash charges for stock compensationrelated to amortization of the fair value of restricted stock and unvestedstock options representing a $2,296, or $0.05 per share, increase from thestock compensation that would have been recorded under APB 25 and SFAS 123.Under this method, the Company will recognize compensation cost, on aprospective basis, for the portion of outstanding awards for which therequisite service has not yet been rendered as of January 1, 2006 and anynew grants, based 

 

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**LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007, and 2006**

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

 

upon the grant-date fair value of those awardscalculated under SFAS 123 for pro forma disclosure purposes.  Accordingly, we have not restated priorperiod amounts.

 

The fair value of each option grantis estimated on the date of the grant using the Black-Scholes option-pricingmodel with the  assumptions noted in thefollowing table.  Expected volatilitiesare based on historical volatility expected over the expected life of theoptions.  The Company uses historicaldata to estimate option exercise and employee termination within the valuationmodel. The expected term of options granted is represents the period of timethat options granted are expected to be outstanding.  Actual forfeitures were used for years ended December 31,2008, 2007 and 2006.  The risk free ratefor period within the expected life of the options is based on U.S. Treasuryrates in effect at the time of grant.

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                     |       |                  |       |   |   |   |   |
| Expected volatility      |       | 63% - 94%             |       | 58% - 100% |   | 100% |   |
| Expected dividends       |       | —                |       | — |   | — |   |
| Expected term (in years) |       | 6                     |       | 5 - 6 |   | 5 |   |
| Risk-free rate           |       | 2.13% - 3.54%         |       | 3.84% - 4.68% |   | 4.3% - 4.82% |   |

 

The following table summarizes the Company’sstock option transactions for the three years ended December 31, 2008:

 
| ** **                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | ** **                 | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | **(in  thousands)**                 | ** ** |
| 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                                       |       |                                                |       |                                |       |
| Granted                                                       |       | 673,966                    |       | 0.50                                       |       |                                                |       |                                |       |
| Exercised                                                     |       | —                     |       | —                                     |       |                                                |       |                                |       |
| Forfeited                                                     |       | (895,330                   | )          | 3.41                                       |       |                                                |       |                                |       |
| Options outstanding at December 31,  2008                |       | 7,975,782                  |       | $                                          | 3.81       |                                                | 4.2        |                                | $          | — |   |
| Options vested or expected to vest at  December 31, 2008 |       | 7,907,779                  |       | $                                          | 4.60       |                                                | 4.2        |                                | $          | — |   |
| Options exercisable at December 31,  2008                |       | 6,302,382                  |       | $                                          | 4.57       |                                                | 2.7        |                                | $          | — |   |

 

The weighted average fair value of optionsgranted during the years ended December 31, 2008, 2007 and 2006 was $0.50,$0.81 and $1.10, respectively.  Therewere 6,303,382 options with a weighted average exercise price of $4.57exercisable at December 31, 2008 and there were 6,263,146 options with aweighted average exercise price of $4.93 exercisable at December 31, 2007.

 

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(measurement date).  Such options totaled358,582 with a weighted average fair value of $11.22 and 734,927 with aweighted average fair value of $7.56 at December 31, 2008 and 2007,respectively.

 

The following table summarizes theCompany’s stock options outstanding and exercisable by ranges of option pricesas of December 31, 2008:

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 
| **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                           |       |                                      | 2,136,661  |   | 8.50 |   | $ | 0.82 |   | 676,261 |   | $ | 0.93 |   |
| 1.56 -   3.10                 |       |                                      | 1,477,856  |   | 3.50 |   | 2.43 |   | 1,274,856 |   | 2.47 |   |
| 3.11 -   4.65                 |       |                                      | 1,694,163  |   | 2.10 |   | 4.62 |   | 1,684,163 |   | 4.63 |   |
| 4.66 -   6.20                 |       |                                      | 2,580,646  |   | 2.40 |   | 6.20 |   | 2,580,646 |   | 6.20 |   |
| 6.21 -   7.75                 |       |                                      | —     |   | — |   | — |   | — |   | — |   |
| 7.76 -   9.30                 |       |                                      | —     |   | — |   | — |   | — |   | — |   |
| 9.31 - 10.85                            |       |                                      | 10,000     |   | 4.00 |   | 9.81 |   | 10,000 |   | 9.81 |   |
| 10.86 - 12.40                           |       |                                      | 4,518      |   | 2.60 |   | 12.40 |   | 4,518 |   | 12.40 |   |
| 12.41 - 13.95                           |       |                                      | —     |   | — |   | — |   | — |   | — |   |
| 13.96 - 15.50                           |       |                                      | 71,938     |   | 3.30 |   | 15.00 |   | 71,938 |   | 15.00 |   |
| Total                                   |       | 7,975,782                                 |       |   |   |   |   | 6,302,382 |   |   |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

**14. Discontinued Operations**

 

*Liquidmetal Golf*

 

On April 30, 2002, management terminatedthe operations of the retail golf segment by means of liquidating substantiallyall of the retail golf assets and liabilities. The disposition of the retailgolf operations represents the disposal of a business segment. Accordingly, theaccompanying consolidated financial statements reflect the retail golf segmentas a discontinued operation for all periods presented.

 

There were no assets associated withdiscontinued retail golf operations at December 31, 2008 and 2007, andthere were no gain or loss resulted from the discontinued operations for theyears ended December 31, 2008, 2007 and 2006.

 

*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.

 

Liquidmetal Golf previously applied AccountingPrinciples Board (“APB”) Opinion No. 25 for options when the exerciseprice of options granted to employees is less than the fair value of theunderlying stock on the date of grant. As permitted, the Company had previously elected to adopt provisions ofStatement of Financial Accounting Standard (“SFAS”) No. 123, Accountingfor Stock-Based Compensation for options granted to non-employees who performservices for the Company and the disclosure-only provisions of options grantedto employees. There was no compensation expense recorded during the years endedDecember 31, 2008, 2007 and 2006.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123,Accounting for Stock-Based Compensation, (“SFAS 123”) and supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”).SFAS 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values. Under SFAS 123R, the Company is required to measure thecost of employee services received in exchange for stock options and similarawards based on the grant-date fair value of the award and recognize this costin the income 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 Company adopted SFAS 123R on January 1,2006 using the modified prospective method for outstanding option.  Under this method, the Company would recognizecompensation cost, on a 

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

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.  There were no charges for stock compensationrelated to amortization of the fair value of restricted stock as theoutstanding options were fully vested as of December 31, 2005 and no newgrants were made during the years ended December 31, 2008, 2007 and 2006.

 

The following table summarizes Liquidmetal Golf’sstock option transactions for the three years ended December 31, 2008:

 
| ** **                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | ** **                 | ** ** | ** **                                     | ** ** | ** **                                                  | ** ** | **(in  thousands)**                 | ** ** |
| 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                |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Granted                                                       |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Exercised                                                     |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Forfeited                                                     |       | —                     |       | —                                         |       |                                                        |       |                                |       |
| Options outstanding at December 31,  2008                |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |
| Options vested or expected to vest at  December 31, 2008 |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |
| Options exercisable at December 31,  2008                |       | —                     |       | $                                              | —     |                                                        | —     |                                | $          | — |   |

 

There were no options exercisable at December 31,2008 and 2007.

 

**15. Preferred Units of Subsidiary**

 

OnFebruary 22, 2008, LMC completed a transaction under which it issued andsold $2,500 in preferred membership units to two minority members of LMC (the “PreferredUnits Transaction”).  Immediately following the sale of the preferredmembership units, the subscription proceeds (after a 1% transaction fee) weredistributed to LMC’s common unit members, and as a result of suchdistribution, the Company received approximately $1,714 in thedistribution.  The preferred units issued by LMC have an accruingpriority return of 14% per year that are priority over any distribution made byLMC and may be redeemed at any time within four years of issuance through cashpayment or distribution in excess of the 14% priority return.  If LMC fails to redeem the preferredunits on or before the second anniversary of the issue date, the preferredunits will receive an additional 200 common membership units (equal to 2%of the currently outstanding common units) per quarter until thepreferred units are redeemed in full.

 

As of December 31, 2008, LMC has redeemed $236 of its preferredunits and distributed $281 in priority return to the preferred unitholders.  The total preferred unitsoutstanding are $2,264 as of December 31, 2008.

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

**16. Income Taxes**

 

Significant components of deferred tax assetsare as follows:

 
| ** **                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
|                          |       |                                        |       |   |   |
| Loss carry forwards           |       | $                                           | 43,359     |   | $ | 36,577 |   |
|                          |       |                                        |       |   |   |
| Other                         |       | 1,117                                       |       | 2,227 |   |
| Total deferred tax asset      |       | 44,476                                      |       | 38,804 |   |
|                          |       |                                        |       |   |   |
| Valuation allowance           |       | (44,476                                     | )          | (38,804 | ) |
| Total deferred tax asset, net |       | $                                           | —     |   | $ | — |   |

 

The following table accounts for the differencesbetween the expected federal tax benefit (based on the statutory U.S. federalincome tax rate of 34%) and the actual tax provision:

 
| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                    |       |                                        |       |   |   |   |   |
| Expected federal tax benefit                            |       | (34                                         | )%         | (34 | )% | (34 | )% |
|                                                    |       |                                        |       |   |   |   |   |
| State tax expense, net of expected federal  tax benefit |       | (3                                          | )%         | 0 | % | (4 | )% |
| Foreign loss not subject to U.S. federal  income tax    |       | 12                                          | %          | 33 | % | 7 | % |
| Net operating loss utilized or expired                  |       | (38                                         | )%         | 88 | % | 0 | % |
| Other                                                   |       | 0                                           | %          | 0 | % | (38 | )% |
| Increase (decrease) in valuation allowance              |       | 63                                          | %          | (87 | )% | 70 | % |
|                                                    |       |                                        |       |   |   |   |   |
| Total tax provision                                     |       | 0                                           | %          | 0 | % | 0 | % |

 

As of December 31, 2008, the Company hadapproximately $118 of net operating loss (“NOL”) carryforwards for U.S. federalincome tax purposes expiring in 2009 through 2028. In addition, the Company hasCalifornia state NOL carryforwards of approximately $63 expiring in 2009through 2018. The Company and Liquidmetal Golf filed on a separate companybasis for federal income tax purposes. Accordingly, the federal NOLcarryforwards of one legal entity are not available to offset federal taxableincome of the other. As of December 31, 2008, Liquidmetal Technologies, Inc.had approximately $81 in federal NOL carryforwards, expiring in 2009 through2028 and Liquidmetal Golf, Inc. had approximately $38 in federal NOLcarryforwards, expiring in 2013 through 2028.

 

As of December 31, 2008, the Company hadapproximately $209 of Research & Development (“R&D”) creditcarryforwards for U.S. federal income tax purposes expiring in 2021 through2028.  In addition, the Company hasCalifornia R&D credit carryforwards of approximately $265, which do notexpire under current California law.

 

Section 382 of the Internal Revenue Code(“IRC”) imposes limitations on the use of NOL’s and credits following changesin ownership as defined in the IRC. The limitation could reduce the amount ofbenefits that would be available to offset future taxable income each year,starting with the year of an ownership change. The Company has not completedthe complex analysis required by the IRC to determine if an ownership changehas occurred.

 

The ability to realize the tax benefitsassociated with deferred tax assets, which includes benefits related to NOL’s,is principally dependent upon the Company’s ability to generate future taxableincome from operations.  The Company hasprovided a full valuation allowance for its net deferred tax assets due to theCompany’s net operating losses.

 

The Company adopted the provisions ofFIN 48 on January 1, 2007. At the adoption date and as of December 31,2008, 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 which were$0 for the year ended December 31, 2008.

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

Tax years 2005 through 2008 and 1998 through 2008are subject to examination by the federal and state taxing authorities,respectively. There are no income tax examinations currently in process.

 

**17. Segment Reporting andGeographic 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 casingcomponents for electronic devices, medical devices, sporting goods, tooling,prototype sampling, defense applications and metal processing equipment.  The expenses incurred by the bulk Liquidmetalalloy segment are manufacturing, research and development costs, and sellingexpenses associated with identifying and developing market opportunities.  Bulk Liquidmetal alloy products can bedistinguished from Liquidmetal alloy coatings in that the bulk Liquidmetalalloy can have significant thickness, up to approximately one inch, whichallows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services are included in the bulk Liquidmetal alloysegment.  The accounting policies of thereportable segments are the same as those described in Note 3 above.

 

Summarized financial information concerning theCompany’s reportable segments is shown in the following tables:

 
| ** **                                 | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
|                                       |       |         |       |                |       |                    |       |
| Year ended December 31, 2008:         |       |         |       |                |       |                    |       |
| Revenue to external customers              |       | $            | 12,508     |                | $          | 9,575                   |       | $ | 22,083 |   |
| Gross profit                               |       | 4,451        |       | 501                 |       | 4,952                   |       |
| Total segment income (loss)                |       | 1,374        |       | (1,347              | )          | 27                      |       |
| Total identifiable assets at end of period |       | 2,931        |       | 7,837               |       | 10,768                  |       |
|                                       |       |         |       |                |       |                    |       |
| 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        |       | (5,003              | )          | (1,666                  | )          |
| Total identifiable assets at end of period |       | 4,441        |       | 13,519              |       | 17,960                  |       |
|                                       |       |         |       |                |       |                    |       |
| Year ended December 31, 2006:         |       |         |       |                |       |                    |       |
| Revenue to external customers              |       | $            | 9,419      |                | $          | 18,250                  |       | $ | 27,669 |   |
| Gross profit                               |       | 3,879        |       | 1,372               |       | 5,251                   |       |
| Total segment income (loss)                |       | 3,075        |       | (1,815              | )          | 1,260                   |       |
| Total identifiable assets at end of period |       | 1,281        |       | 19,005              |       | 20,286                  |       |

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

Reconciling information for the statements ofoperations between reportable segments and the Company’s consolidated totals isshown in the following table:

 
| ** **                                                                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment income (loss) before interest  expense and discontinued operations |       | $                                           | 27         |   | $ | (1,666 | ) | $ | 1,260 |   |
| General and administrative expenses,  excluded                                   |       | (3,765                                      | )          | (6,206 | ) | (6,349 | ) |
| Loss before interest, other income, income  taxes, and discontinued operations   |       | (3,738                                      | )          | (7,872 | ) | (5,089 | ) |
| Loss from extinguishment of debt                                                 |       | —                                      |       | (648 | ) | — |   |
| Change in value of warrants, gain                                                |       | 1,890                                       |       | 4,923 |   | 279 |   |
| Change in value of conversion feature, gain  (loss)                              |       | 1,987                                       |       | 6,965 |   | (226 | ) |
| Interest expense                                                                 |       | (6,293                                      | )          | (8,747 | ) | (9,509 | ) |
| Interest income                                                                  |       | 3                                           |       | 123 |   | 23 |   |
| Minority interests                                                               |       | (421                                        | )          | (384 | ) | — |   |
| Consolidated net loss                                                            |       | $                                           | (6,572     | ) | $ | (5,640 | ) | $ | (14,522 | ) |

 

Included in bulk alloy segment income for theyear ended December 31, 2008 is $429 of other income recognized from $182deferred gain on disposal of assets in connection with a 2007 equipmentpurchase agreement with Liquidmetal Korea (see Note 21) and $247 gain fromaccounts payables write off, and $17 of other expense recognized from loss fromdisposal of assets. Included in bulk alloy segment income for the year ended December 31,2007 is $226 of other income recognized from gain on disposal of assets inconnection with the equipment purchase agreement and transfer agreement of theWeihei operations to Liquidmetal Korea (see Note 21).  Included in bulk alloy segment income for theyear ended December 31, 2006 is $572 of other income recognized from $480gain on termination of a distribution agreement in March 2006 and $92 gainon disposal of idle equipment in June 2006.

 

Excluded general and administrative expensesare attributable to the Company’s corporate headquarters.  These expenses primarily include corporatesalaries, consulting, professional fees and facility costs.  Research and development expenses areincluded in the operating costs of the segment that performed the research anddevelopment.

 

Reconciling information for the balance sheetsbetween reportable segments and the Company’s consolidated totals is shown inthe following table:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total segment assets                      |       | $                     | 10,768     |   | $ | 17,960 |   |
| Cash and cash equivalents                 |       | 56                    |       | 1,055 |   |
| Prepaid expenses and other current assets |       | 866                   |       | 809 |   |
| Other property, plant and equipment       |       | 97                    |       | 123 |   |
| Intangibles, net                          |       | 1,049                 |       | 1,120 |   |
| Other assets                              |       | 404                   |       | 1,446 |   |
| Total consolidated assets                 |       | $                     | 13,240     |   | $ | 22,513 |   |

 

Assets excluded from segments include assets attributable to the Company’scorporate headquarters. The largest asset represents the Company’s intangibleassets, consisting primarily of the Company’s patents and trademarks.

 

Certain customers accounted for more than 10% ofrevenues from continuing operations as follows:

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Samsung                         |       | 0                                           | %          | 2 | % | 5 | % |
| Flextronics Manufacturing, LTD  |       | 5                                           | %          | 6 | % | 13 | % |
| Grant Prideco                   |       | 10                                          | %          | 10 | % | 5 | % |
| Liquidmetal Korea (Grace Metal) |       | 9                                           | %          | 12 | % | 0 | % |

 

Revenues from sales tocompanies in the United States were $13,374, $15,003 and $12,142 during theyears ended December 31, 2008, 2007 and 2006, 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 years ended December 31, 2008,2007 and 2006 the Company had revenue on sales to companies outside of theUnited States of $8,709, $14,019 and $15,527, respectively, of which $1,067,$7,850 and $3,211 represented sales to companies located in South Korea,respectively.

 

Long-lived assets include net property, plant,and equipment and net intangible assets. The Company had long-lived assets of$1,813 and $1,613 located in the United States at December 31, 2008 and2007, respectively. The Company had long-lived assets of $6,277 and $8,935located in South Korea at December 31, 2008 and 2007, respectively.

 

**18. Income (Loss) Per CommonShare**

 

Basic EPS is computed by dividing earnings(loss) attributable to common shareholders by the weighted average numberof common shares outstanding for the periods. Diluted EPS reflects thepotential dilution of securities that could share in the earnings. Areconciliation of the number of common shares used in calculation of basic anddiluted EPS is presented below:

 
| ** **                      | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average basic shares   |       | 44,734,554                                                    |       | 44,730,091 |   | 43,809,339 |   |
| Effect of dilutive securities:  |       |                                                          |       |   |   |   |   |
| Stock options                   |       | —                                                        |       | — |   | — |   |
| Conversion of notes payable     |       | —                                                        |       | — |   | — |   |
| Weighted average diluted shares |       | 44,734,554                                                    |       | 44,730,091 |   | 43,809,339 |   |

 

Options to purchase 7,975,782 shares of commonstock at prices ranging from $0.09 to $15.00 per share were outstanding at December 31,2008, but were not included in the computation of diluted EPS for the sameperiod as the inclusion would have been antidilutive.  Options to purchase 8,197,146 shares ofcommon stock at prices ranging from $0.75 to $15.00 per share were outstandingat December 31, 2007, but were not included in the computation of dilutedEPS for the same period as the inclusion would have been antidilutive.  Options to purchase 7,792,591 shares ofcommon stock at prices ranging from $0.77 to $15.00 per share were outstandingat December 31, 2006, but were not included in the computation of dilutedEPS for the same period as the inclusion would have been antidilutive.

 

Warrants to purchase 14,443,183 shares of commonstock between $1.55 and $2.07 per share outstanding at December 31, 2008were not included in the computation of diluted EPS for the same period as theinclusion would have been antidilutive. Warrants to purchase 14,418,183 shares of common stock between $1.55 and$2.07 per share outstanding at December 31, 2007 were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.  Warrants to purchase 4,875,778shares of common stock between $2.00 and $2.58 per share outstanding at December 31,2006 were not included in the computation of diluted EPS for the same period asthe inclusion would have been antidilutive.

 

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** **

**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

17,375,707 shares of common stock issuable uponconversion of the Company’s senior convertible notes with conversion prices of$1.10 per share outstanding at December 31, 2008 were not included in thecomputation of diluted EPS for the 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 shares of common stock issuable upon conversion of the Company’ssenior convertible notes with conversion prices between $1.00 and $2.00 pershare outstanding at December 31, 2006, respectively, were not included inthe computation of diluted EPS for the period as the inclusion would have beenantidilutive.

 

**19. Commitments andContingencies**

** **

The Company is from time to time a party tocertain legal proceedings arising in the ordinary course of business. Althoughoutcomes cannot be predicted with certainty, the Company does not believe thatany legal proceeding to which it is a party will have a material adverse effecton the Company’s financial position, results of operations, and cash flows.

 

OnJune 26, 2006, the Company entered into a joint venture agreement withSAGA, SpA in Padova, Italy, (“SAGA”) a specialist precision partsmanufacturer.  The joint venture is named Liquidmetal SAGA Italy, Srl (“LSI”). The Company also entered into an exclusive manufacturing license agreement forthe eyewear industry with LSI.  Under the joint venture agreement, theCompany has option to buy ownership interest in LSI, initially, of 19.9% to upto 50%.  In December 2006, the Company exercised the 19.9% interestin LSI and will have two years to purchase the additional interest at a nominalprice. In January 2007 and June 2007, the Company contributedadditional $217 and $86, respectively, into LSI as additional investment. The contribution did not change the Company’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 the years ended December 31,2008, 2007 and 2006, the Company recognized revenues of $0, $103 and $702,respectively, of Liquidmetal alloys sold to LSI for use in the joint venture.

 

TheCompany has outstanding liens and judgments on its assets by various creditorsfor past-due trade payables totaling approximately $1,404, of whichapproximately $1,173 is held by creditors in South Korea, as of December 31,2008.  The Company is currently workingto resolve the matter with each creditor****by seeking aforbearance until we are able to obtain funding to repay the amounts due,although there is no assurance that we will be able to obtain any suchfunding.   If the Company cannot repaythe amounts due or obtain forbearance, the creditors may seek to foreclose onthe Company’s assets.  Such a foreclosurewould have material adverse effect on the Company’s operations, financialcondition, and results of operations.

 

***OperatingLeases***

 

The Company leases its offices and warehousefacilities under various lease agreements, certain of which are subject toescalations based upon increases in specified operating expenses or increasesin the Consumer Price Index. Future minimum lease payments under non-cancelableoperating leases during subsequent years are as follows:

 
| ** **            | ** ** | **Minimum**  | ** ** |
|-----------------------|------------|--------------|------------|
| **December 31,** | ** ** | **Payments** | ** ** |
|                  |       |         |       |
| 2009                  |       | $            | 324        |   |
| 2010                  |       | 312          |       |
| 2011                  |       | 306          |       |
| 2012                  |       | 118          |       |
| 2013                  |       | —       |       |
| Total                 |       | $            | 1,060      |   |

 

Rent expense was $322, $464 and $449 for theyears ended December 31, 2008, 2007 and 2006, respectively.

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

**20. 401(k) Savings Plan**

 

The Company has a tax-qualified employee savingsand retirement plan, or 401(k) plan, which covers all of its UnitedStates-based employees. Our Korean employees are covered under a governmentsponsored pension program and do not participate in the U.S. based 401(k) program.

 

Under the U.S. based 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 theCompany, in its sole discretion, to make additional employer contributions tothe 401(k) plan. However, the Company did not make employer contributionsto the 401(k) plan during any of the periods presented in the accompanyingconsolidated financial statements.

 

**21. Related Party Transactions**

 

The Company isa party to a consulting agreement with William Johnson, a member of the Company’sboard of directors, on a month-to-month basis starting from 2005.  During each of the years ended December 31,2008, 2007 and 2006, the Company incurred $60 in consulting fees from Mr. Johnson.

 

Soo Buchanan, thesister of John Kang, the Company’s Chairman, provides services to the Companyas a consultant.  During the years ended December 31,2008, 2007 and 2006, the Company incurred $70, $0 and $0, respectively, for herservices as a consultant.  Additionally,Otis Buchanan, the husband of Ms. Buchanan, was employed by the Companyand was paid aggregate compensation of approximately $110 during each of theyears ended December 31, 2008, 2007 and 2006.

 

On December 23,2008, John Kang advanced the Company $200 to be used to repay the Company’soutstanding borrowings made under the Factoring, Loan and Security Agreement(the “Factoring Agreement”), dated April 21, 2005, with a financingcompany.  Further, Mr. Kang enteredinto a Continuing Guarantee Agreement, dated January 5, 2009, with thefinancing company to personally guarantee repayment of the outstandingborrowings made under the Factoring Agreement (see Note 22).  Subsequently in January 2009, the $200advance was offset with $178 outstanding receivable from Mr. Kang arisingfrom liabilities incurred from certain stock transactions in August 2002.

 

As of December 312008 and 2007, CK Cho, a member of our Board of Directors, held $503 and $467of the convertible subordinated notes, respectively, and held 305,918exercisable warrants for both periods.

 

As of December 31,2008 and 2007, Ricardo Salas, the Company’s former Chief Executive Officer,held $381 and $354 of the convertible unsecured subordinated notes,respectively, and $259 of the unsecured subordinated notes for bothperiods.  He also held a total of 377,691of exercisable warrants as of December 31, 2008 and 2007.

 

On June 1, 2007, the Company entered into atransaction with Grace Metal (currently Liquidmetal Korea Co., Ltd. “LMK”),under which (i) LMK agreed to purchase various equipments (including diecasting machines and vacuum induction melters) used in the Company’s bulkamorphous alloy business segment and (ii) the Company granted LMK a10-year exclusive license to manufacture products made from bulk Liquidmetalalloys for customers whose principal headquarters or whose major operations arelocated in South Korea.  LMK was formedby an investor group that includes the former director and officer of theCompany, James Kang, who is also the brother of John Kang, Chairman of ourcompany.  Under an equipment purchaseagreement between the Company and LMK, LMK agreed to buy the purchased equipmentfor a total purchase price of $2,000, of which $759 were received as of December 31,2008.  The equipment purchase agreementprovides that delivery of the equipment can be delayed to accommodate theCompany’s continuing manufacturing needs, and it also provides that the Companywill retain a security interest in the purchased equipment until full paymentof the purchase price.

 

In consideration of the license agreement withLMK, the Company will be entitled to royalty of 10% of LMK’s net sales oflicensed products (unless LMK’s margin on the products falls below specifiedlevels, in which case a new royalty will be negotiated in good faith).  Effective June 1, 2008, the royalty ratewas adjusted to 5%.  The agreementprovides that the Company may convert the license to a non-exclusive in the eventthat the net sales in the second year of the contract or thereafter are notsufficient to result in royalties of $500 or more per year.  The agreement also provides that LMK will berequired to purchase all alloy feedstock from the Company, and the Company willhave the right to continue to manufacture Liquidmetal alloy products for SouthKorean customers until all purchased equipment has been commissioned.

 

Additionally, effective June 1, 2007, theCompany discontinued its post-processing operation in Weihai, China andtransferred the manufacturing staff and equipment in Weihai to LMK under anamendment to the equipment purchase agreement with LMK.  

 

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**LIQUIDMETAL TECHNOLOGIES, INC ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended December 31, 2008, 2007,and 2006**

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

 

Further, the Company transferred certain of itsmanufacturing staff from its South Korean plant to LMK.  As a result, LMK assumed $370 of accruedseverance liability for the transferred employees.  The equipment purchase agreement and thetransfer agreement regarding our Weihai operations resulted in a total net gainof $226, which is recorded as other income during the year ended December 31,2007.

 

TheCompany purchased production supplies and outsourced production of certain bulkalloy production with LMK, Lead Metal, and SDM, which are controlled by JamesKang, a former director and officer of the Company and the brother of ourcurrent Chairman.  In June 2008, theCompany began sharing the use of its manufacturing facility and productionequipment in Pyongtaek, South Korea, with LMK as the Company began significantoutsourcing of its bulk alloy parts production. The Company incurred expensesfor purchase of production supplies and outsourcing fees of $2,053, $650 and$466 during the years ended December 31, 2008, 2007 and 2006, respectively.  The Company recognized revenue from sales ofraw materials and royalties for a total of $2,000 and $3,392 during the yearsended December 31, 2008 and 2007, respectively.  Approximately, $212 and $401 is included inaccounts receivables as of December 31, 2008 and 2007, respectively foroutstanding trade receivables due.

 

EffectiveOctober 20, 2006, James Kang began providing services to the Company as aconsultant, which would have continued through December 31, 2009.  On December 31, 2007, the terms of theconsulting agreement were accelerated whereby the remaining two years of Mr. Kang’sconsulting 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 LMK, a South Koreancompany formed by investor groups including our former Founder and director,James Kang, and the two former noteholders, whereby LMK would assume theliabilities due under the January 2010 Notes, including principal, interest,and fees due by our company to the two noteholders totaling $434 and theCompany released obligations due from LMK for outstanding trade accountsreceivables.  In connection with theassumption of the liabilities by LMK, warrants to purchase 179,620 shares ofour common stock held by the holders were cancelled.

 

**22. Subsequent Events**

 

On January 5,2009, John Kang, the Company’s Chairman, entered into a Continuing GuaranteeAgreement (the “Guarantee”), with the Company’s financing company to personallyguarantee repayment of the outstanding borrowings made under the Factoring,Loan and Security Agreement (the “Factoring Agreement”), dated April 21,2005 (see Note 11).  The Guarantee wasmade as the total outstanding borrowings exceeded the receivables assigned ascollateral.  As of the filing of thisreport, approximately $457 outstanding borrowings made under the FactoringAgreement was unsecured.   The Company iscurrently working to repay this amount.

 

On March 17, 2009, theCompany issued $723 of new 8% Convertible Subordinated Notes Due January 2010(the “New Notes”).  The New Notes were dated January 1, 2009 andwere issued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through December 1,2008 (the “Interest Notes”).   The New Notes become due in January 2010with monthly payments of 1/36th of the principal amount beginning on January 31,2009.  The New Notes and the Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5,000 (excluding sales of inventory in theordinary course).  In addition, the New Notes and the Interest Notes (butnot the Original Notes), may be redeemed by the holder if the Company receivesfinancing involving an amount of $25,000 or more in net proceeds at anytime.  The New Notes bear interest at 8% per annum with interestpayable quarterly in arrears in cash and are subordinate to certain securedfinancing from commercial lenders incurred by us in the future.

 

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**ScheduleII – 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, 2008                                                 |       | $                                              | 89         |                                     | $          | 32                            |       | $                                        | —     |   | $ | 121 |   |
| Year ended December 31, 2007                                                 |       | 82                                             |       | 7                                        |       | —                        |       | 89                                       |       |
| Year ended December 31, 2006                                                 |       | 61                                             |       | 47                                       |       | (26                           | )          | 82                                       |       |
|                                                                              |       |                                           |       |                                     |       |                          |       |                                     |       |
| Product warranty accrual                                                          |       |                                           |       |                                     |       |                          |       |                                     |       |
| Year ended December 31, 2008                                                 |       | $                                              | 631        |                                     | $          | 26                            |       | $                                        | (343       | ) | $ | 314 |   |
| Year ended December 31, 2007                                                 |       | 738                                            |       | —                                   |       | (107                          | )          | 631                                      |       |
| Year ended December 31, 2006                                                 |       | 634                                            |       | 46                                       |       | 58                            |       | 738                                      |       |
|                                                                              |       |                                           |       |                                     |       |                          |       |                                     |       |
| Deferred tax asset valuation allowance *                                          |       |                                           |       |                                     |       |                          |       |                                     |       |
| Year ended December 31, 2008                                                 |       | $                                              | 38,804     |                                     | $          | 5,672                         |       | $                                        | —     |   | 44,476 |   |
| Year ended December 31, 2007                                                 |       | 43,134                                         |       | —                                   |       | $                             | (4,330     | )                                        | 38,804     |   |
| Year ended December 31, 2006                                                 |       | 32,771                                         |       | 10,363                                   |       | —                        |       | 43,134                                   |       |

 

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*     The deferred taxasset valuation allowance represents a 100% reserve against the deferred taxasset accounts at December 31, 2008, 2007 and 2006, respectively.

 

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