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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2002
|                                            |  |                                                                                         
|o                                           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ___________

Commission File No. 000-31332






LIQUIDMETAL TECHNOLOGIES(Exact name of Registrant as specified in its charter)

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

100 North Tampa St., Suite 3150
Tampa, Florida 33602(address of principal executive office, zip code)

Registrants telephone number, including area code: (813) 314-0280

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

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

Title of each Class
Common Stock, no par value

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).   
Yes   o   
No   x

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 2003, was approximately $237,619,365, based on the
closing sale price of the registrants common stock on June 28, 2002. The
number of shares of the registrants common stock outstanding as of March 20,
2003, was 41,576,523.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement for its 2003 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
Annual Report on Form 10-K to the extent stated herein.





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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | Item 1. Business.                                                                                      
|                                                 | Item 2. Properties                                                                                     
|                                                 | Item 3. Legal Proceedings                                                                              
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5. Market For Registrants Common Equity and Related Stockholder Matters.                         
|                                                 | Item 6. Selected Consolidated Financial Data                                                           
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risks                                   
|                                                 | Item 8. FINANCIAL Statements and Supplementary Data                                                    
|                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial disclosures          
|PART III                                        
|                                                 | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                 | Item 11. Executive Compensation                                                                        
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13. Certain Relationships and Related Transactions                                                
|                                                 | Item 14. Controls and Procedures                                                                       
|PART IV                                         
|                                                 | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|Ex-10.2 Improved Property Commerical Lease      
|Ex-10.11 Employment Agreement, dated 9/1/02     
|Ex-10.20 Credit Service Agreement               
|Ex-10.21 Agreement for Rent, dated February 2003
|Ex-10.22 Agreement for Rent, dated November 2003
|Ex-10.23 Contract for Monthly Rent of House     
|Ex-21 Subsidiaries of the Registrant            
|Ex-23.1 Consent of Deloitte & Touche LLP        
|Ex-99.1 CEO Certification                       
|Ex-99.2 CFO Certification                       



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TABLE OF CONTENTS

|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|PART I  
|         | Item 1. Business                                                                                       
|         | Item 2. Properties                                                                                     
|         | Item 3. Legal Proceedings                                                                              
|         | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II 
|         | Item 5. Market For Registrants Common Equity and Related Stockholder Matters                          
|         | Item 6. Selected Consolidated Financial Data                                                           
|         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|         | Item 7A. Quantitative and Qualitative Disclosures About Market Risks                                   
|         | Item 8. Financial Statements and Supplementary Data                                                    
|         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III
|         | Item 10. Directors and Executive Officers of the Registrant                                            
|         | Item 11. Executive Compensation                                                                        
|         | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|         | Item 13. Certain Relationships and Related Transactions                                                
|         | Item 14. Controls and Procedures                                                                       
|PART IV 
|         | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               





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PART I




Item 1. Business.

Overview

We are a materials technology company that develops, manufactures, and
markets products made from amorphous alloys. Our Liquidmetal® family of alloys
consists of a variety of coatings, powders, bulk alloys, and composites that
utilize the advantages offered by amorphous alloy technology. We develop,
manufacture, and sell products and components from bulk amorphous alloys that
are incorporated into the finished goods of our customers, and we also market
and sell amorphous alloy industrial coatings. We have the exclusive right to
develop, manufacture, and sell what we believe are the only commercially viable
bulk amorphous alloys.

Amorphous alloys are unique materials that are distinguished by their
ability to retain a random atomic structure when they solidify, in contrast to
the crystalline atomic structure that forms in ordinary metals and alloys when
they solidify. Liquidmetal® alloys possess a combination of performance,
processing, and cost advantages that we believe makes them preferable to other
materials in a variety of applications. The amorphous atomic structure of our
alloys enables them to overcome certain performance limitations caused by
inherent weaknesses in crystalline atomic structures, thus facilitating
performance and processing characteristics superior in many ways to those of
their crystalline counterparts. For example, our zirconium-titanium
Liquidmetal alloys are approximately 250% stronger than commonly used titanium
alloys such as Ti-6Al-4V, but they have processing characteristics similar in
many respects to plastics. We believe these advantages will result in
Liquidmetal alloys supplanting plastics, high-performance alloys, and other
incumbent materials in a wide variety of applications. Moreover, we believe
these advantages will enable the introduction of entirely new products and
applications that are not possible or commercially viable with other materials.

General Corporate Information

We were incorporated in California in 1987. Our principal executive
officers are located at 100 North Tampa St., Suite 3150, Tampa, Florida 33602,
and our telephone number at that address is (813) 314-0280. Our principal
research and development officers are located at 25800 Commercentre Dr., Suite
100, Lake Forest, California 92630, and our telephone number at that address is
(949) 206-8000. Our Internet website address is www.liquidmetal.com, and all
of our filings with the Securities and Exchange Commission are available free
of charge on our website.

Our Technology

The performance, processing, and cost advantages of Liquidmetal alloys are
a function of their unique atomic structure and their proprietary material
composition.

Unique Atomic Structure

The atomic structure of Liquidmetal alloys is the fundamental feature that
differentiates them from other alloys and metals. In a molten state, the atomic
particles of all alloys and metals have an amorphous atomic structure, which
means that the atomic particles appear in a completely random structure with no
discernible patterns. However, when non-amorphous alloys and metals are cooled
to a solid state, their atoms bond together in a repeating pattern of regular
and predictable shapes, or crystalline grains. This process is analogous to the
way ice forms when water freezes and crystallizes. In non-amorphous metals and
alloys, the individual crystalline grains contain naturally occurring
structural defects that limit the potential strength and performance
characteristics of the material. These defects, known as dislocations, consist
of discontinuities or inconsistencies in the patterned atomic structure of each
grain. Unlike other alloys and metals, bulk Liquidmetal alloys retain their
amorphous atomic structure throughout the solidification process and therefore
do not develop crystalline grains and the associated dislocations.
Consequently, bulk Liquidmetal alloys exhibit superior strength and other
superior performance characteristics compared to their crystalline
counterparts. Our Liquidmetal alloy coatings, in contrast to our bulk alloys,
have a crystalline atomic structure when initially applied, but their atomic
structure becomes amorphous as the coatings rub against surfaces under force,
improving performance over time.

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2 PICTURES

Prior to 1993, commercially viable amorphous alloys could be created only in
thin forms, such as coatings, films, or ribbons. However, in 1993, researchers
at the California Institute of Technology (Caltech) developed the first
commercially viable amorphous alloy in a bulk form. Today, bulk Liquidmetal
alloys can be formed into objects that are up to one inch thick, and we are not
aware of any other commercially available amorphous alloys that can achieve
this thickness. We have the exclusive right to commercialize bulk amorphous
alloy technology through a license agreement with Caltech and other patents
that we own.

Proprietary Material Composition

The constituent elements and percentage composition of Liquidmetal alloys
are critical to their ability to solidify into an amorphous atomic structure.
We have several different alloy compositions that have different constituent
elements in varying percentages. These compositions are protected by various
patents that we own or exclusively license from third parties, including
Caltech. The raw materials that we use in Liquidmetal alloys are readily
available and can be purchased from multiple suppliers.

Advantages of Liquidmetal Alloys

Liquidmetal alloys possess a unique combination of performance,
processing, and cost advantages that we believe makes them superior in many
ways to other commercially available materials.

Performance Advantages

Liquidmetal alloys provide several distinct advantages over other
materials in applications that require high strength, strength-to-weight ratio,
elasticity, and hardness. The following graphs compare the strength,
strength-to-weight ratio, elasticity, and hardness properties of our
zirconium-titanium bulk alloy composition (as measured in laboratory tests)
against those of several other alloys that are widely used today in commercial
applications.

Strength

STRENGTH GRAPH

The strength of a material is frequently measured in terms of yield strength,
which is the stress at which definite damage or deformation occurs to the
material with little or no increase in load. Yield strength is an important
performance measure in many structural applications where the potential cost of
damage is high, such as orthopedic devices.

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Strength-to-Weight Ratio

STRENGTH-TO-WEIGHT RATIO GRAPH

A materials strength-to-weight ratio, or specific strength, can be defined as
its yield strength divided by its specific gravity. A high strength-to-weight
ratio is particularly important in applications in which the damage costs are
high and weight is a consideration, such as protective casings for electronic
devices.

Elasticity

ELASTICITY GRAPH

Elasticity is a measure of a materials ability to return to its original shape
after being stretched or forced out of shape. The elastic strain limit, or
elastic limit, of a material is the point at which permanent damage or
deformation starts. Elasticity is an important performance measurement in
applications that need to resist permanent damage from impact to protect
aesthetics or in applications where energy transfer is important, such as golf
club heads.

Hardness

HARDNESS GRAPH

Hardness measures a materials ability to resist penetration and wear by
another material. In the widely-used Vickers hardness test, a diamond point is
pressed slowly against the surface of the material with a prescribed force. The
area of the dent is measured to yield the Vickers hardness number. Hardness is
important in applications that are subjected to heavy wear or penetration and
applications in which an ability to penetrate is important, such as munitions.






Data Source: http://www.matweb.com (other than data relating to bulk
Liquidmetal alloys). This online database contains comprehensive information
regarding the properties of various materials. Data relating to bulk
Liquidmetal alloy comes from Scripta Metallurgica,Vol. 30, pp. 431 and 433,
1994, and Applied Physics Letters,Vol. 71, p. 476, 1997, both of which
describe laboratory tests performed by the California Institute of Technology.



|(1) |  | The aluminum alloy being compared here is 7075-T6, a widely used
high-strength aluminum alloy. This alloy is used in aerospace,
automotive, defense, and other applications.                                                                                                                                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The titanium alloy being compared here is a type of Ti-6Al-4V, a
widely used titanium alloy particularly known for its high strength.
This alloy is commonly used in structural, aircraft, biomedical, and
other applications. The properties being shown here are the properties
exhibited by the cast form of the material.
|   
|(3) |  | The alloy being compared here is a type of corrosion-resistant cast
steel heat-treated to 5528 C, similar to the alloy known in the steel
industry as 17-4 stainless, a widely used premium stainless steel.
This alloy is utilized in industrial, aerospace, aircraft, and other
applications.                              

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In addition, bulk Liquidmetal alloys have other performance features that may
make them desirable in specific applications. For example, very low
coefficients of friction have been measured in certain applications of bulk
Liquidmetal alloys, such as applications in which bulk Liquidmetal alloys wear
against themselves. Moreover, Liquidmetal alloys have demonstrated high
resistance to erosion and corrosion in certain saline and caustic environments.
For example, our Liquidmetal alloys showed no signs of corrosion in an industry
standard saline corrosion test performed by an independent testing laboratory.
These properties, combined with Liquidmetal alloys high strength and hardness,
could yield a material that demonstrates high resistance to wear in various
applications.

The high yield strength of bulk Liquidmetal alloys means that a high
amount of stress must be exerted to create permanent deformation. However,
because the yield strength is so high, the yield strength of many of our bulk
Liquidmetal alloy compositions is very near their ultimate strength, which is
the measure of stress at which total breakage occurs. Therefore, very little
additional stress may be required to break an object made of bulk Liquidmetal
alloys once the yield strength is exceeded. Although we believe that the yield
strength of many of our bulk alloys exceeds the ultimate strength of most other
commonly used alloys and metals, our bulk alloys may not be suitable for
certain applications, such as pressurized tanks, in which the ability of the
material to yield significantly before it breaks is more important than its
strength advantage. Additionally, although our bulk alloys show a high
resistance to crack initiation because of their very high strength and
hardness, certain of our bulk alloys are sensitive to crack propagation under
certain long-term, cyclical loading conditions. Crack propagation is the
tendency of a crack to grow after it forms. Nevertheless, independent research
has shown that the fracture toughness, or ability to resist the formation of
cracks, of our zirconium-titanium Liquidmetal alloy exceeds by 28% the fracture
toughness of a crystalline titanium counterpart known as Ti-6Al-4V. We are
currently developing new alloy compositions that have improved material
properties to overcome these limitations.

Processing Advantages

The processing of a material generally refers to how a material is shaped,
formed, or combined with other materials to create a finished product. Bulk
Liquidmetal alloys possess processing characteristics that we believe make them
preferable to other materials in a wide variety of applications. In particular,
our alloys are amenable to processing options that are similar in many respects
to those associated with plastics. For example, we believe that bulk
Liquidmetal alloys have superior net-shape casting capabilities as compared to
crystalline metals and alloys. Net-shape casting is a type of casting that
permits the creation of highly finished products that do not require much
costly post-finishing processing or machining. Additionally, unlike most
metals and alloys, our bulk Liquidmetal alloys are capable of being
thermoplastically molded in bulk form. Thermoplastic molding consists of
heating a solid piece of material until it is transformed into a moldable,
although not yet molten, state and then introducing it into a mold.
Thermoplastic molding is beneficial and economical because it may require less
energy than casting, resulting in lower direct energy costs and less shrinkage,
and lends itself more readily to continuous processing.

Bulk Liquidmetal alloys also permit the creation of composite materials
that cannot be created with most non-amorphous metals and alloys. A composite
is a material that is made from two or more different types of materials. In
general, the ability to create composites is beneficial because constituent
materials can be combined with one another to optimize the composites
performance characteristics for different applications. In other metals and
alloys, the high temperatures required for processing could damage some of the
composites constituent materials and therefore limit their utility. However,
the relatively low melting temperatures of bulk Liquidmetal alloys allow mild
processing conditions that eliminate or limit damage to the constituent
materials when creating composites. In addition to composites, we believe that
the processing advantages of Liquidmetal alloys will allow for a variety of
other finished forms, including a coating or a spray. Most other metals and
alloys cannot be processed into these forms.

Notwithstanding the foregoing advantages, our bulk Liquidmetal alloys possess
certain limitations relative to processing. The beneficial processing features
of our bulk alloys are made possible in part by the alloys relatively low
melting temperatures. Although a lower melting temperature is a beneficial
characteristic for processing purposes, it renders certain bulk alloy
compositions unsuitable for certain high-temperature applications, such as jet
engine exhaust components. Additionally, the current one-inch thickness
limitation for our zirconium-titanium bulk alloy renders our alloys currently
unsuitable for use as structural materials in large-scale applications, such as
load-bearing beams in building constructions (although we can join together
multiple amorphous alloy objects to create a larger product in some cases). We
are currently engaged in research and development with the goal of developing
processing technology and new alloy compositions that will enable our bulk
alloys to be formed into thicker objects.

Cost Advantages

Liquidmetal alloys have the potential to provide significant cost
advantages over other metals and alloys in certain applications. Because bulk
Liquidmetal alloys have processing characteristics similar in many respects to
plastics, Liquidmetal alloys can in many cases be shaped efficiently into
intricate, sophisticated, engineered products in a substantially finished form.
This capability eliminates or reduces certain finishing steps, such as
grinding, shaping or forming, and therefore has the potential to significantly
reduce processing costs associated with making high-fidelity parts in high
volume.

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Additionally, because the processing of Liquidmetal alloys does not
require capital-intensive heavy industrial equipment such as that found in
foundry and forging operations, Liquidmetal alloys can be processed with a
smaller machinery footprint, which allows for efficient development of
facilities and reduced permitting and regulatory costs. We believe that these
processing advantages and lower capital costs will enable production to scale
up faster and more efficiently than foundry and forging operations. We also
believe that these advantages may allow our customers an opportunity maintain
or improve the performance of their products without a commensurate increase in
cost.

Our Strategy

Our goal is to use our leadership position in amorphous alloy technology
to develop and commercialize a wide variety of product applications. The key
elements of our strategy 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 Initial Commercialization Efforts on Major Industries
Characterized by High Unit Volumes.We are focusing our initial
commercialization efforts on applications for bulk Liquidmetal alloy
products with relatively high unit volumes that are sold in major
industries. For example, we have targeted the electronic product
casing market because of its potential for very high unit volumes.
We believe that manufacturing Liquidmetal alloy products in high
volumes should enable us to facilitate revenue growth and enable us to
improve manufacturing and processing efficiencies associated with our
alloys.                                                                                         
|
| |  |  | 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 better protect our intellectual
property. As our alloys become more pervasive, however, we may enter
into strategic relationships that could involve the license of
Liquidmetal technology to third parties for certain market segments.                                                                                                           
|
| |  |  | Pursuing Acquisitions, Joint Ventures, and Other Strategic
Transactions.We are pursuing acquisitions, joint ventures, and other
strategic transactions to gain access to new technologies, products,
markets, and manufacturing capabilities. In particular, we may engage
in acquisitions and other strategic transactions to gain access to
technologies that will enhance or complement the composition,
processing, and application of our alloys. Under certain
circumstances, we may also enter into licensing relationships under
which we would license some aspect of our technology to third parties
for specific markets.                                                                                       
|
| |  |  | Establishing 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
pursuing a brand development strategy through targeted advertising,
conference and trade show appearances, promotions, public relations,
and other means.
|
| |  |  | Enhancing Our Competitive Position by Aggressively Developing,
Exploiting, and Protecting Both Existing and Future Advances in
Amorphous Alloy Technology.We are investing significant resources
toward developing and acquiring new technologies that will enhance and
expand our existing technology position. In particular, we are
currently seeking to develop and acquire technologies that relate to
the composition, processing, and application of amorphous alloy
technologies. Our efforts will include intensive research and
development activities aimed at decreasing the manufacturing cost and
improving the performance characteristics and processing flexibility
of Liquidmetal alloys.                
|

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Initial Applications

We have identified the following initial market opportunities to allow us
to execute our strategy. We believe that these opportunities are consistent
with our strategy in terms of market size, building brand recognition, and
providing an opportunity to develop and refine our processing capabilities.

Casings for Electronic Products

We produce casing components for electronic devices using our bulk
Liquidmetal alloys. We targeted this market because of its high product volume
and potential branding opportunities. Bulk Liquidmetal alloys can be used for
each of the structural components of a cellular phone, including the shield,
face plate, hinge, back plate, side plates, and the clam shell on so-called
flip-phones. To date, we have shipped production quantities of cellular phone
components to Samsung Electronics Company for inclusion in various cellular
phone models. During the first quarter of 2003, we also began shipping
cellular phone components to LG Electronics. We are currently working with
other cellular phone manufacturers, including Motorola, to develop casing
components for their phones and have received orders for limited quantities of
prototype units.

In addition to cellular phones, bulk Liquidmetal alloys can be used as a
casing material in a variety of other electronic devices. For example, in the
third quarter of 2002, we shipped production quantities of Liquidmetal alloy
casing components to J.S. Tech, a South Korean electronics manufacturer, for
inclusion in a combination MP3/CD player. We are also working with Samsung and
other electronics companies to develop components for products such as personal
digital assistants (PDAs), laptop computers, and digital cameras.

We believe that aesthetics, the growing trend toward miniaturization, and
the introduction of advanced features to electronic devices are the primary
drivers of growth, market share, and profits in this industry, particularly
with respect to cellular phones and PDAs. For example, the introduction of
larger screens into smaller casings has been a significant challenge
confronting electronics manufacturers attempting to take advantage of new
wireless technology. In particular, normal usage of smaller and thinner devices
may result in accidental damage to the display screens and internal electronic
components. The high strength-to-weight ratio and elastic limit of bulk
Liquidmetal alloys enable the production of thinner, but stronger, casings that
protect the screens and miniature electronic circuits of electronic devices
better than materials currently in use, such as plastic and magnesium.
Additionally, we believe that the strength characteristics of our alloys could
facilitate the creation of a new generation of electronic devices that may not
be viable currently because of the strength limitations of incumbent materials.
We also believe that our alloys offer style and design flexibility, such as
shiny metallic finishes, to accommodate the changing tastes of the consumer.

Sporting Goods and Leisure Products

We are developing and marketing a variety of applications for bulk
Liquidmetal alloys in the sporting goods and leisure products area. For
example, we believe that the high strength, hardness, and elasticity of our
alloys will enhance product performance in the sporting goods industry.
Possible applications for our alloys in this industry include golf, skiing,
tennis, hunting, and diving products. We have entered into product development
agreements with HEAD Sport AG and Rawlings, Inc., two well-established sporting
goods manufacturers, to test and develop components for use in their products.

Capitalizing on the experience, knowledge, and recognition that we gained
through our discontinued retail golf club business, we have been working with
established golf club companies to develop Liquidmetal alloy components for
their golf clubs. Using our bulk Liquidmetal alloys, we have manufactured
prototypes of various golf club components, including club head components for
irons and woods. We are continuing to work with PING, Inc., a leading golf club
manufacturer, for the development of golf club heads made from bulk Liquidmetal
alloys, and we are also engaged in discussions and negotiations with other golf
club manufacturers relating to the inclusion of our alloys in their clubs.

In the leisure products category, bulk Liquidmetal alloys can be used to
efficiently produce premium watchcases and other similar intricately engineered
designs with high-quality finishes. For example, the advantages of our bulk
alloys enable us to reduce the number of separate operations required for the
manufacture of a metal watchcase. We currently have a development agreement
with TAG Heuer S.A., a high-quality Swiss watchmaker, to develop bulk
Liquidmetal alloy watchcases for use in TAG Heuer watches, and we are currently
delivering sample quantities to TAG Heuer under this

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agreement. In the third quarter of 2002, we entered into an expanded
product development agreement with TAG Heuer with the goal of extending our
amorphous alloy technology to other products in the broad product portfolio of
LVMHs Watches & Jewelry Division. LVMH is the parent company of TAG Heuer and
is one of the worlds largest luxury-brands product companies. We have also
entered into an agreement with Casio Computer Co., Ltd. to develop bulk
Liquidmetal alloy components for Casio watches. In addition to watches,
Liquidmetal alloy technology can be used to make high-quality, high-strength
jewelry from precious metals. For example, we have successfully produced
prototype rings made from an amorphous Liquidmetal platinum that is three times
harder (and hence more scratch resistant) than regular crystalline platinum.

Medical Devices

We are developing and manufacturing prototypes of various medical devices
made from Liquidmetal alloys. We believe that Liquidmetal alloys are
well-suited for medical devices because of their strength, hardness,
biocompatibility, and corrosion resistance, together with the ability of our
bulk Liquidmetal alloys to be formed into complex shapes with a high quality
finish. We believe that these qualities can provide improved performance,
longer life, and lower production costs than the materials currently being used
in many medical device applications.

In the orthopedic device market, we believe that Liquidmetal alloys
represent a superior alternative to the titanium, cobalt-chromium, and
stainless steel alloys currently used in many orthopedic devices. Titanium
alloys are strong, but they do not move well against other materials and are
therefore not used in devices with parts that move against each other, such as
ball-and-socket hip joints. Cobalt-chromium alloys wear well, but they are
comparatively heavy and difficult to process. Stainless steel corrodes
relatively quickly. In contrast, we believe that Liquidmetal alloy orthopedic
devices will be stronger and produce less friction than titanium orthopedic
devices, have a greater strength-to-weight ratio than cobalt chromium
orthopedic devices, and have better corrosion resistance than stainless steel
orthopedic devices. We have completed initial studies relating to the
biological compatibility of our alloys for purposes of developing our
orthopedic applications, and the results of these studies have been favorable.

Our primary strategy in the medical device market has been to
strategically align ourselves with well-established companies that are best
positioned to facilitate the introduction of Liquidmetal alloys into this
market. For example, in the fourth quarter of 2002, we entered into an
exclusive, multi-year agreement with DePuy Orthopaedics, Inc., a Johnson &
Johnson company, to co-develop orthopedic implants and instruments for the knee
replacement device market. This agreement gives DePuy Orthopaedics the
exclusive worldwide right and license to market and sell knee replacement
devices that incorporate Liquidmetal alloys. Under the terms of the agreement,
we will receive scheduled cash payments upon completion of specific program
milestones, culminating in obtaining and receiving FDA and CE marketing
approval. Thereafter, all product components under this program will be
manufactured by or for us and sold to DePuy Orthopaedics, with DePuy
Orthopaedics providing full marketing and distribution services. The agreement
further provides that we will receive royalty payments from net sales of knee
replacement devices developed under the program and marketed by DePuy
Orthopaedics. DePuy Orthopaedics rights under the agreement will extend
through 2020.

In the third quarter of 2002, we entered into an agreement with Surgical
Specialties Corporation for the development and marketing of a line of
ophthalmic scalpel blades made from Liquidmetal alloys. Under this agreement,
we are currently working with Surgical Specialties to co-develop the blades,
and upon completion of the development phase of the relationship, Surgical
Specialties would sell the blades through its worldwide marketing and
distribution network, which includes the worlds leading ophthalmic surgical
device companies. In addition, we are producing prototype phacoemulsification
tips, which are instruments used to remove cataracts, in limited quantities for
testing by Surgical Specialties.

We are also working with Ethicon Endosurgery, a Johnson & Johnson company,
to develop components for surgical instruments. Additionally, we are working
with Glidewell Laboratories, the largest dental laboratory company in the world
and a producer of crowns, bridges, and dentures, to develop dental devices made
from Liquidmetal alloys. We are also in discussion and negotiations with other
producers and marketers of medical devices to develop Liquidmetal alloy
products for this market.

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Industrial Coatings and Powders

We market and sell amorphous alloy industrial coatings and powders.
Liquidmetal alloy coatings are used primarily as a protective coating for
industrial machinery and equipment. We believe that the high degree of hardness
and low coefficient of friction of our coatings, combined with their strong
adhesion properties, reduce the wear and consequent failure of the machinery
and equipment on which they are used. We sell Liquidmetal coatings primarily
in the form of a wire or powder feedstock that is melted and applied to
machinery or equipment through a thermal spray process. The production of this
feedstock is currently outsourced to a third party, and through our office and
warehouse in Conroe, Texas, we sell and distribute the wire to third-party
coatings applicators and other parties.

Our Liquidmetal coatings are widely used in the oil drilling industry as a
protective coating on drill pipe and casings. Drilling often places tremendous
stress on pipes and casings, especially whenever the drill changes direction.
Both drill pipe and casing experience excessive wear, which leads to higher
replacement costs and greater failure rates. Liquidmetal coatings are used to
provide a protective coating, or hard band, around the outside of the drill pipe
and the inside of casings to reduce wear and failure rates and accordingly
reduce operating costs. We estimate that our coatings represent about 75-80%
of annual worldwide sales of hard band coatings for new oil drill pipe.

Liquidmetal coatings are also sold for the purpose of coating boiler tubes
in coal burning power plants in order to extend the lives of these tubes.
Boiler tubes are subject to high heat, erosion, and corrosion and often require
costly replacement, both in terms of replacement parts and length of downtime
for installation. Additionally, residue build-up in boiler tubes of coal
burning power plants creates operating inefficiencies. Tests on Liquidmetal
coatings have indicated that our coatings extend the life of these boiler
tubes by three to five times their current average life depending on the
specific environment. In addition, tests on our coatings have indicated that
our coatings reduce the build-up of residue on these tubes, helping to improve
the efficiencies of the boilers. Based on the success of our coatings in this
application, we have increased our marketing efforts in this product area.

Our coatings customers currently include Grant Prideco, Inc., TAFA, Inc.,
Smith International, Inc., and Foster Wheeler. In addition to our coatings, we
develop and market Liquidmetal powders that can be used as a binding agent in
industrial applications, such as cutting tools. Initial testing by third
parties suggests that our powders offer high erosion resistance in these
applications and could serve as a superior substitute for cobalt, which is the
primary metal binding agent used in high-performance industrial drilling,
milling, and cutting instruments.

Defense Applications

We are working with the U.S. Department of Defense, as well as a variety
of defense-related research and development agencies and large defense
contractors, to develop a number of defense-related applications for
Liquidmetal alloys. For example, we are currently producing prototype kinetic
energy penetrator rods for use in armor-piercing ammunition systems. Kinetic
energy penetrators, or KEPs, are armor piercing munitions that are currently
made primarily from depleted uranium or tungsten. In the first quarter of
2002, we were awarded a contract by the Defense Advanced Research Projects
Agency (DARPA) for funding of up to $2 million to test Liquidmetal alloy KEP
rods in actual munitions, and in the third quarter of 2002, we were awarded a
research and development contract by the U.S. Army to develop high performance
KEP rods. The U.S. Army research and development program is funded at just
under $2 million for a 15-month period. Initial live-fire ballistic tests
under the KEP programs have demonstrated that tungsten KEPs perform better
whenever Liquidmetal alloy is combined with the tungsten to create a composite
material.

We are also working with a number of defense-related research and
development agencies and large defense companies to identify additional
military applications that may benefit from using Liquidmetal alloys. We
believe that our alloys are well-positioned to capitalize 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 most significant players in
this industry. At the U.S. Armys request, we have recently produced prototype
ceramic-encapsulated armor tiles made from Liquidmetal alloys for testing. In
the fourth quarter of 2002, we entered into a development agreement with
Lockheed Martin Corporation, the worlds largest defense contractor, to test
potential applications of Liquidmetal alloys in current and future armored
weapon systems manufactured by Lockheed Martin. This agreement, which has an
initial one-year term, will initially focus on the use of Liquidmetal alloys to
enhance the survivability of future combat systems. We have also teamed with
other defense contractors, including Raytheon

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Missile Systems and Applied Ordnance Technologies, to compete for recent
solicitations by the U.S. Air Force and U.S. Navy.

We have also entered into discussions with other major defense companies
to jointly fund internal research and development programs to pursue the
application of Liquidmetal in the defense market.

Liquidmetal Golf

From 1997 until September 2001, we engaged in the retail marketing and
sale of golf clubs through a majority owned subsidiary, Liquidmetal Golf. The
retail business of Liquidmetal Golf was discontinued in September 2001and is
now treated as a discontinued operation in our consolidated financial
statements. Although the retail golf club business has been discontinued,
Liquidmetal Golf will be engaged in the business of manufacturing and selling
golf club components to golf original equipment manufacturers who will
integrate these components into their own clubs and then sell them under their
respective brand names. Liquidmetal Technologies owns 79.19% of the outstanding
common equity in Liquidmetal Golf.

Our Liquidmetal Golf subsidiary has the exclusive right and license to
utilize our Liquidmetal alloy technology for purposes of golf equipment
applications. This right and license is set forth in an intercompany license
agreement between Liquidmetal Technologies and Liquidmetal Golf. This license
agreement provides that Liquidmetal Golf has a perpetual and exclusive license
to use Liquidmetal alloy technology for the purpose of manufacturing,
marketing, and selling golf club components and other products used in the
sport of golf. In consideration of this license, Liquidmetal Golf has issued
4,500,000 shares of Liquidmetal Golf common stock to Liquidmetal Technologies.
In addition, Liquidmetal Technologies and Liquidmetal Golf are parties to a
services agreement under which Liquidmetal Technologies provides Liquidmetal
Golf with various goods and services, including operating facilities, research
and development, sales and marketing, manufacturing, management support, and
other support services. Under the services agreement, Liquidmetal Golf pays
Liquidmetal Technologies a service fee equal to Liquidmetal Golfs allocated
share of Liquidmetal Technologies operating costs based on actual time and
resources expended in providing the services.

Our Intellectual Property

Our intellectual property consists of patents, trade secrets, know-how,
and trademarks. Protection of our intellectual property is a strategic priority
for our business, and we intend to vigorously protect our patents and other
intellectual property. Our intellectual property portfolio includes 22 owned or
licensed U.S. patents and various patent applications relating to the
composition, processing, and application of our alloys, as well as various
foreign counterpart patents and patent applications.

Our initial bulk amorphous alloy technology was developed by researchers
at Caltech. We have the exclusive right to commercialize this alloy and other
amorphous alloy technology through a license agreement with Caltech. Under the
Caltech license agreement, we have the exclusive worldwide right to make, use,
and sell products from all of Caltechs inventions, proprietary information,
know-how, and other technology relating to amorphous alloys and existing as of
September 1, 2001. We also have an exclusive worldwide license to eight patents
and six patent applications held by Caltech relating to amorphous alloy
technology, as well as all related foreign counterpart patents and patent
applications. Furthermore, the license agreement gives us the exclusive right
to make, use, and sell products from substantially all related amorphous alloy
technology that is developed in Professor William Johnsons Caltech laboratory
during the period September 1, 2001 through August 31, 2005. All fees and other
amounts payable by us for these rights and licenses have been paid in full, and
no further royalties, license fees, or other amounts will be payable in the
future under this license agreement.

Our rights under the license agreement are perpetual in duration. However,
Caltech has the right to convert the license to a non-exclusive license if we
fail to utilize the licensed technology for a period of 18 or more consecutive
months, provided that Caltech must give us 180-days advance written notice of
the conversion and we may cure the failure at any time during the 180-day
notice period. If we cure the failure, then the license will not be converted
into a non-exclusive license.

Under the license agreement, we have the right to sublicense any of the
licensed technology or patents. The license agreement also provides that
Caltech reserves the right to use the licensed technology and patents for
noncommercial educational and research purposes. The patents and patent
applications that we license from Caltech relate primarily to the

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composition and processing of our alloys. The currently issued U.S.
patents covered by the license agreement will expire between 2013 and 2017.

Under the Caltech license agreement, the parties are obligated to provide
reasonable cooperation to each other in connection with any threatened or
actual infringement of the licensed technology by third parties. We have the
right to commence an action for infringement of any of the licensed technology,
and although Caltech is not obligated to bring suit or take action against
infringers, Caltech is obligated to join in any such lawsuit upon our request.

In addition to the patents and patent applications that we license from
Caltech, we are building a portfolio of our own patents to expand and enhance
our technology position. These patents and patent applications primarily relate
to various applications of our bulk amorphous alloys, the composition of our
coatings and powders, and the processing of our alloys. The patents relating to
our coatings expire on various dates between 2004 and 2017, and the patents
relating to our bulk amorphous alloys expire on various dates between 2013 and
2017. Our policy is to seek patent protection for all technology, inventions,
and improvements that are of commercial importance to the development of our
business, except to the extent that we believe it is advisable to maintain such
technology or invention as a trade secret.

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

Research and Development

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



| |  |  | Enhance the Processing Efficiencies.We plan to continue research and
development of processes and compositions that will decrease our cost
of making products from Liquidmetal alloys.                                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Improve Performance Characteristics.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.                                
|
| |  |  | Develop New Applications.We will continue 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 research and development programs internally and also
through strategic relationships that we enter into with third parties. Our
internal research and development efforts are currently focused on product and
process development. Our internal research and development efforts are
conducted by a team of 32 scientists, engineers, and researchers who are
employed by us or engaged by us as consultants. Included among these employees
is Professor William Johnson, who discovered our initial bulk amorphous alloy
at Caltech in 1993, and his graduate student at the time, Atakan Peker, who is
employed as our Vice President of Technology Management. Professor Johnson
joined our company as an employee as of October 1, 2001 and is also a member of
our board of directors and Technology Advisory Board. We intend to hire
additional scientists and engineers to expand our internal research and
development program.

In addition to our internal research and development efforts, we enter
into cooperative research and development relationships with leading academic
institutions. Professor Johnson continues to supervise a laboratory at
Caltech, and through our license agreement with Caltech, we have a continuing
relationship with the other researchers in Professor Johnsons Caltech
laboratory. We have also entered into research relationships with several
other academic institutions for the conduct of research relating to the
properties and characteristics of our alloys.

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We also enter into development relationships with other companies for the
purpose of identifying new applications for our alloys and establishing
customer relationships with such companies. Some of our product development
programs are partially funded by our customers. We are also engaged in
negotiations with a number of other potential customers regarding possible
product development relationships. Our research and development expenses for
the years ended December 31, 2002, 2001, and 2000 were $11.8 million, $2.1
million, and $0.5 million, respectively.

To assist us in our research and development efforts, we have also
assembled a Technology Advisory Board composed of leading researchers and
scientists in the field of materials science. The members of our Technology
Advisory Board are from leading academic and research institutions in the field
of materials science. Our Technology Advisory Board meets on a semi-annual
basis to discuss issues related to the advancement and application of our
technology and the progress of our research and development programs, although
it may also be convened at other times on an as-needed basis. Additionally, we
occasionally consult with individual members of our Technology Advisory Board
on various issues relating to our technology.

Manufacturing

We currently own and operate a 166,000 square foot manufacturing facility
in Pyongtaek, South Korea, which became operational in the third quarter of
2002. This facility contains 25 machines that are or will be used to cast bulk
Liquidmetal alloy parts, as well as various pieces of finishing equipment and
other equipment. We believe that this facility will meet our anticipated
manufacturing needs through at least the end of 2004, although these needs may
change depending upon the actual and forecasted orders we receive for our
products. We currently intend to develop or acquire additional manufacturing
facilities and capabilities elsewhere, including the United States, for
purposes of meeting our long-term manufacturing needs.

Raw Materials

Liquidmetal alloy compositions are comprised of many elements, all of
which are readily available commodity products. We believe that each of these
raw materials is readily available in sufficient quantities from multiple
sources on commercially acceptable terms. However, any substantial increase in
the price or interruption in the supply of these materials could have an
adverse effect on our profitability.

Customers

During 2002, three customers accounted for 10% or more of our revenue from
continuing operations. Revenue from Samsung represented 15%, Growell Metal,
Inc. represented 12% and defense-related contracts with three departments of
the United States of America represented 10% of revenue from continuing
operations for the year ended December 31, 2002. During the years ended
December 31, 2001 and 2000, revenue earned on contracts with the United States
of America represented less than 1% of revenue.

For the two years ended December 31, 2001, three other customers accounted
for 10% or more of our revenue from continuing operations. Revenue from Grant
Prideco, Inc. represented approximately 22% and 19% of revenue from continuing
operations for the years ended December 31, 2001 and 2000, respectively.
Revenue from TAFA, Inc. represented approximately 14% and 13% of revenue from
continuing operations for the years ended December 31, 2001 and 2000,
respectively. Revenue from Smith International, Inc. represented approximately
16% of revenue from continuing operations for the year ended December 31, 2001.
These three customers purchased solely industrial coatings from us. We expect
that a significant portion of our revenue may continue to be concentrated in a
limited number of customers, even as our bulk Liquidmetal alloy business grows.

Competition

We are not aware of any other company or business that manufactures,
markets, distributes, or sells bulk amorphous alloys or products made from bulk
amorphous alloys. We believe it would be difficult to develop a competitive
bulk amorphous alloy without infringing our patents. However, we expect that
our bulk Liquidmetal alloys will face competition from other materials,
including metals, alloys, and plastics, that are currently used in the
commercial applications that we

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pursue. Our alloys could also face competition from new materials that may
be developed in the future, including new materials that could render our
alloys obsolete.

Our Liquidmetal alloy coatings face competition from industrial coatings
currently manufactured or sold by other companies. At present, the primary
competitors of our coatings business are Grant Prideco, Inc., Varco
International, Inc., and Arnco Technology Trust, Limited. Although we believe,
based on market data gathered by us, that our coatings compete favorably with
these companies products and that we continue to maintain the dominant market
share with respect to protective coatings for oil drill pipe and casings, these
competitors are larger well-established businesses that have substantially
greater financial, marketing, and other resources than we do.

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

Backlog

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

Sales and Marketing

We direct our marketing efforts towards customers that will incorporate
our components and products into their finished goods. To that end, we will
continue to hire business development personnel who, in conjunction with
engineers and scientists, will actively identify potential customers that may
be able to benefit from the introduction of Liquidmetal alloys to their
products. In some cases, we will develop applications in conjunction with
existing or potential customers. By adopting this strategy, we intend to take
advantage of the sales and marketing forces and distribution channels of our
customers to facilitate the commercialization of our alloys.

Employees

As of March 1, 2003, we had 272 full-time employees and 3 part-time
employees. This does not include contract laborers who work for an independent
South Korean labor pool that we utilize from time to time in our Pyongtaek,
South Korea manufacturing facility. The number of independent laborers that we
lease from the labor pool varies depending our needs and the production
activities of the Pyongtaek facility. As of March 1, 2003, none of our
employees was represented by labor unions (except for two specific
individuals employed by our Korean operations) or covered by collective bargaining
agreements. We have not experienced any work stoppages, and we consider our
employee relations to be good.

Governmental Regulation

Medical instruments incorporating our Liquidmetal alloys, such as scalpel
blades and phacoemulsification tips, will be subject to regulation in the
United States by the FDA and corresponding state and foreign regulatory
agencies. Any orthopedic devices that we develop will be regulated in a similar
manner. Medical device manufacturers to whom we intend to sell our products may
need to obtain FDA approval before marketing their medical devices that
incorporate our products. Medical device manufacturers may need to obtain
similar approvals before marketing these medical device products in foreign
countries.

Because we intend to sell our medical device products to medical device
manufacturers, we do not believe that we will need to obtain FDA approval or
similar foreign approvals before selling products to medical device
manufacturers.

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Nonetheless, as a manufacturer of medical device components, we would be
subject to quality control and record keeping requirements of FDA and other
federal and state statutes and regulations, as well as similar regulations in
foreign countries.

The process of obtaining and maintaining required FDA and foreign
regulatory approvals for medical devices that incorporate our products could be
lengthy, expensive, and uncertain for our customers. Additionally, regulatory
agencies can delay or prevent product introductions. Generally, before a
medical device manufacturer can market a product incorporating one of our
products, our customer must obtain for their finished product marketing
clearance through a 510(k) premarket notification or approval of a premarket
approval application, or PMA. The FDA will typically grant a 510(k) clearance
if the applicant can establish that the device is substantially equivalent to a
predicate device. It generally takes a number of months from the date of a
510(k) submission to obtain clearance, but it may take longer, particularly if
a clinical trial is required.

The FDA may find that a 510(k) is not appropriate for a medical device
that incorporates our product or that substantial equivalence has not been
shown and as a result will require a PMA. A PMA application must be submitted
if a proposed medical device does not qualify for a 510(k) premarket clearance
procedure. PMA applications must be supported by valid scientific evidence to
demonstrate the safety and effectiveness of the device, typically including the
results of clinical trials, bench tests, and laboratory and animal studies. The
PMA process can be expensive, uncertain and lengthy, requires detailed and
comprehensive data, and generally takes significantly longer than the 510(k)
process. Additionally, the FDA may never approve the PMA.

Similar regulations in foreign countries vary significantly from country
to country and with respect to the nature of the particular medical device. The
time required to obtain these foreign approvals to market our products may be
longer or shorter than that required in the United States, and requirements for
such approval may differ from FDA requirements.

Factors Affecting Future Results

This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that are based on current
expectations, estimates, forecasts, and projections about the company and its
business. In addition, other written or oral statements which constitute
forward-looking statements may be made from time to time by or on behalf of
Liquidmetal Technologies. Any statement in this report that is not a statement
of historical fact is a forward-looking statement, and in some cases, words
such as believe, estimate, project, expect, intend, may,
anticipate, plans, seeks, and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual outcomes and results to differ materially
from the anticipated outcomes or result. These statements are not guarantees
of future performance, and undue reliance should not be placed on these
statements. Liquidmetal Technologies undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

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

We have not sustained profitability and may incur losses in the future.

We had an accumulated deficit of approximately $76.9 million at December
31, 2002. Of this accumulated deficit, $42.9 million was attributable to losses
generated by our discontinued retail golf business through December 31, 2002.
We realized a net loss of $19.9 million for the year ended
December 31, 2002 and $5.2 million for the year ended December 31, 2001, excluding the results of our
discontinued retail golf business. We may incur additional operating losses in
the future. Moreover, we expect that our operating expenses will continue to
increase as we continue to strengthen and expand our manufacturing
capabilities and invest substantial
resources for research and development activities. Consequently, it is possible
that we may not achieve positive earnings and, if we do achieve positive
earnings, we may not be able to achieve them on a sustainable basis.

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We have a limited history of developing, manufacturing, and selling
products made from our bulk amorphous alloys.

We have marketed and sold industrial coatings to distributors in the
coatings industry since 1987. Prior to the third quarter of 2002, our experience
selling products made from bulk amorphous alloys has been limited to our
discontinued retail golf business, which had a different marketing strategy
than the one we are currently employing. We only recently began producing bulk
amorphous alloy components and products on a mass-production basis. Many of
our relationships with potential customers for bulk alloy products are at an
early stage, and there can be no assurance that these customers will enter into
purchase commitments with us. Moreover, as we gain more experience and
knowledge relating to the manufacturing process of our bulk alloys and the
purchase and utilization of raw materials used in these alloys, we expect to be
able to further decrease the cost of producing bulk alloy parts. We believe
that decreasing manufacturing and raw material costs will enable our alloys to
compete more effectively against plastics and other incumbent materials in
certain markets, such as the cellular phone casing market.

We rely on assumptions about the markets for our products and components
that, if incorrect, may adversely affect our profitability.

We only recently began producing bulk amorphous alloy components on a
mass-production basis. We have made assumptions regarding the market size for,
and the manufacturing requirements of, our products and components based in
part on information we received from third parties. If these assumptions prove
to be incorrect, we may not be able to achieve profitability.

Our historical results of operations may not be indicative of our future
results.

Although our discontinued retail golf business did not contribute to our
revenues in 2002, this business contributed approximately 46.2%, 61.5%, and
74.7% of our revenues for the years ended December 31, 2001, 2000, and 1999,
respectively. As a result of our limited history of selling bulk amorphous
alloy components and products that are incorporated into the finished goods of
our customers, and because the revenues, costs and expenses, assets and
liabilities, and cash flows in connection with our discontinued retail golf
business have been segregated in our consolidated financial statements, our
historical results of operations may not be indicative of our future results.

If we cannot establish and maintain relationships with customers that
incorporate our components and products into their finished goods, we will not
be able to increase our revenue and commercialize our products.

To increase our revenue, we must establish and maintain relationships with
customers that will incorporate our components and products into their finished
goods. We expect to rely on the marketing, distribution, and, in some cases,
the manufacturing, research, and development abilities of our customers to
assist us in developing, commercializing, and marketing our products in
different markets. Our future growth and success will depend in large part on
our ability to enter into these relationships and the subsequent success of
these relationships. If our products are chosen to be incorporated into a
customers products, we still may not realize significant revenue from that
customer if that customers products are not commercially successful.

It may take significant time and cost for us to develop new customer
relationships, which may delay our ability to generate additional revenue or
achieve profitability.

Our ability to generate revenue from new customers will be affected by the
amount of time it takes for us:



| |  |  | to identify a potential customer and introduce the customer to Liquidmetal alloys;                
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | to work with the customer to select and design the parts to be fabricated from Liquidmetal alloys;
|
| |  |  | to make the molds and tooling to be used to produce the selected part;                            
|
| |  |  | to make prototypes and samples for customer testing;                                              
|
| |  |  | to work with our customers to test and analyze prototypes and samples; and                        

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| |  |  | with respect to some types of products, such as medical devices, to obtain regulatory approval.
| | - |  | -----------------------------------------------------------------------------------------------

We currently do not have a sufficient history of selling products made
from our bulk amorphous alloys to predict accurately the length of our average
sales cycle. We believe that our average sales cycle from the time we deliver
an active proposal to a customer until the time our customer fully integrates
our bulk amorphous alloys into its product could be a significant period of
time. The sales cycle could extend longer than we anticipate. The time it takes
to transition a customer from limited production to full-scale production runs
will depend upon the nature of the processes and products into which our alloys
are integrated.

After we develop a customer relationship, it may take a significant amount
of time for that customer to develop, manufacture, and sell finished goods that
incorporate our components and products.

We believe that many of our customers will perform numerous tests and
extensively evaluate our components and products before incorporating them into
their finished products. The time required for testing, evaluating, and
designing our components and products into a customers products, and in some
cases, obtaining regulatory approval, can take a significant amount of time,
with an additional period of time before a customer commences volume production
of products incorporating our components and products, if ever. Moreover,
because of this lengthy development cycle, we may experience a delay between
the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenue, if any. We may incur
substantial costs in an attempt to transition a customer from initial testing
to prototype and from prototype to final product. If we are unable to minimize
these transition costs, or to recover the costs of these transitions from our
customers, our operating results will be adversely affected.

A limited number of our customers generate a significant portion of our
revenue.

For the near future, we expect that a significant portion of our revenue
will be concentrated in a limited number of customers. For example, for the
year ended December 31, 2002, revenue from three customers represented
approximately 37% of total revenue from continuing operations. A reduction,
delay, or cancellation of orders from one or more of our customers or the loss
of one or more customer relationships could significantly reduce our revenue.
Unless we establish long-term sales arrangements with these customers, they
will have the ability to reduce or discontinue their purchases of our products
on short notice.

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

Our future revenue growth and ultimate profitability will depend in part
on the ability of our customers to successfully market and sell their finished
goods that incorporate our products. We will have little control over our
customers marketing and sales efforts. These marketing and sales efforts may
be unsuccessful for various reasons, any of which could hinder our ability to
increase revenue or achieve profitability. For example, our customers may not
have or devote sufficient resources to develop, market, and sell their finished
goods that incorporate our products. Because we likely will not have exclusive
sales arrangements with our customers, they will not be precluded from
exploring and adopting competing technologies. Also, products incorporating
competing technologies may be more successful for reasons unrelated to
performance of our customers products or the marketing efforts of our
customers.

Our growth depends on our ability to identify, develop, and commercialize
new applications for our technology.

Our future growth and success will depend in part on our ability to
identify, develop, and commercialize, either alone or in conjunction with our
customers, new applications and uses for Liquidmetal alloys. If we are unable
to identify and develop new applications, we may be unable to develop new
products or generate additional revenue. Successful development of new
applications for our products may require additional investment, including
costs associated with research and development and the identification of new
customers. In addition, difficulties in developing and achieving market
acceptance of new products would harm our business.

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We may not be able to effectively compete with current suppliers of
incumbent materials or producers of competing products.

The future growth and success of our bulk amorphous alloy business will
depend in part on our ability to establish and retain a technological advantage
over other materials for our targeted applications. For many of our targeted
applications, we will compete with manufacturers of similar products that use
different materials. For example, we have targeted the cellular phone casing
market as an application for bulk Liquidmetal alloys. In this market, we
believe we will compete with other manufacturers of cellular phone casings who
use plastics or metal to construct their casings. In other markets, we will
compete directly with suppliers of the incumbent material. For example, in the
orthopedic device market, we compete with the suppliers of titanium alloy,
stainless steel, and other materials currently used to make orthopedic devices.
Manufacturers of competing products or suppliers of incumbent materials may
have significantly greater financial resources than we do.

In addition, in each of our targeted markets, our success will depend in
part on the ability of our customers to compete successfully in their
respective markets. Thus, even if we are successful in replacing an incumbent
material in a finished product, we will remain subject to the risk that our
customer will not compete successfully in its own market.

Future advances in materials science could render Liquidmetal alloys
obsolete.

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

Our growth depends upon our ability to retain and attract a sufficient
number of qualified employees.

Our future growth and success will depend in part on our ability to retain
key members of our management and scientific staff, particularly John Kang, our
President and Chief Executive Officer, and Professor William Johnson, Vice
Chairman of our board of directors. We do not have key man or similar
insurance on either of these individuals. If we lose either of their services
or the services of other key personnel, our financial results or business
prospects may be harmed. Additionally, our future growth and success will
depend in part on our ability to attract, train, and retain new scientific,
manufacturing, sales, marketing, and management personnel. We cannot be certain
that we will be able to attract and retain the personnel necessary to manage
our operations effectively. Competition for experienced executives and
scientists from numerous companies and academic and other research institutions
may limit our ability to hire or retain personnel on acceptable terms. In
addition, many of the companies with which we compete for experienced personnel
have greater financial and other resources than we do. Moreover, the employment
of non-citizens may be restricted by applicable immigration laws.

We may not be able to effectively manage our anticipated growth.

If we fail to effectively manage our internal growth in a manner that
minimizes strains on our resources, we could experience disruption in our
operations and ultimately be unable to achieve or sustain profitability.
Managing our
anticipated growth may be difficult because:



| |  |  | our management team has worked together for a relatively short period of time;                                                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we have a limited history of manufacturing our own products, and we intend to
continue the scale-up of production at our manufacturing facility in South
Korea;                                                                      
|
| |  |  | we have a limited history of developing, manufacturing, and marketing
products made from bulk Liquidmetal alloys, and we expect that our bulk alloy
segment will continue to generate the majority of our revenue in the near future;
|
| |  |  | we intend to rapidly expand our research and development programs; and                                                                                                                                                               

16



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| |  |  | we intend to pursue acquisitions, joint ventures, and other strategic
transactions that will enhance or expand our technology and manufacturing
base.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

If we fail to effectively manage this growth, we may not be
able to effectively implement our strategy, and our financial results and
business prospects could be harmed.

We may not be able to successfully identify, consummate, or integrate
strategic transactions.

We intend to pursue strategic transactions that provide access to new
technologies, products, markets, and manufacturing capabilities. These
transactions could include acquisitions, partnerships, joint ventures, business
combinations, and investments. For example, we may pursue transactions that
will give us access to new technologies that are useful in connection with the
composition, processing, or application of Liquidmetal alloys. In particular,
we intend to focus our acquisition efforts on companies that will expand or
enhance our manufacturing capabilities. We may not be able to successfully
identify any potential strategic transactions. Even if we do identify one or
more potentially beneficial strategic transactions, we may not be able to
consummate these transactions on favorable terms or obtain the benefits we
anticipate from such a transaction. If we are able to consummate any strategic
transactions, the transactions could pose significant integration challenges or
management and business disruptions, especially while we are in the early
stages of our growth.

We may encounter manufacturing problems or delays or may be unable to
produce high-quality products at acceptable costs.

We have limited experience in manufacturing our products and may be
required to manufacture a range of products in high volumes while ensuring high
quality and consistency. Although we currently own and operate a 166,000
square foot manufacturing facility in South Korea, we cannot
guarantee that
this facility will be able to produce its intended products with the production
yields, quality controls, and production costs that we currently assume. We may
be required to incur additional capital expenditures if it is necessary to
increase our manufacturing capacity, and we may not be able to finance any
future capital expenditures on commercially reasonable terms or at all.

We expect to derive a substantial portion of our revenue from sales
outside the United States, and problems associated with international business
operations could affect our ability to manufacture and sell our products.

We expect that we will continue to manufacture substantially all of our
initial bulk Liquidmetal alloy products in our South Korean facility. As a
result, our manufacturing operations are subject to risks of political
instability, including the risk of conflict between North Korea and South Korea
and recently increased tensions between the United States and North Korea. In
addition, we anticipate that sales to customers located outside of the United
States will account for a significant portion of our revenue in future periods
and that the trend of foreign customers accounting for an increasing portion of
our total sales may continue. Specifically, we expect to derive a significant
amount of revenue from sales to customers located in Asia. A downturn in the
economies of Asian countries where our products will be sold, particularly
South Koreas economy, could materially harm our business.

Consequently, our operations and revenue likely will be subject to a
number of risks associated with 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 facilities and the United States;
|
| |  |  | political and economic
instability, including instability involving North Korea;                                                                                                        

17



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| |  |  | potentially adverse tax consequences;                                                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | burden of complying with complex foreign laws and treaties; and                                                                                                                    
|
| |  |  | trade protection laws, policies, and measures and other regulatory
requirements affecting trade and investment, including loss or
modification of exemptions for taxes and tariffs.

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

Our business is subject to the potential adverse consequences of exchange
rate fluctuations.

We expect to conduct business in various foreign currencies and will be
exposed to market risk from changes in foreign currency exchange rates and
interest rates. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on our business, results
of operations, and financial condition and could specifically result in foreign
exchange gains and losses. The impact of future exchange rate fluctuations on
our operations cannot be accurately predicted. To the extent that the
percentage of our non-U.S. dollar revenue derived from international sales
increases in the future, our exposure to risks associated with fluctuations in
foreign exchange rates will increase further. Moreover, as a result of
operating a manufacturing facility in South Korea, a substantial portion of our
costs are and will continue to be denominated in the South Korean won. Adverse
changes in the exchange rates of the South Korean won to the U.S. dollar will
affect our costs of goods sold and operating margins and could result in
exchange losses.

Our inability to
protect our licenses, patents, and proprietary rights in
the United States and foreign countries could harm our business because third
parties may take advantage of our research and development efforts.

We have an exclusive license from Caltech to several patents and patent
applications relating to amorphous alloy technology, and we have obtained
several of our own patents. We also have the exclusive right to Caltechs
inventions, proprietary information, know-how, and other technology relating to
bulk amorphous alloys existing as of September 1, 2001. Our success depends in
part on our ability to obtain and maintain patent and other proprietary right
protection for our technologies and products in the United States and other
countries. If we are unable to obtain or maintain these protections, we may not
be able to prevent third parties from using our proprietary rights.
Specifically, we must:



| |  |  | protect and enforce our license agreement with Caltech and our own patents and intellectual property;                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | exploit our license of the patented technology under our license agreement with Caltech as well as
our own patents; and
|
| |  |  | operate our business without infringing on the intellectual property rights of third parties.                          

Caltech owns several issued United States patents covering the composition
and method of manufacturing of the family of Liquidmetal alloys. We also hold
several United States and corresponding foreign patents covering the
manufacturing processes of Liquidmetal alloys and their use. The patents
relating to our coatings expire on various dates between 2004 and 2017, and
those relating to our bulk amorphous alloys between 2013 and 2017. If we are
unable to protect our proprietary rights prior to the expiration of these
patents, we may lose the advantage we have established as being the first to
market bulk amorphous alloy products. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of
the United States, and we may encounter significant problems and costs in
protecting our proprietary rights in these foreign countries.

Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. Our patent protection involves
complex legal and technical questions. Our patents and those patents for which
we have license rights may be challenged, narrowed, invalidated, or
circumvented. We may be able to protect our proprietary rights from
infringement by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Furthermore, others may independently develop
similar or alternative

18



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technologies or design around our patented technologies. Litigation or
other proceedings to defend or enforce our intellectual property rights could
require us to spend significant time and money and could otherwise adversely
affect our business.

Other companies may claim that we infringe their intellectual property
rights, which could cause us to incur significant expenses or prevent us from
selling our products.

Our success depends, in part, on our ability to operate without infringing
valid, enforceable patents or proprietary rights of third parties and not
breaching any licenses that may relate to our technology and products. Future
patents issued to third parties may contain claims that conflict with our
patents and that compete with our products and technologies, and third parties
could assert infringement claims against us. Any litigation or interference
proceedings, regardless of their outcome, may be costly and may require
significant time and attention of our management and technical personnel.
Litigation or interference proceedings could also force us to:



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

The time and cost associated with complying with government regulations to
which we could become subject could have a material adverse effect on our
business.

Some of the applications that we have identified or may identify in the
future may be subject to government regulations. For example, any medical
devices such as precision ophthalmic instruments and orthopedic devices made
from our alloys likely will be subject to extensive government regulation in
the United States by the Food and Drug Administration, or FDA. Any medical
device manufacturers to whom we sell Liquidmetal alloy products may need to
comply with FDA requirements, including premarket approval or clearance under
Section 510(k) of the Food Drug and Cosmetic Act before marketing in the United
States Liquidmetal alloy medical device products. These medical
device manufacturers may be required to obtain similar approvals before
marketing these medical devices in foreign countries. Any medical device
manufacturers with which we jointly develop and sell medical device products
may not provide significant assistance to us in obtaining required regulatory
approvals. The process of obtaining and maintaining required FDA and foreign
regulatory approvals could be lengthy, expensive, and uncertain. Additionally,
regulatory agencies can delay or prevent product introductions. The failure to
comply with applicable regulatory requirements can result in substantial fines,
civil and criminal penalties, stop sale orders, loss or denial of approvals,
recalls of products, and product seizures.

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

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

19



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We may require additional funding, which may not be available on favorable
terms or at all.

Our future capital requirements will depend on the amount of cash
generated by our operations. Our projections of cash flows from
operations and, consequently, future cash needs are subject to
substantial uncertainty. If our available funds and cash generated
from operations are insufficient to satisfy our liquidity
requirements, we may need additional funds in the future to
support our working capital requirements, the expansion of manufacturing
capabilities, and for other purposes, and we may seek to raise additional funds
through public or private equity financing, bank debt financing, or from other
sources. Adequate funds may not be available when needed or may not be
available on favorable terms. If we raise additional funds by issuing equity
securities, existing shareholders may be diluted. If funding is insufficient at
any time in the future, we may not be able to develop or enhance our products
or services, take advantage of business opportunities, or respond to competitive
pressures, any of which could harm our business.

Antitakeover provisions of our articles of incorporation and bylaws and
provisions of applicable corporate law could delay or prevent a change of
control that you may favor.

Provisions in our articles of incorporation, our bylaws, and California
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to you. These provisions could discourage potential
takeover attempts and could adversely affect the market price of our shares.
Because of these provisions, you might not be able to receive a premium on your
investment. These provisions:



| |  |  | authorize our board of directors, without shareholder approval, to
issue up to 10,000,000 shares of blank check preferred stock that
could be issued by our board of directors to increase the number of
outstanding shares and prevent a takeover attempt;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | limit shareholders
ability to call a special meeting of our shareholders;                                                                                                                                                                                   
|
| |  |  | provide for a classified board of directors; and                                                                                                                                                                                                             
|
| |  |  | establish advance notice requirements to nominate directors for
election to our board of directors or to propose matters that can be
acted on by shareholders at shareholder meetings.                                                                       

The provisions described above could delay or make more difficult transactions
involving a change in control of us or our management. At our 2003 Annual
Meeting of Shareholders to be held on May 20, 2003, the shareholders of
Liquidmetal Technologies will vote upon a proposal to change the state of
incorporation of the company from California to Delaware. If this proposal is
approved by the shareholders, then the company will become subject to Delaware
corporate law. Under Delaware corporate law, the company would become subject
to many provisions that are similar to the provisions described above.




Item 2. Properties

Our principal executive office is located in Tampa, Florida and consists
of approximately 14,000 square feet. This office is occupied pursuant to a
lease agreement that expires in February 2006. Our principal research and
development office is located in Lake Forest, California and consists of
approximately 30,000 square feet. This office is occupied pursuant to a lease
agreement that expires in June 2007. In Conroe, Texas, we lease an office and
warehouse for our coatings business segment. This facility, which is
approximately 10,000 square feet, is leased through September 2007.

We operate several manufacturing facilities in South Korea. Our primary
manufacturing facility is in Pyongtaek, South Korea, and consists of
approximately 166,000 square feet. We lease the land on which this facility is
located, although we own the buildings, fixtures, and all personal property
located on the land. The parcel of land consists of approximately four acres
and is leased through 2022. We currently expect that this facility will meet
our anticipated manufacturing needs through at least the end of 2004. We also
operate a 13,497 square foot facility in AnSan, South Korea, where we produce
some of the molds and tooling utilized in our Pyongtaek operations.
This facility is leased through November 2003 and will automatically renew on a
year-to-year basis unless six-months advance notice of termination is provided
by the landlord or Liquidmetal Technologies. We intend to let this lease
automatically renew through at least November 2004. We also lease a facility
in Incheon, South Korea, where we assemble proprietary casting equipment used
for

20



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##### Table of Contents



the processing of Liquidmetal alloys. This facility is approximately
22,430 square feet, and its lease expires in February 2005. Our majority-owned
Dongyang subsidiary leases a separate facility in Incheon, South Korea, where
it manufactures the furnace equipment that it sells. This facility is
approximately 4,617 square feet, and its lease expires in September 2003.




Item 3. Legal Proceedings

We are from time to time a party to certain legal proceedings arising in
the ordinary course of business. Although outcomes cannot be predicted with
certainty, we do not believe that any legal proceeding to which we are a party
will have a material adverse effect on our financial position, results of
operations, or cash flows.




Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the
fourth quarter of 2002.

21



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##### Table of Contents






PART II




Item 5. Market For Registrants Common Equity and Related Stockholder Matters.

Our common stock trades on The Nasdaq National Market under the symbol
LQMT since our initial public offering on May 21, 2002. The following table
sets forth for the periods indicated the high and low sale prices for our
common stock as reported by The Nasdaq National Market:

|                                               |  |             |       |     |  |   |      | 
|---------------------------------------------- |  | ----------- | ----- | --- |  | - | ---- | 
|                                               |  | Fiscal 2002
|                                               |  |            
|                                               |  | High        |       | Low
|                                               |  |             |       |    
|First Quarter                                  |  | $           | N/A   |     |  | $ | N/A  | 
|Second Quarter (May 21, 2002 to June 30, 2002) |  |             | 22.50 |     |  |   | 8.26 | 
|Third Quarter                                  |  |             | 13.68 |     |  |   | 3.60 | 
|Fourth Quarter                                 |  |             | 11.28 |     |  |   | 5.31 | 

The closing price of our common stock as reported on The Nasdaq National
Market on March 20,2003, was $6.17 per share. As of March 20, 2003, there
were 241 holders of record of our common stock.

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

22



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##### Table of Contents






Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data should be read in
conjunction with Liquidmetal Technologies consolidated financial statements
and the related notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
annual report on Form 10-K. The selected consolidated financial data for the
years ended December 31, 2002, 2001 and 2000 and as of December 31, 2002 and
2001, have been derived from our audited consolidated financial statements
included elsewhere in this Form 10-K. The selected consolidated financial data
for the years ended December 31, 1999 and 1998 and as of December 31, 2000,
1999 and 1998 have been derived from our audited consolidated financial
statements not included in this Form 10-K.

|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |        |       | 
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------ | ------- | ------------------------------------- | ------ | ---- | ------- | ------- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                                                                           |                                                                    |                          |         | For the Years Ended December 31,     
|                                                                                                           |                                                                    |                          |         |                                      
|                                                                                                           |                                                                    |                          |         | 2002                                  |        | 2001 |         | 2000    |       | 1999 |        | 1998  
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |       
|                                                                                                           |                                                                    |                          |         | (in thousands, except per share data)
|Consolidated Statements of Operations Data:                                                                |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Revenue                                                                                                    |                                                                    | $                        | 13,139  |                                       |        | $    | 3,882   |         |       | $    | 4,200  |        |       | $ | 2,012  |        |       | $ | 3,143  |       
|Cost of sales                                                                                              |                                                                    |                          | 8,679   |                                       |        |      | 1,924   |         |       |      | 1,983  |        |       |   | 805    |        |       |   | 1,388  |       
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                           | Gross profit                                                       |                          |         | 4,460                                 |        |      |         | 1,958   |       |      |        | 2,217  |       |   |        | 1,207  |       |   |        | 1,755  |      
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Operating expense:                                                                                         |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                           | Selling, general and administrative                                |                          |         | 12,767                                |        |      |         | 3,970   |       |      |        | 1,449  |       |   |        | 847    |       |   |        | 2,123  |      
|                                                                                                           | Research and development                                           |                          |         | 11,825                                |        |      |         | 2,057   |       |      |        | 455    |       |   |        | 333    |       |   |        | 278    |      
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|                                                                                                           |                                                                    | Total operating expenses |         |                                       | 24,592 |      |         |         | 6,027 |      |        |        | 1,904 |   |        |        | 1,180 |   |        |        | 2,401 | 
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Income (loss) before interest, other income, income taxes, minority interest
and discontinued operations   |                                                                    |                          | (20,132 | )                                     |        |      | (4,069  | )       |       |      | 313    |        |       |   | 27     |        |       |   | (646   | )     
|                                                                                                           | Interest income (expense), net                                     |                          |         | (603                                  | )      |      |         | (1,095  | )     |      |        | (188   | )     |   |        | (190   | )     |   |        | 452    |      
|                                                                                                           | Gain on sale of marketable securities held-for-sale                |                          |         | 832                                   |        |      |         |        |       |      |        |       |       |   |        |       |       |   |        |       |      
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Income (loss) before income taxes, minority interest and
discontinued operations                           |                                                                    |                          | (19,903 | )                                     |        |      | (5,164  | )       |       |      | 125    |        |       |   | (163   | )      |       |   | (194   | )     
|                                                                                                           | Income taxes                                                       |                          |         | (123                                  | )      |      |         |        |       |      |        |       |       |   |        |       |       |   |        |       |      
|                                                                                                           | Minority interest in loss of consolidated subsidiary               |                          |         | 118                                   |        |      |         |        |       |      |        |       |       |   |        |       |       |   |        |       |      
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Income (loss) from continuing operations                                                                   |                                                                    |                          | (19,908 | )                                     |        |      | (5,164  | )       |       |      | 125    |        |       |   | (163   | )      |       |   | (194   | )     
|                                                                                                           | Loss from operations of discontinued retail golf segment, net      |                          |         |                                      |        |      |         | (5,973  | )     |      |        | (8,938 | )     |   |        | (7,977 | )     |   |        | (7,052 | )    
|                                                                                                           | Gain (loss) from disposal of discontinued retail golf segment, net |                          |         | 1,556                                 |        |      |         | (11,949 | )     |      |        |       |       |   |        |       |       |   |        |       |      
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Net loss                                                                                                   |                                                                    | $                        | (18,352 | )                                     |        | $    | (23,086 | )       |       | $    | (8,813 | )      |       | $ | (8,140 | )      |       | $ | (7,246 | )     
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Income (loss) per share from continuing operations  basic                                                 |                                                                    | $                        | (0.51   | )                                     |        | $    | (0.15   | )       |       | $    | 0.00   |        |       | $ | (0.01  | )      |       | $ | (0.01  | )     
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Income (loss) per share from continuing operations  diluted                                               |                                                                    | $                        | (0.51   | )                                     |        | $    | (0.15   | )       |       | $    | 0.00   |        |       | $ | (0.01  | )      |       | $ | (0.01  | )     
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Weighted average common shares use to compute income (loss) per
share from continuing operations  basic   |                                                                    |                          | 38,714  |                                       |        |      | 33,323  |         |       |      | 30,233 |        |       |   | 26,788 |        |       |   | 21,505 |       
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       
|Weighted average common shares use to compute income (loss) per
share from continuing operations  diluted |                                                                    |                          | 38,714  |                                       |        |      | 33,323  |         |       |      | 33,285 |        |       |   | 26,788 |        |       |   | 21,505 |       
|                                                                                                           |                                                                    |                          |         |                                       |        |      |         |         |       |      |        |        |       |   |        |        |       |   |        |       

|                                                             |  |              |        |      |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       | 
|------------------------------------------------------------ |  | ------------ | ------ | ---- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ----- | 
|                                                             |  | December 31,
|                                                             |  |             
|                                                             |  | 2002         |        | 2001 |  | 2000                                  |        | 1999 |  | 1998
|                                                             |  |              |        |      |  |                                       |        |      |  |     
|                                                             |  |              |        |      |  | (in thousands, except per share data) |        |      |  |     
|Consolidated Balance Sheet Data:                             |  |              |        |      |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       | 
|Cash and cash equivalents                                    |  | $            | 26,003 |      |  | $                                     | 2,230  |      |  | $    | 124    |   |  | $ | 314    |   |  | $ | 33    | 
|Marketable securities held-for-sale                          |  |              | 3,068  |      |  |                                       |       |      |  |      |       |   |  |   |       |   |  |   |      | 
|Working capital (deficiency)                                 |  |              | 26,385 |      |  |                                       | (9,572 | )    |  |      | (3,967 | ) |  |   | 117    |   |  |   | 2,928 | 
|Total assets                                                 |  |              | 65,005 |      |  |                                       | 6,680  |      |  |      | 1,945  |   |  |   | 2,043  |   |  |   | 5,557 | 
|Long-term debt and capital leases, including current portion |  |              | 93     |      |  |                                       | 2,988  |      |  |      | 2,506  |   |  |   | 2,106  |   |  |   | 1,596 | 
|Shareholders equity (deficiency)                            |  |              | 51,172 |      |  |                                       | (7,503 | )    |  |      | (3,680 | ) |  |   | (1,461 | ) |  |   | 2,033 | 

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

This managements discussion and analysis should be read in the
conjunction with the condensed consolidated financial statements and notes
included elsewhere in this report on Form 10-K.

This managements discussion and analysis, as well as other sections of
this report on Form 10-K, may contain forward-looking statements that involve
risks and uncertainties, including statements regarding our plans, future
events, objectives, expectations, forecasts, or assumptions. Any statement that
is not a statement of historical fact is a forward-looking statement, and in
some cases, words such as believe, estimate,  project, expect,
intend, may, anticipate, plans, seeks, and similar expressions
identify forward-looking statements. These statements involve risks and
uncertainties that could cause actual outcomes and results to differ materially
from the anticipated outcomes or results, and undue reliance should not be
placed on these statements. These risks and uncertainties include, but are not
limited to, the matters discussed under the caption Factors Affecting Future
Results in Item 1 of this report and other risks and uncertainties discussed
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 disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.

OVERVIEW

We are a materials technology company that develops, manufactures, and
markets products made from amorphous alloys. Our Liquidmetal® family of alloys
consists of a variety of coatings, powders, bulk alloys, and composites that
utilize the advantages offered by amorphous alloy technology. We develop,
manufacture, and sell products and components from bulk amorphous alloys that
are incorporated into the finished goods of our customers, and we also market
and sell amorphous alloy industrial coatings. We have the exclusive right to
develop, manufacture, and sell what we believe are the only commercially viable
bulk amorphous alloys.

Amorphous alloys are unique materials that are distinguished by their
ability to retain a random atomic structure when they solidify, in contrast to
the crystalline atomic structure that forms in ordinary metals and alloys when
they solidify. Liquidmetal alloys possess a combination of performance,
processing, and cost advantages that we believe makes them preferable to other
materials in a variety of applications. The amorphous atomic structure of our
alloys enables them to overcome certain performance limitations caused by
inherent weaknesses in crystalline atomic structures, thus facilitating
performance and processing characteristics superior in many ways to those of
their crystalline counterparts. For example, our zirconium-titanium
Liquidmetal alloys are approximately 250% stronger than commonly used titanium
alloys, such as Ti-6Al-4V, but they have processing characteristics similar in
many respects to plastics. We believe these advantages will result in
Liquidmetal alloys supplanting plastics, high-performance alloys, and other
incumbent materials in a wide variety of applications. Moreover, we believe
these advantages will enable the introduction of entirely new products and
applications that are not possible or commercially viable with other materials.

Our revenues are derived from two principal operating segments:
Liquidmetal alloy coatings and bulk Liquidmetal alloy products. Liquidmetal
alloy coatings are used primarily as a protective coating for industrial
machinery and equipment, such as drill pipe used by the oil drilling industry
and boiler tubes used in coal-burning power plants. The historical operating
information for fiscal year 2001 and years prior to 2001 contained in this
section is based substantially on sales of Liquidmetal alloy coatings; however,
this is a diminishing percentage of our business. In the second half of 2002,
we began producing bulk Liquidmetal alloy components and products for
incorporation into our customers finished goods. Bulk Liquidmetal alloy
revenue includes sales of: parts or components of electronic devices, medical
products, sports and leisure goods; tooling and prototype parts for customers
with products in development; bulk alloy processing equipment; and research and
development revenue relating primarily to defense and medical programs. We
have been focusing our initial commercialization efforts for bulk Liquidmetal
alloys primarily on applications for products with high unit volumes that are
sold in major industries. We expect that these new sources of revenue will
continue to significantly change the size and character of our revenue mix.

The cost of sales for our Liquidmetal coatings consists primarily of the
costs of outsourcing our manufacturing to third parties. We expect
that our cost of sales will increase significantly from historical results as
we further develop our bulk Liquidmetal alloy business. Although we plan to
continue outsourcing the manufacturing of our coatings, we will internally

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manufacture many products derived from our bulk Liquidmetal alloys and expect
to incur continued capital expenses as we expand our manufacturing
capabilities.

Selling, general, and administrative expenses currently consist primarily
of marketing and advertising, salaries and related benefits, stock-based
compensation, professional fees, administrative expenses, and other expenses
related to our operations. While many of these same expenses will continue, we
expect that the amounts incurred for these expenses will increase in support of
the expanding operations, facilities, and applications offered.

Research and development expenses represent salaries, related benefits
expense, stock-based compensation, expenses incurred for the design and testing
of new processing methods, and other expenses related to the research and
development of Liquidmetal alloys. Costs associated with research and
development activities are expensed as incurred. We plan to enhance our
competitive position by improving our existing technologies and developing
advances in amorphous alloy technologies. We believe that our research and
development efforts will focus on the discovery of new alloy compositions, the
development of improved processing technology, and the identification of new
applications for our alloys. Our historical operations, prior to 2002,
included our coatings business and our retail golf operation conducted through
our majority owned Liquidmetal Golf subsidiary. On September 29, 2001, our
board of directors and the board of directors of Liquidmetal Golf voted to
discontinue the retail golf operations of Liquidmetal Golf in order to conform
our operations to our business strategy. Pursuant to Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, we reclassified our
consolidated financial statements to reflect the discontinuation of Liquidmetal
Golfs retail golf operations. The revenue, costs and expenses, assets and
liabilities, and cash flows of the retail golf business were segregated in our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Comprehensive Loss, and Consolidated Statements of Cash Flows. The net
operating results, net assets, and net cash flows of the retail golf business
were reported as discontinued operations in our annual consolidated financial
statements and in the consolidated financial statements included in
this report on Form 10-K. On April 30, 2002, management terminated the
operations of the retail golf segment by means of completing the liquidation of
the retail golf assets and liabilities.

The following discussion and analysis of our financial condition and
results of operations focuses on the historical results of our continuing
operations.

Results of Operations

Comparison of the years ended December 31, 2002 and 2001

Revenue. Revenue increased to $13.1 million in the twelve months ended
December 31, 2002 from $3.9 million in the twelve months ended December 31,
2001. This increase was primarily due to increased sales related to our bulk
Liquidmetal alloys. Included in sales related to our bulk Liquidmetal alloys
were revenue derived from sales of parts and prototypes made from our
alloys, furnace equipment sales, revenue recognized from
research and development contracts with the U.S. Department of Defense related to
our bulk Liquidmetal alloys, and revenue recognized from the delivery of our
first production products manufactured from our bulk Liquidmetal alloys.
Additionally, revenue was derived from sales of our Liquidmetal coatings.
Revenue from the sales and prototyping of parts manufactured from our bulk
Liquidmetal alloys increased by $3.8 million over 2001. Revenue from the sales
of Liquidmetal coatings products increased $1.0 million. Additionally, revenue
of furnace equipment increased $1.8 million as a result of the purchase of a
51% interest in Dongyang Yudoro (Dongyang), a South Korean furnace equipment
company, and revenue from our research and development contracts, including
contracts with the Department of Defense, increased $2.6 million.

Cost of Sales. Cost of sales increased to $8.7 million, or 66% of revenue,
in the twelve months ended December 31, 2002 from $1.9 million, or 50% of
revenue, in the twelve months ended December 31, 2001. This increase was
primarily a result of costs to manufacture products made from our bulk
Liquidmetal alloys and the cost of furnace equipment sold in the twelve months
ended December 31, 2002. The increase in cost of sales as a percentage of
revenue was also the result of increased costs required to manufacture products made
from our bulk Liquidmetal alloys and costs to manufacture the furnace equipment
sold in the twelve months ended December 31, 2002. Our Liquidmetal coatings
products are produced by third parties and sold wholesale to various
industries. The cost of sales for these coating products is generally fixed.
However, the

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cost to manufacture parts from our bulk Liquidmetal alloys is variable and
differs based on the part design. As expected, cost of sales as a percentage
of revenue has continued to increased as our revenue mix has shifted more
toward the bulk alloy business, although we believe that anticipated higher
manufacturing volumes and an expected greater mix of high-margin products in
the future will cause this measure to improve over time.

Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased to $12.8 million, or 97% of revenue, in the
twelve months ended December 31, 2002 from $4.0 million, or 102% of revenue, in
the twelve months ended December 31, 2001. This increase was primarily a result
of increased wages of $3.2 million, increased professional fees, consultant
fees, and contract services of $1.3 million, increased travel expenses of $0.6
million, increased property rent of $0.6 million, increased insurance expenses
of $0.5 million, increased product warranty expense of $0.6 million, increased
bad debt expense of $0.4 million, and $0.2 of stock compensation expense
incurred in the twelve months ended December 31, 2002. These and other
increases in selling, general and administrative expenses represent the
continued additions to our corporate infrastructure required to prepare for and
support the anticipated growth of our bulk Liquidmetal alloy business.

Research and Development Expenses. Research and development expenses
increased to $11.8 million, or 89% of revenue, in the twelve months ended
December 31, 2002 from $2.1 million, or 53% of revenue, in the twelve months
ended December 31, 2001. This increase was partially a result of expenses
related to the continued research and development of new Liquidmetal alloys and
related processing capabilities, including the hiring of additional research
employees, developing new manufacturing techniques, and contracting with
consultants to advance the development of Liquidmetal alloys. Salaries and
wages increased $2.5 million, professional fees, consultant fees, and contract
services increased $2.0 million, laboratory and prototyping expenses increased
$2.6 million, and travel related expenses increased $0.4 million. The increase
in research and development expenses in the twelve months ended December 31,
2002 also included $0.2 million in accelerated depreciation attributable to the
acceleration of the estimated useful lives of certain capitalized research and
development equipment and an increase in stock-based compensation expense of
$1.0 million primarily triggered by modifications made to accelerate the
remaining vesting periods of stock options in connection with the hiring of
certain consultants as employees in March 2002.

Interest (Expense) Income, Net. Interest expense, net was at ($0.6)
million, or 5.0% of revenue, in the twelve months ended December 31, 2002 and
was ($1.1) million, or 28% of revenue, in the twelve months ended December 31,
2001. The interest expense, net was primarily due to the amortization of the
fair value of warrants granted in connection with subordinated promissory notes
we issued in February 2001. In the twelve months ended December 31, 2002, these
subordinated promissory notes were paid, requiring the unamortized fair value
of the warrants granted in connection with these subordinated promissory notes
to be expensed fully in the twelve months ended December 31, 2002 in an amount
totaling $0.5 million. Also in the twelve months ended December 31, 2002, we
earned $0.5 million in interest income from the investment of the net proceeds
of our initial public offering.

Gain from Sale of Investment.In December of 2002 we sold 30% of the
shares of Growell Metal, Inc. that were purchased in July 2002. We recognized an
$0.8 million gain on the sale of these shares.

Comparison of the years ended December 31, 2001 and 2000

Revenue.Revenue decreased to $3.9 million in 2001 from $4.2 million in
2000. This decrease was primarily due to the absence in 2001 of some
non-recurring sales that occurred in 2000. These non-recurring sales were the
result of a recall of defective drill pipe that was manufactured overseas by
third parties, and as a result of this recall, there was a need to coat the
replacement pipe. This decrease in revenue was partially offset by a $0.2
million increase in revenue during 2001 primarily resulting from increased
drilling activities as a result of higher crude oil prices.

Cost of Sales.Cost of sales decreased to $1.9 million, or 50% of revenue,
in 2001 from $2.0 million, or 47% of revenue, in 2000. The decrease in cost of
sales reflects the corresponding decline in sales volume over the same period.
The increase in cost of sales as a percentage of revenue was the result of a
change in our sales mix that included greater sales to the oil drilling
industry, which carries a slightly lower gross profit margin than sales to other
industries.

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Selling, General, and Administrative Expenses.Selling, general, and
administrative expenses increased to $4.0 million, or 102% of revenue, in 2001
from $1.4 million, or 35% of revenue, in 2000. This increase was primarily a
result of increases in wages, stock-based compensation, professional fees, and
travel expenses of $1.2, $0.1, $0.6, and $0.4 million, respectively. These
expenses represented the continued additions to our corporate infrastructure
required to prepare for and support the anticipated growth of our bulk
Liquidmetal alloy business.

Research and Development Expenses.Research and development expenses
increased to $2.1 million, or 53% of revenue, in 2001 from $0.5 million, or 11%
of revenue, in 2000. This increase was partially a result of expenses related
to the continued research and development of new Liquidmetal alloys and related
processing capabilities. This included the hiring of additional research
employees, developing new manufacturing techniques, and contracting with
consultants to advance the development of our alloys. The increase in research
and development expenses in the year ended December 31, 2001 also included $0.3
million of stock-based compensation related to options granted to consultants
who performed services for us during 2001.

Other (Expense)
Income, Net.Other expense, net increased to ($1.1) million,
or 28% of revenue, in 2001 from ($0.2) million, or 4% of revenue, in 2000. This
increase was primarily due to the amortization of the fair value of warrants
granted in connection with subordinated promissory notes we issued in February
2001.

QUARTERLY RESULTS

The following information presents our unaudited quarterly operating
results for 2002 and 2001. The data has been prepared by Liquidmetal
Technologies on a basis consistent with the Consolidated Financial Statements
included elsewhere in this Form 10-K, and includes all adjustments, consisting
of normal recurring accruals, that we consider necessary for a fair
presentation thereof. These operating results are not necessarily indicative
of our future performance.

|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |       |       | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------ | ------------------------ | ------ | ------------------------------------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                                                             |                                                                    |                          |        | For the Three Months Ended           
|                                                                                                             |                                                                    |                          |        |                                      
|                                                                                                             |                                                                    |                          |        | 12/31/02                              |       | 9/30/02 |        | 6/30/02 |       | 3/31/02
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |        
|                                                                                                             |                                                                    |                          |        | (in thousands, except per share data)
|Consolidated Statements of Operations Data:                                                                  |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Revenue                                                                                                      |                                                                    | $                        | 5,877  |                                       |       | $       | 3,655  |         |       | $       | 2,144  |       |       | $ | 1,463  |      
|Cost of sales                                                                                                |                                                                    |                          | 4,286  |                                       |       |         | 2,524  |         |       |         | 1,187  |       |       |   | 682    |      
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|                                                                                                             | Gross profit                                                       |                          |        | 1,591                                 |       |         |        | 1,131   |       |         |        | 957   |       |   |        | 781   |      
|Operating expense:                                                                                           |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|                                                                                                             | Selling, general, and administrative                               |                          |        | 3,726                                 |       |         |        | 3,912   |       |         |        | 2,860 |       |   |        | 2,269 |      
|                                                                                                             | Research and development                                           |                          |        | 4,817                                 |       |         |        | 2,652   |       |         |        | 1,660 |       |   |        | 2,696 |      
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|                                                                                                             |                                                                    | Total operating expenses |        |                                       | 8,543 |         |        |         | 6,564 |         |        |       | 4,520 |   |        |       | 4,965 | 
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Loss before interest, other income, income taxes, minority interest
and discontinued operations              |                                                                    |                          | (6,952 | )                                     |       |         | (5,433 | )       |       |         | (3,563 | )     |       |   | (4,184 | )    
|                                                                                                             | Interest income (expense), net                                     |                          |        | 113                                   |       |         |        | 291     |       |         |        | (695  | )     |   |        | (312  | )    
|                                                                                                             | Gain on sale of marketable securities held-for-sale                |                          |        | 832                                   |       |         |        |        |       |         |        |      |       |   |        |      |      
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Loss before income taxes, minority interest and
discontinued operations                                      |                                                                    |                          | (6,007 | )                                     |       |         | (5,142 | )       |       |         | (4,258 | )     |       |   | (4,496 | )    
|                                                                                                             | Income taxes                                                       |                          |        | (123                                  | )     |         |        |        |       |         |        |      |       |   |        |      |      
|                                                                                                             | Minority interest in (loss) income of consolidated subsidiary      |                          |        | 204                                   |       |         |        | (76     | )     |         |        | (10   | )     |   |        |      |      
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Income (loss) from continuing operations                                                                     |                                                                    |                          | (5,926 | )                                     |       |         | (5,218 | )       |       |         | (4,268 | )     |       |   | (4,496 | )    
|                                                                                                             | Gain (loss) from disposal of discontinued retail golf segment, net |                          |        | (418                                  | )     |         |        | 1,466   |       |         |        | 1,038 |       |   |        | (530  | )    
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Net loss                                                                                                     |                                                                    | $                        | (6,344 | )                                     |       | $       | (3,752 | )       |       | $       | (3,230 | )     |       | $ | (5,026 | )    
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Loss per share from continuing operations  basic and diluted                                                |                                                                    | $                        | (0.14  | )                                     |       | $       | (0.13  | )       |       | $       | (0.11  | )     |       | $ | (0.13  | )    
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      
|Weighted average common shares used to compute loss per
share from continuing operations  basic and diluted |                                                                    |                          | 40,995 |                                       |       |         | 40,993 |         |       |         | 37,697 |       |       |   | 35,080 |      
|                                                                                                             |                                                                    |                          |        |                                       |       |         |        |         |       |         |        |       |       |   |        |      

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|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |        |     | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ------------------------ | ------ | ------------------------------------- | ----- | ------- | ------- | ------- | ----- | ------- | ------ | ------ | --- | - | ------ | ------ | --- | 
|                                                                                                             |                                                                           |                          |        | For the Three Months Ended           
|                                                                                                             |                                                                           |                          |        |                                      
|                                                                                                             |                                                                           |                          |        | 12/31/01                              |       | 9/30/01 |         | 6/30/01 |       | 3/31/01
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |        
|                                                                                                             |                                                                           |                          |        | (in thousands, except per share data)
|Consolidated Statements of Operations Data:                                                                  |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Revenue                                                                                                      |                                                                           | $                        | 874    |                                       |       | $       | 1,112   |         |       | $       | 1,022  |        |     | $ | 874    |       
|Cost of sales                                                                                                |                                                                           |                          | 402    |                                       |       |         | 549     |         |       |         | 531    |        |     |   | 442    |       
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|                                                                                                             | Gross profit                                                              |                          |        | 472                                   |       |         |         | 563     |       |         |        | 491    |     |   |        | 432    |    
|Operating expense:                                                                                           |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|                                                                                                             | Selling, general, and administrative                                      |                          |        | 1,837                                 |       |         |         | 1,084   |       |         |        | 634    |     |   |        | 415    |    
|                                                                                                             | Research and development                                                  |                          |        | 1,171                                 |       |         |         | 364     |       |         |        | 270    |     |   |        | 252    |    
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|                                                                                                             |                                                                           | Total operating expenses |        |                                       | 3,008 |         |         |         | 1,448 |         |        |        | 904 |   |        |        | 667 | 
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Loss before interest and discontinued operations                                                             |                                                                           |                          | (2,536 | )                                     |       |         | (885    | )       |       |         | (413   | )      |     |   | (235   | )     
|                                                                                                             | Interest expense, net                                                     |                          |        | (314                                  | )     |         |         | (294    | )     |         |        | (299   | )   |   |        | (188   | )  
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Loss from continuing operations                                                                              |                                                                           |                          | (2,850 | )                                     |       |         | (1,179  | )       |       |         | (712   | )      |     |   | (423   | )     
|                                                                                                             | Loss from operations of discontinued retail golf segment, net             |                          |        |                                      |       |         |         | (1,835  | )     |         |        | (2,251 | )   |   |        | (1,887 | )  
|                                                                                                             | Gain (Income loss) from disposal of discontinued retail golf segment, net |                          |        | 5,837                                 |       |         |         | (17,786 | )     |         |        |       |     |   |        |       |    
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Net loss                                                                                                     |                                                                           | $                        | 2,987  |                                       |       | $       | (20,800 | )       |       | $       | (2,963 | )      |     | $ | (2,310 | )     
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Income (loss) per share from continuing operations  basic and diluted                                       |                                                                           | $                        | (0.08  | )                                     |       | $       | (0.03   | )       |       | $       | (0.02  | )      |     | $ | (0.01  | )     
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       
|Weighted average common shares used to compute loss per
share from continuing operations  basic and diluted |                                                                           |                          | 34,994 |                                       |       |         | 34,055  |         |       |         | 33,047 |        |     |   | 31,193 |       
|                                                                                                             |                                                                           |                          |        |                                       |       |         |         |         |       |         |        |        |     |   |        |       

LIQUIDITY AND CAPITAL RESOURCES

Our operating activities, including our discontinued retail golf
operations, used cash of $19.3 million for the twelve months ended December 31,
2002 and $12.1 million for the twelve months ended December 31, 2001. Cash used
in operating activities for the twelve months ended December 31, 2002 resulted
from net cash used by discontinued operations of $2.5 million and net cash used
by continuing operations of $16.9 million. Cash used in operating activities
for the twelve months ended December 31, 2001 resulted from net cash used by
discontinued operations of $8.9 million and net cash used by continuing
operations of $3.2 million. We had working capital of $26.4 million as of
December 31, 2002. Cash used by continuing operations in the twelve months
ended December 31, 2002 resulted primarily from operating losses
from continuing
operations of $19.9 million.

Our investing activities used cash of $24.3 million for the twelve months
ended December 31, 2002 primarily for the acquisition of machinery and
equipment and for the construction and development of our South Korean
manufacturing facility totaling $21.8 million. The remaining $2.5 million used
for the purchase of property and equipment during the twelve months ended
December 31, 2002 related primarily to the purchase of furniture and
furnishings, computer equipment, and software. Included in the investing
activities for the twelve months ended December 31, 2002 was the investment of
$2.0 million in the common stock of Growell Metal, Inc., a South Korean metals
processing company. We intend to source a portion of the production of our
Liquidmetal alloy ingots through Growell Metal, Inc. to increase the supply and
availability of the Liquidmetal alloy ingots used in our manufacturing
operations in Korea. We sold 30% of our investment in Growell Metal,
Inc. as of December
31, 2002 for $1.4 million. Also included in the investing activities for the
twelve months ended December 31, 2002 was an investment of $0.3 million,
resulting in a $0.1 million increase, net of cash received, in Dongyang,
whereby we acquired 51% of the outstanding stock of Dongyang. Dongyang
manufactures furnace equipment critical to the manufacturing of our bulk
Liquidmetal alloys. The acquisition of a controlling interest in Dongyang
allows us to better control the manufacturing equipment supply chain relating
to the manufacture of our bulk Liquidmetal alloys. We also invested $0.1
million in patents and trademarks related to our Liquidmetal alloys during the
twelve months ended December 31, 2002.

Our financing activities provided $67.3 million in cash for the twelve
months ended December 31, 2002 and primarily included $70.7 million, net of
transaction costs paid, received from our initial public offering. Included in
the financing activities is $3.5 million of cash borrowed through the issuance
of debt prior to the initial public offering and $7.4 million used to repay all
of our outstanding debt obligations. Also received in the twelve months ended
December 31, 2002 was $0.5 million from the exercise of stock options.

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We currently anticipate substantially lower capital expenditures for at
least the next 12 months, given the completion of construction and purchase of
manufacturing equipment for our plant in Pyongtaek, South Korea. We anticipate
that our capital expenditures will be approximately $7.0 to $10.0 million in
2003 for any additional equipment requirements and for the acquisition of
furniture, fixtures, and other business equipment. This amount is subject to
change, however, depending upon the nature and the amount of the orders that we
actually receive from customers.

Our capital requirements during the next 12 months will depend on numerous
factors, including the success of our existing products, the development of new
applications for Liquidmetal alloys, and the resources we devote to develop and
support our Liquidmetal alloy products. During the next 12 months, we expect to
devote substantial capital to expand our research and development activities,
to further develop and strengthen our manufacturing capabilities, and for
working capital and other general corporate purposes. These additional expenses
and capital expenditures will consume a material amount of our cash resources,
including a portion of the net proceeds of our initial public offering. Our
liquidity is not dependent upon the use of off-balance sheet financing
arrangements, such as securitization of receivables or obtaining access to
assets through special purpose entities.

We intend to continue to develop our manufacturing resources and
capabilities. Additionally, we anticipate growth in our working capital
requirements from our expanding bulk Liquidmetal alloy business. However, the
amount of these requirements will depend on the nature and amount of orders we
receive for the purchase of our bulk Liquidmetal alloy products. We believe the
net proceeds received from our initial public offering and proceeds from
borrowings, together with anticipated cash flow from our operations, will be
sufficient to fund our long-term liquidity requirements. In January 2003, we
obtained approximately $5.4 million in additional financing in the form of debt
collateralized by our Pyongtaek plant and some equipment contained in the
Pyongtaek plant from Kookmin Bank in Korea.

We believe that our
current cash and cash equivalents, together with anticipated cash
flow from our operations, will be sufficient to fund our working
capital and capital expenditure requirements for at least the next 12
months. However, our future capital
needs will be dependent to a significant extent on our ability to
generate cash flow from operations. Our projections of cash flows
from operations and, consequently, future cash needs are subject to
uncertainty. If our available funds and cash generated
from operations are insufficient to satisfy our liquidity
requirements, we may need to raise additional capital to fund our
working capital or capital expenditure requirements. We cannot be
certain that additional capital, whether through selling additional
debt or equity securities or obtaining a line of credit or other
loan, will be available to us or, if available, will be on terms
acceptable to us. If we issue additional securities to raise funds,
these securities may have rights, preferences, or privileges senior
to those of the rights of our common stock and our stockholders may
experience additional dilution.

We are a party to a distribution agreement whereby we granted to a third
party exclusive rights to market and sell golf products incorporating
Liquidmetal technology to certain Japanese sporting equipment companies. The
third party paid us a $1.0 million distribution fee as part of this
distribution agreement, of which a portion was refundable according to a
formula based on the gross profit earned by the third party. None of the
distribution fee has been refunded, and we do not believe the third party is
entitled to a refund.

USE OF PROCEEDS

Pursuant to our Registration Statement on Form S-1 (Registration No.
333-73716), as amended, initially filed with the Securities and Exchange
Commission on November 20, 2001 and declared effective
May 21, 2002, we closed
an initial public offering of 5,000,000 shares of common stock on
May 28, 2002,
plus an additional 229,000 shares on June 10, 2002 pursuant to an overallotment
option, at a price of $15.00 per share (which sale is referred to herein as the
Offering). The Offering generated aggregate cash proceeds during the second
quarter 2002 of $78.4 million. The net proceeds were $70.7 million after
deducting underwriting commissions of $5.5 million and other transaction fees
of $2.2 million. The managing underwriters for the Offering were Merrill Lynch
& Co., UBS Warburg, and Robert W. Baird & Co.

As of December 31, 2002, we had used approximately $46.8 million of net
proceeds from the Offering. We used approximately $7.8 million of the net
proceeds from the Offering to repay all outstanding promissory notes and
accrued interest, $9.9 million to partially fund the construction of our
manufacturing facility in South Korea, $8.1 million to purchase equipment used
to manufacture Liquidmetal parts, and $0.3 million to purchase the 51% interest
in Dongyang. During the third quarter of 2002, we used $2.0 million to invest
in the common stock of Growell, which will supply a portion of the Liquidmetal
alloy ingots used in our manufacturing operations in Korea. As of December
31, 2002, we used approximately $17.6 million of the net proceeds for working
capital, excluding $1.1 million paid to Paul Azinger for amounts due under the
terms of his endorsement agreement. We have invested the remaining net
proceeds of this offering in short-term, investment grade, interest-bearing
securities. We intend to use the remaining net proceeds of the offering for the
purchase of additional equipment used to manufacture Liquidmetal parts and for
working capital purposes. Additionally, management may determine to fund all
or a portion of the costs of any acquisitions of complementary businesses we
determine to pursue in the future with proceeds from the Offering, although
there are no assurances that we will be able to successfully identify or
consummate any such acquisitions.

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OFF-BALANCE SHEET ARRANGEMENTS

|                        |                                                            |       |   |                                       |       |        |   |           |       |           |   |         |       |  |   |       |       |           |   |     |     | 
|----------------------- | ---------------------------------------------------------- | ----- | - | ------------------------------------- | ----- | ------ | - | --------- | ----- | --------- | - | ------- | ----- |  | - | ----- | ----- | --------- | - | --- | --- | 
|                        |                                                            |       |   | Payments due by period               
|                        |                                                            |       |   |                                      
|                        |                                                            |       |   |                                       |       |        |   | Less than |       |           |   |         |       |  |   |       |       | More than
|                        |                                                            |       |   | Total                                 |       | 1 year |   | 1-3 years |       | 3-5 years |   | 5 years
|                        |                                                            |       |   |                                       |       |        |   |           |       |           |   |        
|                        |                                                            |       |   | (in thousands, except per share data)
|Contractual Obligations |                                                            |       |   |                                       |       |        |   |           |       |           |   |         |       |  |   |       |       |           |   |    
|                        | Long-term debt                                             |       | $ |                                      |       |        | $ |          |       |           | $ |        |       |  | $ |      |       |           | $ |    |    
|                        | Capital lease obligation                                   |       |   | 111                                   |       |        |   | 26        |       |           |   | 52      |       |  |   | 33    |       |           |   |    |    
|                        | Operating leases and rents                                 |       |   | 4,752                                 |       |        |   | 1,337     |       |           |   | 1,984   |       |  |   | 1,267 |       |           |   | 164 |    
|                        | Purchase obligations                                       |       |   | 3,488                                 |       |        |   |          |       |           |   |        |       |  |   |      |       |           |   |    |    
|                        | Other long-term liabilities reflected on the Balance Sheet |       |   |                                      |       |        |   |          |       |           |   |        |       |  |   |      |       |           |   |    |    
|                        |                                                            |       |   |                                       |       |        |   |           |       |           |   |         |       |  |   |       |       |           |   |    
|                        |                                                            | Total |   | $                                     | 8,351 |        |   | $         | 1,363 |           |   | $       | 2,036 |  |   | $     | 1,300 |           |   | $   | 164 | 
|                        |                                                            |       |   |                                       |       |        |   |           |       |           |   |         |       |  |   |       |       |           |   |    

In January 2003, we obtained approximately $5.5 million in additional
financing from Kookmin Bank in South Korea. This additional financing is in the form of debt that is collateralized by our Pyongtaek
plant and some equipment contained in the Pyongtaek plant.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates and assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ materially from
these estimates under different assumptions or conditions.

We believe that the following accounting policies are the most critical to
our consolidated financial statements since these policies require significant
judgment or involve complex estimates that are important to the portrayal of
our financial condition and operating results:



| |  |  | Our earnings and cash flows are subject to fluctuations due to changes
in non-U.S. currency exchange rates. We are exposed to non-U.S.
exchange rate fluctuations as the financial results of non-U.S.
subsidiaries are translated into U.S. dollars. As
exchange rates vary, those results, when translated, may vary from
expectations and adversely impact overall expected profitability. The
cumulative translation effects for subsidiaries using functional
currencies other than the U.S. dollar are included in accumulated
foreign exchange translation in shareholders equity. Movements in
non-U.S. currency exchange rates may affect our competitive position,
as exchange rate changes may affect business practices and/or pricing
strategies of non-U.S. based competitors.                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We record an accrual for potential product warranty costs. Due to the
lack of historical information for warranty expense related to bulk
alloy products, management estimates product warranties as a
percentage of bulk alloy product sales earned during the period. In
the event in future periods the actual product warranty costs
consistently exceed the estimate for product warranty costs, an
adjustment would be made and income would decrease in the period of
such determination. Likewise, in the event we determine that actual
product warranty costs would be consistently lower than the estimate
for product warranty costs, an adjustment would be made and income
would increase in the period of such determination.                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | We record an allowance for doubtful accounts as a contra-asset to our
trade receivables for potential uncollectible accounts. Management
estimates the amount of potentially uncollectible accounts by
reviewing significantly past due customer balances relative to
historical information available for those customers. In the event,
in future periods, actual uncollectible accounts exceed the estimate
for uncollectible accounts, an adjustment would be made and income
would decrease in the period of such determination. Likewise, in the
event, in future periods, actual uncollectible accounts are lower than
the estimate for uncollectible accounts, an adjustment would be made
and income would increase in the period of such determination. At
December 31, 2002, 42%, or $2.7 million, of trade receivables was
concentrated in two customers, of which $0.7 million has been
outstanding for more than 150 days. Should one or more of these
customers be unable to pay the amounts to to us, we would need to
increase our allowance for doubtful accounts. As of March 27, 2003,
$1.7 million of the $2.7 million has been collected.

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| |  |  | We record valuation allowances to reduce the deferred tax assets to
the amounts estimated to be recognized. While we consider taxable
income in assessing the need for a valuation allowance, in the event
we determine we would be able to realize our deferred tax assets in
the future in excess of the net recorded amount, an adjustment would
be made and income increased in the period of such determination.
Likewise, in the event we determine we would not be able to realize
all or part of our deferred tax assets in the future, an adjustment
would be made and charged to income in the period of such
determination. At December 31, 2002, we recorded a deferred tax asset
valuation of $27.6 million, representing 100% of existing deferred tax
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have accounted for our retail golf business as a discontinued
operation. In calculating the loss on disposal of our retail golf
business, we made certain estimates with regard to the valuation of
the assets and liabilities of the retail golf business. Estimates were
made for the collectability of accounts receivables, the liquidation
value of inventories, the liquidation of certain other operating
assets, and the estimated future losses of the retail golf business
through the estimated disposal date of April 30, 2002. Also included
in the loss on disposal was our estimate of stock option compensation
expense attributable to an endorsement contract. The estimated stock
option expense was based in part on an estimated future common stock
price. During the year ended December 31, 2002, we recorded a $1.6
million reduction to the estimated loss on disposal of the
discontinued retail golf segment primarily due to a change in
estimated value of stock-based compensation. The change in estimated
value of the stock-based compensation was a result of the cumulative
decrease in the fair market value of the common shares underlying the
options granted to Paul Azinger of $2.1 million and a decrease of
$0.3 million in
the estimate of fees related to the termination of the endorsement
agreement. Additionally, there was a $0.1 million gain due to the reversal of
the accumulated foreign exchange gains after the liquidation of
Liquidmetal Golf Europe Inc, and a decrease in the estimated warranty
cost of $0.1 million. These gains were partially offset by other changes in
the estimated loss on disposal that included; $0.5 million of additional
operating expenses, a $0.1 million increase in the allowance for doubtful
accounts and $0.5 million primarily for the reduction of the estimated
disposal value of work-in-process inventory and equipment. In
December 2001, we recorded a $5.6 million reduction to the estimated
loss on disposal of the discontinued retail golf segment due to a
change in the estimated stock option value attributable to options
granted pursuant to an endorsement agreement. The change in the
estimate stock option value was due to a change in the estimated fair
market value of the underlying common stock prior to the Offering. It
is not expected that there will be any significant changes to the loss
on disposal of the discontinued retail golf segment subsequent to
December 31, 2002.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other
Intangible Assets.SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwills impairment and that limited-life
intangible assets other than goodwill should be amortized over their useful
lives. Implementation of SFAS No. 141 and SFAS No. 142 is required for fiscal
year 2002. The adoption of SFAS No. 141 and 142 did not have a material impact
on our financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations.SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which such liabilities are incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs should be capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Adoption of SFAS No. 143 is not expected to have a material impact on our
financial statements.

Issued in October 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The accounting model for long-lived assets to be disposed of by sale applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of OperationsReporting
the Effects of Disposal of a Segment of a Business,for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for

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operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. In 2002, we adopted SFAS
No. 144,
which did not result in a material impact to our financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 are required to be applied in fiscal
years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of
this Statement related to Statement 13 are required to be applied to
transactions occurring after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB No. 30 for classification as an
extraordinary item is required to be reclassified. All other provisions of
this Statement are effective for financial statements issued on or after May 15, 2002. We elected to early adopt SFAS No. 145 during the second quarter of
2002. The effect of adopting SFAS No. 145 was to increase interest expense by
$0.5 million, increase net loss from continuing operations by
$0.5 million, and to increase
basic and diluted loss from continuing operations per share by $0.01.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires costs associated with exit or disposal activities to be recognized
when the costs are incurred, rather than at a date of commitment to an exit or
disposal plan. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 is not
expected to have a material impact on our financial statements.

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosurewas issued by the FASB. This standard amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation. In
addition, this standard amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
financial statements for fiscal years ending after December 15, 2002. We will
implement SFAS No. 148 effective January 1, 2003 regarding disclosure
requirements for condensed financial statements for interim periods. We have
not yet determined whether we will voluntarily change to the fair value based
method of accounting for stock-based employee compensation.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risks

We are exposed to various market risks in conducting the business of the
company, and we anticipate 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 times enter into derivative financial instruments, although we have not
historically done so. These may take the form of forward sales contracts,
option contracts, foreign currency exchange contracts, and interest rate swaps.
We have not, and do not intend to, engage in the practice of trading derivative
securities for profit.

Interest Rates.We are exposed to market risks relating to changes in
interest rates. Some of the proceeds from our initial public offering
have been invested in
short-term, interest-bearing, investment grade securities. The value of these
securities will be subject to interest rate risk and could fall in value if
interest rates rise.

Commodity Prices.We are exposed to price risk related to anticipated
purchases of certain commodities used as raw materials by our businesses,
including titanium and zirconium. Although we do not currently enter into
commodity future, forward, and option contracts to manage the fluctuations in
prices of anticipated purchases, we may enter into such contacts in the future
as our business grows and as our purchases of these raw materials increases.

Foreign Exchange Rates.As a result of our manufacturing presence in South
Korea, a substantial portion of our costs will be denominated in South Korean
won. Consequently, fluctuations in the exchange rates of the South Korean won
to the U.S. dollar will affect our costs of goods sold and operating margins
and could result in exchange losses. Although we do not currently enter into
foreign exchange hedge transactions, we may do so in the future as our business
grows.




Item 8. Financial Statements and Supplementary Data

The financial statements required by this item are located beginning on
page 41 of this report. The supplementary financial information required by
this item is located under the caption QUARTERLY RESULTS in Item 7 of this
report.




Item 9. Changes in and Disagreements with Accountants on Accounting and financial Disclosures

None.




PART III




Item 10. Directors and Executive Officers of the Registrant

The information in response to this item is incorporated by reference from
the sections captioned PROPOSAL NO. 1: ELECTION OF DIRECTORS, SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS, and EXECUTIVE OFFICERS
contained in the definitive Proxy Statement to be filed in connection with our
2003 Annual Meeting of Shareholders to be held on May 20, 2003 (the 2003 Proxy
Statement).




Item 11. Executive Compensation

The information in response to this item is incorporated by reference from
the section captioned EXECUTIVE COMPENSATION contained in the 2003 Proxy
Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information in response to this item is incorporated by reference from
the section captioned PRINCIPAL SHAREHOLDERS contained in the 2003 Proxy
Statement.




Item 13. Certain Relationships and Related Transactions

The information in response to this item is incorporated by reference from
the sections captioned BOARD OF DIRECTORS and
EQUITY COMPENSATION PLAN INFORMATION contained in the 2003 Proxy
Statement.




Item 14. Controls and Procedures

Within the 90 days prior to the date of this annual report on Form 10-K,
Liquidmetal Technologies (the Company) carried out an evaluation, under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of
1934, as amended. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company, including its consolidated subsidiaries, required to
be included in the material information relating to the Companys periodic
filings with the Securities and Exchange Commission. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of our evaluation.




PART IV




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements. The Index to our Consolidated Financial
Statements is set forth on page 41 of this report.
|
| | 2. Financial Statement Schedules. See the last page of Consolidated
Financial Statements.                          
|
| | 3. Exhibits. See Item 15(c) below.                                                                                 



| | 
| | 

(b)  Reports on Form 8-K. There were no reports on Form 8-K filed
during the fourth quarter of 2002.

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

(d)  Financial Statement Schedules. See Item 15(a)(2) above.

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EXHIBIT INDEX

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                              
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                              
|Number  |  |   |  | Description of Document                                                                                                                                                                                                                                                                                                                                      
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                              
|3.1     |  |  |  | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-1 (Amendment No. 2) filed by Liquidmetal Technologies on
April 5, 2002 (Registration No. 333-73716)).                                                                                                                       
|3.2     |  |  |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Amendment No. 2) filed by Liquidmetal Technologies on April 5, 2002
(Registration No. 333-73716)).                                                                                                                                          
|4.1     |  |  |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                   
|4.2     |  |  |  | Form of Common Stock Certificate (incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Amendment No. 3) filed by Liquidmetal Technologies on April 29, 2002
(Registration No. 333-73716)).                                                                                                                                    
|10.1    |  |  |  | Amended and Restated License Agreement, dated September 1, 2001, between Liquidmetal
Technologies and California Institute of Technology (incorporated by reference to Exhibit 10.1
to the Registration Statement on Form S-1 filed by Liquidmetal Technologies on November 20,
2002 (Registration No. 333-73716)).                                          
|10.2    |  |  |  | Improved Property Commercial Lease, dated September 11, 2002,
between Liquidmetal technologies and P & S Properties.                                                                                                                                                                                                                                         
|10.3    |  |  |  | Lease, dated October 4, 2001, between Plaza IV Associates, Ltd. and Liquidmetal Technologies
(incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 filed by
Liquidmetal Technologies on November 20, 2002 (Registration No. 333-73716)).                                                                                      
|10.4    |  |  |  | Standard Lease, dated May 27, 2001, between Investors Equity Fund, Inc. and Amorphous
Technologies International (now known as Liquidmetal Technologies) (incorporated by reference
to Exhibit 10.1 to the Registration Statement on Form S-1 filed by Liquidmetal Technologies on
November 20, 2002 (Registration No. 333-73716)).                          
|10.5*   |  |  |  | 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 by Liquidmetal
Technologies on November 20, 2002 (Registration No. 333-73716)).                                                                                                  
|10.6*   |  |  |  | Employment Agreement, dated December 31, 2000, between Liquidmetal Technologies 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 by Liquidmetal
Technologies on November 20, 2002 (Registration No. 333-73716)).         
|10.7*   |  |  |  | Employment Agreement, dated May 1, 2001, between Liquidmetal Technologies and James Kang, as
amended by Amendment No. 1 to Employment Agreement, dated June 28, 2001 (incorporated by
reference to Exhibit 10.9 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*   |  |  |  | Employment Agreement, dated October 1, 2001, between Liquidmetal Technologies and William
Johnson, Ph.D. (incorporated by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 filed by Liquidmetal Technologies on November 20,
2002 (Registration No. 333-73716))                                                                          
|10.9*   |  |  |  | Employment Agreement, dated December 31, 2000, between
Liquidmetal Technologies and T. Scott Wiggins
(incorporated by reference to Exhibit 10.11 to the
Registration Statement on Form S-1
filed by Liquidmetal Technologies on November 20, 2002 (Registration No. 333-73716)).                                                                             
|10.10*  |  |  |  | Employment Agreement, dated May 21, 2001, between
Liquidmetal Technologies and Brian McDougall
(incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 filed by
Liquidmetal Technologies on November 20, 2002 (Registration No. 333-73716)).                                                                                   
|10.11*  |  |  |  | Employment Agreement, dated September 1, 2002, between Liquidmetal Technologies and John Grant.                                                                                                                                                                                                                                                              

35



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|       |  |   |  |                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |   |  |                                                                                                                                                                                                                                                                                                                                                                       
|       |  |   |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.12* |  |  |  | Separation and Consulting Agreement, dated November 15,
2001, between Liquidmetal Technologies and Shekhar
Chitnis, together with Consulting Agreement attached as
Exhibit A (incorporated by
reference to Exhibit 10.14 to the Registration Statement on Form S-1 (Amendment No. 2) filed
by Liquidmetal Technologies on April 5, 2002 (Registration No. 333-73716)).
|10.13  |  |  |  | Warrant for Purchase of Shares of Common Stock, dated
February 21, 2001, granted by Liquidmetal Technologies to
John Kang and Ricardo Salas (incorporated by reference to
Exhibit
10.18 to the Registration Statement on Form S-1 filed by Liquidmetal Technologies on November
20, 2002 (Registration No. 333-73716)).                                               
|10.14  |  |  |  | Warrant for Purchase of Shares of Common Stock, dated February 21, 2001, granted by
Liquidmetal Technologies to Tjoa Thian Song (incorporated by reference to Exhibit 10.19 to the
Registration Statement on Form S-1 filed by Liquidmetal Technologies on November 20, 2002
(Registration No. 333-73716)).                                                           
|10.15  |  |  |  | Non-Qualified Stock Option Agreement, dated January 1,
2001, between Liquidmetal Technologies and Paul Azinger
(incorporated by reference to Exhibit 10.19 to the
Registration Statement on
Form S-1 filed by Liquidmetal Technologies on November 20, 2002 (Registration No. 333-73716)).                                                                            
|10.16  |  |  |  | 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)).                          
|10.17* |  |  |  | 2002 Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to the Registration
Statement on Form S-1 (Amendment No. 2) filed by Liquidmetal Technologies on April 5, 2002
(Registration No. 333-73716)).                                                                                                                                                  
|10.18* |  |  |  | 2002 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.23 to
the Registration Statement on Form S-1 (Amendment No. 2) filed by Liquidmetal Technologies on
April 5, 2002 (Registration No. 333-73716)).                                                                                                                                
|10.19* |  |  |  | Employment Agreement, dated March 29, 2002, between
Liquidmetal Technologies and Neil Paton (incorporated by
reference to Exhibit 10.29 to the Registration Statement
on Form S-1 (Amendment No. 3) filed by Liquidmetal
Technologies on April 29, 2002 (Registration No.
333-73716)).                                                                                
|10.20  |  |  |  | Credit Service Agreement, dated February 2003, between Liquidmetal Technologies and Kookmin
Bank.                                                                                                                                                                                                                                                                     
|10.21  |  |  |  | Agreement for Rent,
dated February, 2003, between Liquidmetal Technologies and Dong Myung Seo.                                                                                                                                                                                                                                                                        
|10.22  |  |  |  | Agreement for Rent, dated November, 2003, between Liquidmetal Technologies and Chun Hwan Chu.                                                                                                                                                                                                                                                                         
|10.23  |  |  |  | Contract for Monthly
Rent, dated September 11, 2002, between Liquidmetal Technologies
and Lee Ho-Joo.                                                                                                                                                                                                                                                                 
|21     |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                       
|23.1   |  |  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                     
|24.1   |  |  |  | Power of Attorney relating to subsequent amendments (included on the signature page(s) of this
report).                                                                                                                                                                                                                                                               
|99.1   |  |  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                  
|99.2   |  |  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                  



---

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

36



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##### Table of Contents



SIGNATURES

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

|                     |  |     |  |                                                             
|-------------------- |  | --- |  | ------------------------------------------------------------
|                     |  |     |  | Liquidmetal Technologies                                    
|                    
|                     |  |     |  |                                                             
|                    
|                     |  | By: |  | /s/ John KangJohn Kang
President and Chief Executive Officer
|                    
|                     |  |     |  |                                                             
|                    
|Date: March 28, 2003 |  |     |  |                                                             

POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John A. Kang and Brian McDougall and
each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.

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

|                                    |  |                                                                                    |  |               
|----------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|Signature                           |  | Title                                                                              |  | Date          
|                                    |  |                                                                                    |  |               
|/s/ John KangJohn Kang              |  | Chief Executive Officer
President and Director
(Principal Executive Officer)       |  | March 28, 2003
|                                   
|/s/ Brian McDougallBrian McDougall  |  | Chief Financial and Operating Officer
(Principal Financial and Accounting Officer) |  | March 28, 2003
|                                   
|/s/ James KangJames Kang            |  | Chairman of the Board of Directors                                                 |  | March 28, 2003
|                                   
|/s/ William JohnsonWilliam Johnson  |  | Vice Chairman of the Board
of Directors                                            |  | March 28, 2003
|                                   
|/s/ Shekhar ChitnisShekhar Chitnis  |  | Director                                                                           |  | March 28, 2003
|                                   
|/s/Ricardo A. SalasRicardo A. Salas |  | Director                                                                           |  | March 28, 2003
|                                   
|/s/Jack ChitayatJack Chitayat       |  | Director                                                                           |  | March 28, 2003
|                                   
|/s/Tjoa Thian SongTjoa Thian Song   |  | Director                                                                           |  | March 28, 2003

37



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##### Table of Contents



|                               |  |          |  |               
|------------------------------ |  | -------- |  | --------------
|                              
|/s/ Jeffrey OsterJeffrey Oster |  | Director |  | March 28, 2003
|                              
|/s/Henri TchenHenri Tchen      |  | Director |  | March 28, 2003
|                              
|/s/ Betsy AtkinsBetsy Atkins   |  | Director |  | March 28, 2003
|                              
|/s/ David BrowneDavid Browne   |  | Director |  | March 28, 2003

38



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##### Table of Contents



CERTIFICATION

I, John Kang, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Liquidmetal Technologies;                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                                            
|-------------------- |  | -------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/  John KangJohn Kang
President and Chief Executive Officer
(Principal Executive Officer)

39



---



##### Table of Contents



CERTIFICATION

I, Brian McDougall, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Liquidmetal Technologies;                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                                                                    
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/ Brian McDougallBrian McDougall
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)

40



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                   |                                                              |    |      |  | 
|---------------------------------- | ------------------------------------------------------------ | -- | ---- |  | 
|                                   |                                                              |    | Page
|                                   |                                                              |    |     
|Independent Auditors Report       | 42                                                          
|Consolidated Financial Statements:
|                                   | Consolidated Balance Sheet                                   | 43
|                                   | Consolidated Statements of Operations and Comprehensive Loss | 44
|                                   | Consolidated Statements of Shareholders Equity (Deficiency) | 45
|                                   | Consolidated Statements of Cash Flows                        | 46
|                                   | Notes to Consolidated Financial Statements                   | 48

41



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Liquidmetal Technologies
Tampa, Florida

We have audited the accompanying consolidated balance sheets of Liquidmetal
Technologies and subsidiaries (the Company) as of December 31, 2002 and 2001,
and the related consolidated statements of operations and comprehensive loss,
of shareholders equity (deficiency), and of cash flows for each of the three
years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)2. These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Liquidmetal Technologies and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Certified Public Accounts

Tampa, Florida
February 4, 2003

42



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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |         |   |   |        |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------------------------------------------------------- | - | ------------ | ------ | ------- | - | - | ------ | -
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   | December 31,
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |             
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   | 2002         |        | 2001   
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|ASSETS                                             
|CURRENT ASSETS:                                     |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    | Cash and cash equivalents                                                                                                                                                       |  | $      | 26,003                                                  |   |              | $      | 2,230   |  
|                                                    | Marketable securities held-for-sale                                                                                                                                             |  |        | 3,068                                                   |   |              |        |        |  
|                                                    | Trade receivables, net                                                                                                                                                          |  |        | 6,404                                                   |   |              |        | 911     |  
|                                                    | Inventories                                                                                                                                                                     |  |        | 2,506                                                   |   |              |        | 503     |  
|                                                    | Prepaid expenses and other current assets                                                                                                                                       |  |        | 2,142                                                   |   |              |        | 967     |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total current assets                                    |   |              | 40,123 |         |   |   | 4,611  |  
|PROPERTY, PLANT AND EQUIPMENT, NET                  |                                                                                                                                                                                 |  | 23,505 |                                                         |   |              | 1,163  |        
|INTANGIBLE ASSETS, NET                              |                                                                                                                                                                                 |  | 785    |                                                         |   |              | 723    |        
|GOODWILL                                            |                                                                                                                                                                                 |  | 184    |                                                         |   |              |       |        
|OTHER ASSETS                                        |                                                                                                                                                                                 |  | 408    |                                                         |   |              | 183    |        
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total assets                                            |   | $            | 65,005 |         |   | $ | 6,680  |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)  
|CURRENT LIABILITIES:                                |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    | Accounts payable and accrued expenses                                                                                                                                           |  | $      | 11,174                                                  |   |              | $      | 2,706   |  
|                                                    | Net liabilities of discontinued operations                                                                                                                                      |  |        | 1,148                                                   |   |              |        | 7,492   |  
|                                                    | Deferred revenue                                                                                                                                                                |  |        | 1,397                                                   |   |              |        | 830     |  
|                                                    | Other liabilities, current portion                                                                                                                                              |  |        | 19                                                      |   |              |        | 167     |  
|                                                    | Current portion of notes payable to shareholders                                                                                                                                |  |        |                                                        |   |              |        | 2,988   |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total current liabilities                               |   |              | 13,738 |         |   |   | 14,183 |  
|OTHER LONG-TERM LIABILITIES, NET OF CURRENT PORTION |                                                                                                                                                                                 |  | 74     |                                                         |   |              |       |        
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total liabilities                                       |   |              | 13,812 |         |   |   | 14,183 |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|COMMITMENTS AND CONTINGENCIES                       |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|MINORITY INTEREST                                   |                                                                                                                                                                                 |  | 21     |                                                         |   |              |       |        
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|SHAREHOLDERS EQUITY (DEFICIENCY):                  |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    | Preferred stock, no par value; 10,000,000 shares authorized
and none outstanding at December 31, 2002 and 456,857
outstanding at December 31, 2001                              |  |        |                                                        |   |              |        | 5,577   |  
|                                                    | Common stock, no par value; 200,000,000 shares authorized
and 41,009,245 issued and outstanding at December 31, 2002 and 35,023,515
issued and outstanding at December 31, 2001 |  |        | 106,554                                                 |   |              |        | 29,752  |  
|                                                    | Paid in capital                                                                                                                                                                 |  |        | 20,326                                                  |   |              |        | 22,401  |  
|                                                    | Unamortized stock-based compensation                                                                                                                                            |  |        | (480                                                    | ) |              |        | (6,717  | )
|                                                    | Accumulated deficit                                                                                                                                                             |  |        | (76,940                                                 | ) |              |        | (58,588 | )
|                                                    | Accumulated comprehensive income                                                                                                                                                |  |        | 1,712                                                   |   |              |        | 72      |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total shareholders equity (deficiency)                 |   |              | 51,172 |         |   |   | (7,503 | )
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        
|                                                    |                                                                                                                                                                                 |  |        | Total liabilities and shareholders equity (deficiency) |   | $            | 65,005 |         |   | $ | 6,680  |  
|                                                    |                                                                                                                                                                                 |  |        |                                                         |   |              |        |        

See notes to consolidated financial statements.

43



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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |   |        |       |  | 
|------------------------------------------------------------------------------------------------------- | ------------------------ | ------------------------------------------------------------------ | -------------- | - | ------ | ------------------------------------- | ------- | ---- | ------- | ----- | ------ | - | ------ | ----- |  | 
|                                                                                                        |                          |                                                                    |                |   |        | Years Ended December 31,             
|                                                                                                        |                          |                                                                    |                |   |        |                                      
|                                                                                                        |                          |                                                                    |                |   |        | 2002                                  |         | 2001 |         | 2000 
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |      
|                                                                                                        |                          |                                                                    |                |   |        | (In thousands, except per share data)
|REVENUE                                                                                                 |                          | $                                                                  | 13,139         |   |        | $                                     | 3,882   |      |         | $     | 4,200  |  
|COST OF SALES                                                                                           |                          |                                                                    | 8,679          |   |        |                                       | 1,924   |      |         |       | 1,983  |  
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Gross profit                                                       |                |   | 4,460  |                                       |         |      | 1,958   |       |        |   | 2,217  |      
|OPERATING EXPENSES:                                                                                     |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Selling, general and administrative                                |                |   | 12,767 |                                       |         |      | 3,970   |       |        |   | 1,449  |      
|                                                                                                        |                          | Research and development                                           |                |   | 11,825 |                                       |         |      | 2,057   |       |        |   | 455    |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          |                                                                    | Total expenses |   |        | 24,592                                |         |      |         | 6,027 |        |   |        | 1,904 | 
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|INCOME (LOSS) BEFORE INTEREST, OTHER INCOME, INCOME TAXES
MINORITY INTEREST AND DISCONTINUED OPERATIONS |                          |                                                                    | (20,132        | ) |        |                                       | (4,069  | )    |         |       | 313    |  
|                                                                                                        |                          | Interest expense                                                   |                |   | (1,113 | )                                     |         |      | (1,103  | )     |        |   | (200   | )    
|                                                                                                        |                          | Interest income                                                    |                |   | 510    |                                       |         |      | 8       |       |        |   | 12     |      
|                                                                                                        |                          | Gain on sale of marketable securities held-for-sale                |                |   | 832    |                                       |         |      |        |       |        |   |       |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND
DISCONTINUED OPERATIONS                        |                          |                                                                    | (19,903        | ) |        |                                       | (5,164  | )    |         |       | 125    |  
|                                                                                                        |                          | Income taxes                                                       |                |   | (123   | )                                     |         |      |        |       |        |   |       |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS                                      |                          |                                                                    | (20,026        | ) |        |                                       | (5,164  | )    |         |       | 125    |  
|                                                                                                        |                          | Minority interest in loss of consolidated subsidiary               |                |   | 118    |                                       |         |      |        |       |        |   |       |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                                                |                          |                                                                    | (19,908        | ) |        |                                       | (5,164  | )    |         |       | 125    |  
|                                                                                                        | DISCONTINUED OPERATIONS: |                                                                    |                |   |        |                                       |         |      |         |       |        |   |       
|                                                                                                        |                          | Loss from operations of discontinued retail golf segment, net      |                |   |       |                                       |         |      | (5,973  | )     |        |   | (8,938 | )    
|                                                                                                        |                          | Gain (loss) from disposal of discontinued retail golf segment, net |                |   | 1,556  |                                       |         |      | (11,949 | )     |        |   |       |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|NET LOSS                                                                                                |                          |                                                                    | (18,352        | ) |        |                                       | (23,086 | )    |         |       | (8,813 | )
|OTHER COMPREHENSIVE INCOME (LOSS):                                                                      |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Foreign exchange translation (loss) gain during the period         |                |   | (28    | )                                     |         |      | (24     | )     |        |   | 96     |      
|                                                                                                        |                          | Net unrealized gain on marketable securities held-for-sale         |                |   | 1,668  |                                       |         |      |        |       |        |   |       |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|COMPREHENSIVE LOSS                                                                                      |                          | $                                                                  | (16,712        | ) |        | $                                     | (23,110 | )    |         | $     | (8,717 | )
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|PER COMMON SHARE BASIC:                                                                                 |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Income (loss) from continuing operations                           |                | $ | (0.51  | )                                     |         | $    | (0.15   | )     |        | $ | 0.00   |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Income (loss) from discontinued operations                         |                | $ | 0.04   |                                       |         | $    | (0.54   | )     |        | $ | (0.30  | )    
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Net loss                                                           |                | $ | (0.47  | )                                     |         | $    | (0.69   | )     |        | $ | (0.29  | )    
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|PER COMMON SHARE DILUTED:                                                                               |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Income (loss) from continuing operations                           |                | $ | (0.51  | )                                     |         | $    | (0.15   | )     |        | $ | 0.00   |      
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Income (loss) from discontinued operations                         |                | $ | 0.04   |                                       |         | $    | (0.54   | )     |        | $ | (0.27  | )    
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  
|                                                                                                        |                          | Net loss                                                           |                | $ | (0.47  | )                                     |         | $    | (0.69   | )     |        | $ | (0.26  | )    
|                                                                                                        |                          |                                                                    |                |   |        |                                       |         |      |         |       |        |  

See notes to consolidated financial statements.

44



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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY)
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except share data)

|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   |               |        |         |   |         |         |        |   |       |       |   |   |        |         |  
|-------------------------- | --------------------------------------------------------------------- |  | --------- | -------- | --------- | - | ------ | ------ | ------ |  | ---------- | --------- | ------- | - | ------- | ------ | ------------- | - | ------ | ------ | - | - | ------------- | ------ | ------- | - | ------- | ------- | ------ | - | ----- | ----- | - | - | ------ | ------- | -
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   | Unamortized   |        |         |   |         |         | Accumu |   |       |       |  
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   | Stock
Option- |        |         |   |         |         | lated  |   |       |       |  
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   | Based         |        | Accumu- |   | Compre- |         |        |   |      
|                           |                                                                       |  | Preferred |          | Preferred |   | Common |        | Common |  | Paid in    |           | Compen- |   | lated   |        | hensive       |   |        |        |  
|                           |                                                                       |  | Shares    |          | Stock     |   | Shares |        | Stock  |  | Capital    |           | sation  |   | Deficit |        | Income (Loss) |   | Total 
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |       
|Balance, December 31, 1999 |                                                                       |  |          |          |           | $ |       |        |        |  | 29,456,265 |           |         | $ | 15,227  |        |               | $ | 9,994  |        |   | $ |              |        |         | $ | (26,682 | )       |        | $ |      |       |   | $ | (1,461 | )      
|                           | Common stock issued                                                   |  |           |         |           |   |        |       |        |  |            | 1,358,422 |         |   |         | 3,970  |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 3,970   |  
|                           | Conversion of note payable                                            |  |           |         |           |   |        |       |        |  |            | 69,355    |         |   |         | 108    |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 108     |  
|                           | Stock-based compensation                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 852    |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 852     |  
|                           | Dilution gain on common stock
issued by subsidiaries                  |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 500    |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 500     |  
|                           | Conversion of note payable of
subsidiaries                            |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 1,075  |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 1,075   |  
|                           | Foreign exchange translation
gain (loss)                              |  |           |         |           |   |        |        |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       | 96    |   |   |        | 96      |  
|                           | Other                                                                 |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         | (7      | )      |   |       |      |   |   |        | (7      | )
|                           | Net loss                                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         | (8,813  | )      |   |       |      |   |   |        | (8,813  | )
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   |               |        |         |   |         |         |        |   |       |       |   |   |        |        
|Balance, December 31, 2000 |                                                                       |  |          |          |           |   |       |        |        |  | 30,884,042 |           |         |   | 19,305  |        |               |   | 12,421 |        |   |   |              |        |         |   | (35,502 | )       |        |   | 96    |       |   |   | (3,680 | )      
|                           | Preferred stock issued                                                |  |           | 456,857  |           |   |        | 5,665  |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 5,665   |  
|                           | Commission expense on sale of
preferred stock                         |  |           |         |           |   |        | (88    | )      |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | (88     | )
|                           | Common stock issued                                                   |  |           |         |           |   |        |       |        |  |            | 977,034   |         |   |         | 5,477  |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 5,477   |  
|                           | Stock options exercised                                               |  |           |         |           |   |        |       |        |  |            | 1,822,581 |         |   |         | 2,400  |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 2,400   |  
|                           | Conversion of notes payable                                           |  |           |         |           |   |        |       |        |  |            | 1,339,858 |         |   |         | 2,570  |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 2,570   |  
|                           | Discounts on notes payable                                            |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 1,692  |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 1,692   |  
|                           | Stock-based compensation                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 8,301  |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 8,301   |  
|                           | Unamortized stock option-
based compensation                          |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               | (6,717 | )       |   |         |        |        |   |       |      |   |   |        | (6,717  | )
|                           | Dilution gain on common stock
issued by subsidiaries                  |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | 37     |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 37      |  
|                           | Purchase of common stock of
subsidiaries                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | (50    | ) |   |               |       |         |   |         |        |        |   |       |      |   |   |        | (50     | )
|                           | Foreign exchange translation
gain (loss)                              |  |           |         |           |   |        |        |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       | (24   | ) |   |        | (24     | )
|                           | Net loss                                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         | (23,086 | )      |   |       |      |   |   |        | (23,086 | )
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   |               |        |         |   |         |         |        |   |       |       |   |   |        |        
|Balance, December 31, 2001 |                                                                       |  | 456,857   |          |           |   | 5,577  |        |        |  | 35,023,515 |           |         |   | 29,752  |        |               |   | 22,401 |        |   |   | (6,717        | )      |         |   | (58,588 | )       |        |   | 72    |       |   |   | (7,503 | )      
|                           | Common stock issued                                                   |  |           |         |           |   |        |       |        |  |            | 5,229,000 |         |   |         | 78,435 |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 78,435  |  
|                           | Transaction expenses of
initial public offering
including commissions |  |           |         |           |   |        |       |        |  |            |          |         |   |         | (7,714 | )             |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | (7,714  | )
|                           | Stock options exercised                                               |  |           |         |           |   |        |       |        |  |            | 299,873   |         |   |         | 504    |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        | 504     |  
|                           | Conversion of preferred stock
to common stock                         |  |           | (456,857 | )         |   |        | (5,577 | )      |  |            | 456,857   |         |   |         | 5,577  |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       |      |   |   |        |        |  
|                           | Stock-based compensation                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        | (2,075 | ) |   |               | 2,075  |         |   |         |        |        |   |       |      |   |   |        |        |  
|                           | Unamortized stock option-
based compensation                          |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               | 4,162  |         |   |         |        |        |   |       |      |   |   |        | 4,162   |  
|                           | Foreign exchange translation
gain (loss)                              |  |           |         |           |   |        |        |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       | (28   | ) |   |        | (28     | )
|                           | Net unrealized gain on marketable
securities                          |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         |        |        |   |       | 1,668 |   |   |        | 1,668   |  
|                           | Net loss                                                              |  |           |         |           |   |        |       |        |  |            |          |         |   |         |       |               |   |        |       |   |   |               |       |         |   |         | (18,352 | )      |   |       |      |   |   |        | (18,352 | )
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   |               |        |         |   |         |         |        |   |       |       |   |   |        |        
|Balance, December 31, 2002 |                                                                       |  |          |          |           | $ |       |        |        |  | 41,009,245 |           |         | $ | 106,554 |        |               | $ | 20,326 |        |   | $ | (480          | )      |         | $ | (76,940 | )       |        | $ | 1,712 |       |   | $ | 51,172 |        
|                           |                                                                       |  |           |          |           |   |        |        |        |  |            |           |         |   |         |        |               |   |        |        |   |   |               |        |         |   |         |         |        |   |       |       |   |   |        |        

See notes to consolidated financial statements.

45



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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |     |        |      |  
|---------------------------------------------------- | ------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------- | --- | ------------------------ | ------ | ------- | -- | ------- | ----- | ------ | --- | ------ | ---- | -
|                                                     |               |                                                                                    |                                                     |     | Years Ended December 31,
|                                                     |               |                                                                                    |                                                     |     |                         
|                                                     |               |                                                                                    |                                                     |     | 2002                     |        | 2001    |    | 2000   
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |        
|                                                     |               |                                                                                    |                                                     |     | (In thousands)          
|OPERATING ACTIVITIES:                                |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|                                                     |               | Net loss                                                                           |                                                     | $   | (18,352                  | )      |         | $  | (23,086 | )     |        | $   | (8,813 | )   
|                                                     |               | Add loss (gain) from operations and loss on disposition of discontinued
operations |                                                     |     | (1,556                   | )      |         |    | 17,922  |       |        |     | 8,938  |     
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |     |        |      |  
|                                                     |               | Income (loss) from continuing operations                                           |                                                     |     | (19,908                  | )      |         |    | (5,164  | )     |        |     | 125    |     
|                                                     |               | Adjustments to reconcile net loss to net cash used by operating activities:        |                                                     |     |                          |        |         |    |         |       |        |     |        |     
|                                                     |               |                                                                                    | Gain on sale of marketable securities held-for-sale |     |                          | (832   | )       |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Gain on sale of property and equipment              |     |                          | (19    | )       |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Minority interest                                   |     |                          | (118   | )       |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Bad debt expense                                    |     |                          | 366    |         |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Warranty expense                                    |     |                          | 435    |         |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Depreciation and amortization                       |     |                          | 1,513  |         |    |         | 132   |        |     |        | 131  |  
|                                                     |               |                                                                                    | Amortization of debt discount                       |     |                          | 912    |         |    |         | 780   |        |     |        |     |  
|                                                     |               |                                                                                    | Stock-based compensation                            |     |                          | 1,670  |         |    |         | 393   |        |     |        |     |  
|                                                     |               | Changes in operating assets and liabilities:                                       |                                                     |     |                          |        |         |    |         |       |        |     |        |     
|                                                     |               |                                                                                    | Accounts receivable                                 |     |                          | (5,788 | )       |    |         | (126  | )      |     |        | (374 | )
|                                                     |               |                                                                                    | Inventories                                         |     |                          | (1,803 | )       |    |         | (311  | )      |     |        | (57  | )
|                                                     |               |                                                                                    | Prepaid expenses and other assets                   |     |                          | (1,048 | )       |    |         | (273  | )      |     |        | (32  | )
|                                                     |               |                                                                                    | Other assets                                        |     |                          | (217   | )       |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Accounts payable and accrued expenses               |     |                          | 7,581  |         |    |         | 1,303 |        |     |        | 363  |  
|                                                     |               |                                                                                    | Unearned revenue                                    |     |                          | 567    |         |    |         |      |        |     |        |     |  
|                                                     |               |                                                                                    | Other liabilities                                   |     |                          | (167   | )       |    |         | 80    |        |     |        | (262 | )
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|Net cash used by continuing operations               |               |                                                                                    | (16,856                                             | )   |                          |        | (3,186  | )  |         |       | (106   | )  
|Net cash used by discontinued operations             |               |                                                                                    | (2,456                                              | )   |                          |        | (8,866  | )  |         |       | (4,752 | )  
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|Net cash used by operating activities                |               |                                                                                    | (19,312                                             | )   |                          |        | (12,052 | )  |         |       | (4,858 | )  
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|INVESTING ACTIVITIES:                                |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|                                                     |               | Purchases of property and equipment                                                |                                                     |     | (23,787                  | )      |         |    | (1,070  | )     |        |     | (62    | )   
|                                                     |               | Proceeds from sale of property and equipment                                       |                                                     |     | 129                      |        |         |    |        |       |        |     |       |     
|                                                     |               | Purchase of marketable securities held-for-sale                                    |                                                     |     | (2,000                   | )      |         |    |        |       |        |     |       |     
|                                                     |               | Proceeds from sale of marketable securities held-for-sale                          |                                                     |     | 1,432                    |        |         |    |        |       |        |     |       |     
|                                                     |               | Acquisition of subsidiary, net of cash received                                    |                                                     |     | 74                       |        |         |    |        |       |        |     |       |     
|                                                     |               | Investment in patents and trademarks                                               |                                                     |     | (144                     | )      |         |    | (89     | )     |        |     | (59    | )   
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|Net cash used by investing activities                |               |                                                                                    | (24,296                                             | )   |                          |        | (1,159  | )  |         |       | (121   | )  
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|FINANCING ACTIVITIES:                                |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|                                                     |               | Proceeds from borrowings                                                           |                                                     |     | 3,500                    |        |         |    | 4,000   |       |        |     | 1,250  |     
|                                                     |               | Repayment of borrowings                                                            |                                                     |     | (7,400                   | )      |         |    | (100    | )     |        |     | (750   | )   
|                                                     |               | Repayment of other liabilities                                                     |                                                     |     | (14                      | )      |         |    |        |       |        |     |       |     
|                                                     |               | Proceeds from issuance of common stock, net of offering costs                      |                                                     |     | 70,721                   |        |         |    | 3,477   |       |        |     | 3,700  |     
|                                                     |               | Proceeds from issuance of preferred stock, net of offering costs                   |                                                     |     |                         |        |         |    | 5,577   |       |        |     |       |     
|                                                     |               | Stock options exercised                                                            |                                                     |     | 504                      |        |         |    | 2,400   |       |        |     |       |     
|                                                     |               | Dividends paid                                                                     |                                                     |     |                         |        |         |    |         |      |        |     | (7     | )   
|                                                     |               | Proceeds from issuance (repurchase) of common stock by subsidiaries, net           |                                                     |     |                         |        |         |    | (13     | )     |        |     | 500    |     
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|Net cash provided by financing activities            |               |                                                                                    | 67,311                                              |     |                          |        | 15,341  |    |         |       | 4,693  |    
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|EFFECT OF FOREIGN EXCHANGE TRANSLATION               |               |                                                                                    | 70                                                  |     |                          |        | (24     | )  |         |       | 96     |    
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |               |                                                                                    | 23,773                                              |     |                          |        | 2,106   |    |         |       | (190   | )  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |               |                                                                                    | 2,230                                               |     |                          |        | 124     |    |         |       | 314    |    
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |               | $                                                                                  | 26,003                                              |     |                          | $      | 2,230   |    |         | $     | 124    |    
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|SUPPLEMENTAL CASH FLOW INFORMATION                   |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|                                                     | Interest paid |                                                                                    | $                                                   | 443 |                          |        | $       | 52 |         |       | $      | 162 |       
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    
|                                                     | Taxes paid    |                                                                                    | $                                                   |    |                          |        | $       |   |         |       | $      |    |       
|                                                     |               |                                                                                    |                                                     |     |                          |        |         |    |         |       |        |    

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)

In 2001 and 2000, respectively, $2,570 and $108 in notes payable and
accrued interest were converted to the Companys common stock. In 2001,
Liquidmetal Golf transferred and assigned to the Company two subordinated
promissory notes in exchange for the Companys common stock in
the amount of
$2,000.

In 2001, the Company recorded paid in capital of $1,692 comprised of
discounts on notes payable.

In 2001, the Company incurred $792 of costs related to the initial public
offering that had not been paid as of December 31, 2001.

In 2002, the Company entered into a lease agreement for $107 of office
furniture that was recorded as a capital lease obligation.

As of December 31, 2001, the Company accrued $100 for payments to be made
to Caltech in exchange for rights to certain patents (see Note 7). In 2000, the
Company issued 96,774 shares of common stock in the amount of $270 to Caltech
in exchange for rights to certain patents (see Note 7).

In 2002, 2001, and 2000, respectively, the Company recorded a net addition
to shareholders deficiency of $2,492, $1,191, and $852 comprised of stock
compensation and discounts on convertible notes payable in the discontinued
retail golf operations. In 2000, a subordinated convertible promissory note
in the amount of $1,075, issued by Liquidmetal Golf was converted to
Liquidmetal Golfs common stock. Additionally, in 2002, there was a $98
foreign exchange loss effect in the discontinued retail golf operations.

See notes to consolidated financial statements.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001, and 2000
(in thousands, except share data)

1. Description of Business

Liquidmetal Technologies (Liquidmetal Technologies) and its subsidiaries
(collectively the Company) are in the business of developing, manufacturing,
and marketing products made from amorphous alloys. Liquidmetal Technologies
markets and sells Liquidmetal® alloy industrial coatings and also manufactures,
markets and sells products and components from bulk Liquidmetal alloys that can
be incorporated into the finished goods of its customers across a variety of
industries.

The Company classifies operations into two reportable segments:
Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys.
Liquidmetal alloy industrial coatings are used primarily as a protective
coating for industrial machinery and equipment, such as drill pipe used by the
oil drilling industry and boiler tubes used by coal-burning power plants. Bulk
Liquidmetal alloys include potential market opportunities to manufacture and
sell casing components for electronic devices, medical devices, sporting goods,
tooling and prototype sampling, and furnace equipment. In addition, such alloys
are used to generate research and development services revenue for developing
uses related primarily to defense and medical applications. In the
twelve months
ended December 31, 2001, the Company derived a majority of its revenue from
the operation of its retail golf segment, which was discontinued on September
30, 2001 and is now accounted for as a discontinued operation. The retail golf
segment marketed golf clubs made of the Companys bulk Liquidmetal alloys. The
Company outsourced the manufacturing of the golf clubs.

2. Summary of Significant Accounting Policies

Principles of Consolidation.The consolidated financial statements include
the accounts of Liquidmetal Technologies and its wholly-owned subsidiaries,
Liquidmetal Korea Co., Ltd. (LMT Korea), located in Korea, and Amorphous
Technologies International (Asia) PTE LTD (LMT Singapore), located in
Singapore and its majority-owned subsidiaries, Chusik Hoesa Dongyang Yudoro
(Dongyang) and Liquidmetal Golf and its subsidiaries, which included the
retail golf segment, now accounted for as a discontinued operation. The
Company acquired its 51% interest in Dongyang in 2002; accordingly, the results
of Dongyangs operations have been included in the consolidated financial
statements from the acquisition date (see Note 8). The aggregate purchase
price was $333 in cash. Effective in 2001, management closed the Singapore
operations, which did not result in a significant impact on the financial
statements for any of the periods presented. All intercompany balances and
transactions have been eliminated. A minority interest in Liquidmetal Golf is
included in the consolidated financial statement as a component of the loss
from operations of the discontinued retail golf segment (see Note 14).

Sales of Stock by Subsidiaries.Gains on sales of stock by Liquidmetal
Golf are recognized as components of the Companys shareholders equity
(deficiency).

Revenue Recognition.On December 3, 1999, the staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements(SAB 101) that summarizes the staffs
views in applying accounting principles generally accepted in the United States
of America to revenue recognition in financial statements. The Companys
revenue recognition policy complies with the requirements of SAB 101. Revenue
is recognized at the time the Company ships its products, as this is when title
passes to the customer. Revenue is deferred and included in liabilities when
the Company receives cash in advance for services not yet performed or goods
not yet delivered. Revenue from research and development contracts is
recognized under the percentage of completion method.

Cash and Cash Equivalents.The Company considers all highly liquid
investments with maturity dates of three months or less when purchased to be
cash equivalents. The Company limits the amount of credit exposure to each
individual financial institution and places its temporary cash into investments
of high credit quality. There are no significant concentrations of credit risk
to the Company associated with cash and cash equivalents.

Marketable Securities.The Company has conformed its investment policies
to be consistent with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, and
classifies all of its investment securities as held-for-sale. Held-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in Shareholders Equity (Deficiency) under the caption Accumulated
Comprehensive Income (Loss).

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Realized gains and losses on held-for-sale securities
are included in other income. The cost of securities sold is based on the
specific identification method.

Trade Receivables.The Company grants credit to its customers generally in
the form of short-term trade accounts receivable. The creditworthiness of
customers is evaluated prior to the sale of inventory. Two customers represent
42%, or $2,703, of total outstanding trade receivables as of
December 31, 2002.

Inventories.Inventories are accounted for on the first-in, first-out
basis and reported at the lower of cost or market. Inventories consist of raw
materials and finished goods. The Company records write-offs for inventory
obsolescence when it 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 and amortization. Additions and major
renewals are capitalized. Repairs and maintenance are charged to expense as
incurred. Upon disposal, the related cost and accumulated depreciation are
removed from the accounts, with the resulting gain or loss included in
operating income. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets, which range
from two to twenty years.

Lease property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability. Amortization
of capitalized lease assets is provided on the straight-line method over the
estimated useful lives of the assets, which is five years.

Intangible Assets.Intangible assets consist of the costs incurred to
purchase patent rights and costs incurred to internally develop patents and
trademarks. Intangible assets are reported net of accumulated amortization.
Patents and trademarks are amortized using the straight-line method over a
period based on their contractual lives ranging from eleven to
seventeen years.

Goodwill.Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets(See New Accounting Pronouncements). According to this statement,
goodwill and other intangible assets are no longer subject to amortization, but
instead must be reviewed annually for impairment by applying a fair value-based
test. The Companys goodwill arose in 2002 as a result of its
acquisition of Dongyang (see Note 8). During 2002, the Company completed an impairment review and did not
recognize any impairment of goodwill. The Company expects to receive future
benefits from previously acquired goodwill over an indefinite period of time.
Accordingly, for 2002, the Company has forgone all related goodwill
amortization expense.

Impairment of Long-lived Assets.The Company reviews long-lived assets to
be held and used in operations for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may be impaired. An
impairment loss is recognized when the estimated fair value of the assets is
less than the carrying value of the assets.

Fair Value of Financial Instruments.The estimated fair value of amounts
reported in the consolidated financial statements have been determined using
available market information and valuation methodologies, as applicable. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, and all other current assets and liabilities approximate their fair
value
because of their short term maturities at December 31, 2002 and 2001, unless
otherwise stated. The fair values of non-current assets and liabilities
approximate their carrying value unless otherwise stated.

Research and Development Expenses.Research and development expenses
represent salaries, related benefits expense, expenses incurred for the design
and testing of new processing methods and other expenses related to the
research and development of Liquidmetal alloys. Development costs incurred in
research and development activities are expensed as incurred.

Advertising and Promotion Expenses.Advertising and promotion expenses are
expensed when incurred. Advertising and promotion expenses were $127,
$62, and
$11 for the years ended December 31, 2002, 2001 and 2000, respectively.

Debt Discount Amortization.Debt discounts for notes payable are amortized
to interest expense, using a method that approximates the interest method over
the term of the related debt instruments.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation.As permitted under SFAS No. 123, Accounting for
Stock-Based Compensation,the Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,which prescribes the intrinsic value method in accounting for its
stock options issued to employees and directors. Stock options issued to
non-employees of the Company have been accounted for in accordance with SFAS
No. 123, which prescribes the fair value accounting method.

Income Taxes.Income taxes 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 tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. The effect of a tax rate
change on deferred taxes is recognized in operations in the period that the
change in the rate is enacted. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized.

Translation of Foreign Currency.Upon consolidation of the Companys
foreign subsidiaries into the Companys consolidated financial statements, any
balances with the subsidiaries denominated in the foreign currency are
translated at the exchange rate at year-end. The financial statements of LMT
Singapore have been translated based upon Singapore Dollars as the functional
currency. The financial statements of LMT Korea, which include the Companys
51% owned subsidiary, Dongyang, have been translated based upon Korean Won as
the functional currency. LMT Singapores and LMT Koreas assets and liabilities
were translated using the exchange rate at year end and income and expense
items were translated at the average exchange rate for the year. The resulting
translation adjustment was included in other comprehensive income (loss).

Earnings Per Share.Basic earnings per share (EPS) is computed by
dividing earnings (losses) attributable to common shareholders by the weighted
average number of common shares outstanding for the periods. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.

Use of Estimates.The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reported periods. Actual results could differ
from those estimates. These management estimates are primarily related to
product warranty and the allowance for bad debt account balances.

Reclassifications.Certain amounts from prior years have been
reclassified to conform to the current years presentation.

New Accounting
Pronouncements.In July 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, Business Combinationsand SFAS
No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwills impairment and that
limited-life intangible assets other than goodwill should be amortized over
their useful lives. Implementation of SFAS No. 141 and SFAS No. 142 is required
for fiscal year 2002. The adoption of SFAS No. 141 and 142 did not have a
material impact on the Companys financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations.SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which such liabilities are incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs should be capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Adoption of SFAS No. 143 is not expected to have a material impact on the
Companys financial statements.

Issued in October 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The accounting model for long-lived assets to be disposed of by sale applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of OperationsReporting
the Effects of Disposal of a Segment

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of a Business,for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001 and, generally, are to be applied prospectively. In 2002, the Company
adopted SFAS No. 144 which did not result in a material impact to the Companys
financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 are required to be applied in fiscal
years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of this Statement related to Statement
13 are required to be applied to transactions occurring after May 15, 2002.
Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria
in APB No. 30 for classification as an extraordinary item is required to be
reclassified. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. The Company elected to
early adopt SFAS No. 145 during the second quarter of 2002. The effect of
adopting SFAS No. 145 was to increase interest expense by $532, increase net
loss from continuing operations by $532, and to increase basic and diluted loss
from continuing operations per share by $0.01.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires costs associated with exit or disposal activities to be recognized
when the costs are incurred, rather than at a date of commitment to an exit or
disposal plan. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 is not
expected to have a material impact on the Companys financial statements.

In December 2002,
SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurewas issued by the FASB. This standard amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation. In
addition, this standard amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The Company will
implement SFAS No. 148 effective January 1, 2003 regarding disclosure
requirements for condensed financial statements for interim
periods. The Company has not yet determined whether they will voluntarily
change to the fair value based method of accounting for stock-based employee
compensation.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(Interpretation 45). Interpretation 45
changes the accounting for and the disclosure of guarantees. Interpretation 45
requires that guarantees meeting the characteristics described in the
Interpretation be initially recorded as fair value in contrast to FASB No. 5,
which requires recording a liability when a loss is probable and reasonably
estimable. The disclosure requirements of Interpretation 45 are effective for
financial statements and annual periods ending after December 15, 2002. The
initial recognition and initial measurement provisions of Interpretation 45 are
effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of Interpretation 45 is not
expected to have a material
impact on the Companys financial statements.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Marketable Securities

On July 29, 2002, the Company invested $2,000 in Growell Metal, Inc.
(Growell Metal), a metals processing company located in South Korea and
publicly traded on South Koreas KOSDAQ stock market. The Company acquired
891,100 shares (or approximately 5%) of Growell Metals
outstanding common stock in this transaction. During the fourth quarter of
2002, Growell Metals spin-off of its electronics division
resulted in the creation of a new company
named Growell Electronics, Inc. (Growell Electronics). As a result of the
spin-off, 30% of the Companys 891,100 common shares of Growell Metal were
exchanged for an equal number of shares in the common stock of Growell
Electronics. During the year ended December 31, 2002, the Company sold its
shares in Growell Electronics for approximately $1,432, which was based on the
market price of the stock on the KOSDAQ stock market on the date of sale. This
sale resulted in a realized gain of $832 (see Note 20). At December 31, 2002,
the change in fair value of the remaining investment in Growell Metal resulted
in an unrealized gain of $1,668, which is reported as other comprehensive
income in the accompanying consolidated financial statements.

4. Trade receivables

Trade receivables from continuing operations were comprised of the
following:

|                                      |                         |   |              |       |      |   |     |     | 
|------------------------------------- | ----------------------- | - | ------------ | ----- | ---- | - | --- | --- | 
|                                      |                         |   | December 31,
|                                      |                         |   |             
|                                      |                         |   | 2002         |       | 2001
|                                      |                         |   |              |       |     
|Accounts receivable                   |                         | $ | 6,681        |       |      | $ | 941 |    
|Less: Allowance for doubtful accounts |                         |   | (277         | )     |      |   | (30 | )  
|                                      |                         |   |              |       |      |   |     |    
|                                      | Account receivable, net |   | $            | 6,404 |      |   | $   | 911 | 
|                                      |                         |   |              |       |      |   |     |    

During the year ended December 31, 2002, the Company recorded $366 of bad
debt expense and wrote off $119 of customer account balances deemed to be
uncollectible. During the years ended December 31, 2001 and 2000, the Company
recorded $25 and $5 of bad debt expense, respectively.

5. Inventories

Inventories from continuing operations were comprised of the following:

|                  |  |              |       |      |  |   |     | 
|----------------- |  | ------------ | ----- | ---- |  | - | --- | 
|                  |  | December 31,
|                  |  |             
|                  |  | 2002         |       | 2001
|                  |  |              |       |     
|Raw materials     |  | $            | 1,585 |      |  | $ | 186 | 
|Work in process   |  |              | 592   |      |  |   |    | 
|Finished goods    |  |              | 329   |      |  |   | 317 | 
|                  |  |              |       |      |  |   |     | 
|Total inventories |  | $            | 2,506 |      |  | $ | 503 | 
|                  |  |              |       |      |  |   |     | 

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

|                                                             |                                          |   |              |        |      |   |      |       | 
|------------------------------------------------------------ | ---------------------------------------- | - | ------------ | ------ | ---- | - | ---- | ----- | 
|                                                             |                                          |   | December 31,
|                                                             |                                          |   |             
|                                                             |                                          |   | 2002         |        | 2001
|                                                             |                                          |   |              |        |     
|Machinery and equipment                                      |                                          | $ | 11,002       |        |      | $ | 234  |      
|Computer equipment                                           |                                          |   | 1,342        |        |      |   | 126  |      
|Office equipment, furnishings and improvements               |                                          |   | 1,123        |        |      |   | 253  |      
|Buildings                                                    |                                          |   | 11,084       |        |      |   |     |      
|Construction in process of machinery and equipment and plant |                                          |   | 403          |        |      |   | 808  |      
|                                                             |                                          |   |              |        |      |   |      |      
|                                                             | Total                                    |   |              | 24,954 |      |   |      | 1,421 | 
|Accumulated depreciation                                     |                                          |   | (1,449       | )      |      |   | (258 | )    
|                                                             |                                          |   |              |        |      |   |      |      
|                                                             | Total property, plant and equipment, net |   | $            | 23,505 |      |   | $    | 1,163 | 
|                                                             |                                          |   |              |        |      |   |      |      

Depreciation expense was classified as follows:

|                                    |                            |   |                                  |       |      |   |      |    |  |   |    |    | 
|----------------------------------- | -------------------------- | - | -------------------------------- | ----- | ---- | - | ---- | -- |  | - | -- | -- | 
|                                    |                            |   | For the
years ended December 31,
|                                    |                            |   |                                 
|                                    |                            |   | 2002                             |       | 2001 |   | 2000
|                                    |                            |   |                                  |       |      |   |     
|Cost of sales                       |                            | $ | 403                              |       |      | $ |     |    |  | $ |   |   
|Selling, general and administrative |                            |   | 229                              |       |      |   | 69   |    |  |   | 74 |   
|Research and development            |                            |   | 799                              |       |      |   |     |    |  |   |   |   
|                                    |                            |   |                                  |       |      |   |      |    |  |   |    |   
|                                    | Total depreciation expense |   | $                                | 1,431 |      |   | $    | 69 |  |   | $  | 74 | 
|                                    |                            |   |                                  |       |      |   |      |    |  |   |    |   

Additionally, during the year ended December 31, 2002, $240 of the
depreciation expense was as a result of accelerated depreciation expense due to
a change in the estimated useful life of certain machinery and equipment.

7. Intangible Assets

|                                     |                              |   |              |       |      |   |      |     | 
|------------------------------------ | ---------------------------- | - | ------------ | ----- | ---- | - | ---- | --- | 
|                                     |                              |   | December 31,
|                                     |                              |   |             
|                                     |                              |   | 2002         |       | 2001
|                                     |                              |   |              |       |     
|Purchased and licensed patent rights |                              | $ | 458          |       |      | $ | 420  |    
|Internally developed patents         |                              |   | 622          |       |      |   | 506  |    
|Trademarks                           |                              |   | 56           |       |      |   | 66   |    
|                                     |                              |   |              |       |      |   |      |    
|                                     | Total                        |   |              | 1,136 |      |   |      | 992 | 
|Accumulated amortization             |                              |   | (351         | )     |      |   | (269 | )  
|                                     |                              |   |              |       |      |   |      |    
|                                     | Total intangible assets, net |   | $            | 785   |      |   | $    | 723 | 
|                                     |                              |   |              |       |      |   |      |    

Amortization expense
was $82, $63, and $57 for the years ended December 31,
2002, 2001, and 2000, respectively.

Purchased patent rights represent the exclusive right to commercialize the
bulk amorphous alloy and other amorphous alloy technology acquired from
California Institute of Technology (Caltech), a shareholder, through a
license agreement with Caltech (License Agreement). Under the License
Agreement, the Company has the exclusive right to make, use, and sell products
from all of Caltechs inventions, proprietary information, know-how, and other
technology relating to amorphous alloys in existence as of September 1, 2001.
The Company also has an exclusive license to 8 patents and 5 patent
applications held by Caltech relating to amorphous alloy technology, as well as
all related foreign counterpart patents and patent applications. Of the patents
currently issued to Caltech and licensed by the Company, the earliest
expiration date is 2011 and the latest expiration date is 2017. Furthermore,
the license agreement gives the Company the exclusive right to make, use, and
sell products from substantially all amorphous alloy technology that is
developed in Professor William

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Johnsons Caltech laboratory during the period
September 1, 2001 through August 31, 2005. All fees and other amounts payable
by the Company for these rights and licenses have been paid or accrued in full,
and no further royalties, license fees or other amounts will be payable in the
future under the License Agreements.

In addition to the patents and patent applications under the License
Agreement with Caltech, the Company has internally developed patents.
Internally developed patents include legal and registration costs incurred to
obtain the respective patents. The Company currently holds various patents and
numerous pending patent applications in the United States, as well as numerous
foreign counterparts to these patents outside of the United States.

8. Goodwill

On June 28, 2002, the Company acquired a 51% interest in Chusik Hoesa
Dongyang Yudoro (Dongyang). The results of Dongyangs operations have been
included in the consolidated financial statements since that date. The
aggregate purchase price was $333 in cash.

The following table summarizes the estimated fair values of the net assets
held by Dongyang as of June 28, 2002:

|                                   |                     |   |      |     | 
|---------------------------------- | ------------------- | - | ---- | --- | 
|Cash                               |                     | $ | 407  |    
|Accounts receivable                |                     |   | 71   |    
|Inventories                        |                     |   | 200  |    
|Other current assets               |                     |   | 126  |    
|Property, plant and equipment, net |                     |   | 34   |    
|Other long-term assets             |                     |   | 9    |    
|                                   |                     |   |      |    
|                                   | Total assets        |   |      | 847 | 
|Total liabilities                  |                     |   | (554 | )  
|                                   |                     |   |      |    
|                                   | Net assets acquired |   | $    | 293 | 
|                                   |                     |   |      |    

The difference between the purchase price of $333 and the Companys
investment in 51% of the net assets of Dongyang was assigned to Goodwill in the
amount of $184. The results of Dongyangs operations prior to June 28, 2002
were not significant.

9. Other Liabilities

The other liabilities balance consists entirely of a single capital lease
obligation for office furniture and furnishings. All leases with an initial
term greater than one year are accounted for under SFAS No. 13 Accounting for
Leases.These leases are classified as either capital leases or operating
leases, as appropriate.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease. At December 31, 2002, the cost
recorded for assets under capital leases was $107 and the accumulated
amortization was $14. Future minimum lease payments for the above assets
under capital leases during subsequent years are as follows.

|                                                    |       |          |         |     | 
|--------------------------------------------------- | ----- | -------- | ------- | --- | 
|                                                    |       |          | Minimum
|December 31,                                        |       | Payments
|                                                    |       |         
|2003                                                |       | $        | 26      |    
|2004                                                |       |          | 26      |    
|2005                                                |       |          | 26      |    
|2006                                                |       |          | 26      |    
|2007                                                |       |          | 7       |    
|Thereafter                                          |       |          |        |    
|                                                    |       |          |         |    
|                                                    | Total |          |         | 111 | 
|Imputed interest                                    |       |          | (18     | )  
|                                                    |       |          |         |    
|                                                    | Total |          |         | 93  | 
|Less current portion                                |       |          | 19      |    
|                                                    |       |          |         |    
|Other long-term liabilities, net of current portion |       | $        | 74      |    
|                                                    |       |          |         |    

10. Product Warranty

Due to the lack of historical information for warranty expense related to
bulk alloy products, management estimates product warranties as a percentage of
bulk alloy product sales earned during the period. During the year ended
December 31, 2002, the Companys product warranty accrual balance had the
following activity:

|                           |  |   |      |  
|-------------------------- |  | - | ---- | -
|Balance, December 31, 2001 |  | $ |     |  
|Expense accrual            |  |   | 587  |  
|Warranty charges           |  |   | (152 | )
|                           |  |   |      |  
|Balance, December 31, 2002 |  | $ | 435  |  
|                           |  |   |      |  

The product warranty accrual balance was included in accounts payable and
accrued expenses at December 31, 2002.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Notes Payable to Shareholders

The notes payable as of December 31, 2002 and 2001 and the activity for
the year ended December 31, 2002 is shown in the following table:

|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   |  | 
|--------------------------------- | ---------------------------------------------------- | - | ------------ | ------ | ---------- | - | ---------- |  | ---- | - | ------ | - | ------------ | - | - |  | 
|                                  |                                                      |   | December 31, |        |            |   |            |  |      |   |        |   | December 31,
|                                  |                                                      |   | 2001         |        | Borrowings |   | Repayments |  | 2002
|                                  |                                                      |   |              |        |            |   |            |  |     
|Kang/Salas 8.5%, principal $1,500 |                                                      | $ | 1,400        |        |            | $ |           |  |      | $ | (1,400 | ) |              | $ |  | 
|Tjoa 8.5%, principal $1,500       |                                                      |   | 1,500        |        |            |   |           |  |      |   | (1,500 | ) |              |   |  | 
|Kang 8.0%, principal $2,000       |                                                      |   |             |        |            |   | 2,000      |  |      |   | (2,000 | ) |              |   |  | 
|Tjoa 8.0%, principal $1,000       |                                                      |   | 1,000        |        |            |   |           |  |      |   | (1,000 | ) |              |   |  | 
|Kang 8.0%, principal $750         |                                                      |   |             |        |            |   | 750        |  |      |   | (750   | ) |              |   |  | 
|Tjoa 8.0%, principal $750         |                                                      |   |             |        |            |   | 750        |  |      |   | (750   | ) |              |   |  | 
|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   | 
|                                  |                                                      |   | 3,900        |        |            | $ | 3,500      |  |      | $ | (7,400 | ) |              | $ |  | 
|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   | 
|                                  | Less debt discount                                   |   |              | (912   | )          |   |            |  |      |   |        |   |              |   |   |  | 
|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   | 
|                                  |                                                      |   | 2,988        |        |            |   |            |  |      |   |        |   |              |   |   | 
|                                  | Less current portion                                 |   |              | (2,988 | )          |   |            |  |      |   |        |   |              |   |   |  | 
|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   | 
|                                  | Notes payable less current portion, net of discounts |   | $            |       |            |   |            |  |      |   |        |   |              |   |   |  | 
|                                  |                                                      |   |              |        |            |   |            |  |      |   |        |   |              |   |   | 

Kang 8.0%, principal $2,000- On March 12, 2002, the Company borrowed
$2,000 on an unsecured basis from Mr. John Kang that was due on the earlier of
May 1, 2003 or the closing of an initial public offering. The Company elected
to repay the note upon the closing of the Companys initial public offering.

Kang 8.0%, principal $750- On April 3, 2002, the Company borrowed $750 on
an unsecured basis from Mr. John Kang that was due on the earlier of July 1,
2003 or the closing of the initial public offering. The Company elected to
repay the note upon the closing of the Companys initial public offering.

Kang/ Salas 8.5% and Tjoa 8.5% In conjunction with the issuance of these
subordinated promissory notes, the Company issued detachable warrants for each
of these notes for the purchase of 322,581 common stock shares of the Company
at an exercise price of $4.65 per share (the fair value at the date of grant),
as adjusted for the stock split and reverse stock split (see Note 12). The
warrants expire on December 31, 2005. As of December 31, 2001, none of the
detachable warrants had been exercised. The warrants are detachable from the
note and therefore each warrant was allocated a portion of the proceeds, debt
discount, in the amount of approximately $846, based on their estimated
relative fair values at the time they were issued. The Company elected to
repay the note upon the closing of the Companys initial public offering. Upon
the early repayment, the amortization of the remaining unamortized debt
discount of $532 was accelerated.

Tjoa 8.0%- On April 3, 2002, the Company borrowed $750 on an unsecured
basis from Mr. Tjoa that was due on the earlier of July 1, 2003 or the closing
of an initial public offering. The Company elected to repay the note upon the
closing of the Companys initial public offering.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total interest expense, including the debt discount amortization on the
notes payable to shareholders, was $1,113, $1,103 and $200 for the three years
ended December 31, 2002, 2001 and 2000, respectively. Included in the total
interest expense is $532 of accelerated amortization of the remaining
unamortized debt discount upon the early repayment of the Kang/Salas 8.5% and
the Tjoa 8.5% promissory notes in May of 2002.

12. Shareholders Equity (Deficiency)

Initial Public Offering.Pursuant to 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 initial public 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 an overallotment option, at a price of
$15.00 per share (which sale is referred to herein as the Offering). The
Offering generated net cash proceeds for the Company during the second quarter
2002 of approximately $70,721, net of underwriting commissions of $5,490 and
other transaction fees of approximately $2,224.

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

Preferred Stock.As of December 31, 2001, the Company received net
proceeds of $5,577 from the sale of the preferred stock at a per share price of
$12.40, as adjusted for the revised stock split. Upon the completion of the
Offering, each share of preferred stock was converted automatically into one share of Class A
common stock pursuant to the terms of the preferred stock
issued.

13. Stock Compensation Plan

Under the Companys 1996 Stock Option Plan (1996 Company Plan) the
Company could grant to employees, directors or consultants options to purchase
up to 12,903,226 shares of common stock as adjusted for the reverse stock
split. The stock options are exercisable over a period determined by the Board
of Directors or the Compensation Committee, but no longer than 10 years.

On April 4, 2002, our shareholders and board of directors adopted the 2002
Incentive Equity 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. In addition, the plan permits the granting of
stock appreciation rights, with, or independently of, options, as well as stock
bonuses and rights to purchase restricted stock. A total of 10,000,000 shares
of our common stock may be granted under the 2002 Equity Plan. As of December
31, 2002, there are 354,487 options outstanding under the 2002 Equity Plan.

Prior to the approval of the 2002 Equity Plan, options were primarily
granted under the Companys 1996 Stock Option Plan (1996 Company Plan). On
April 4, 2002, our board of directors terminated the 1996 Company Plan. The
termination will not affect any outstanding options under the 1996 Company Plan
and all such options will continue to remain outstanding and be governed by the
Plan. No additional options may be granted under the 1996 Company Plan. As of
December 31, 2002, there were 4,761,191 options outstanding under the 1996
Company Plan.

On April 4, 2002, our shareholders and board of directors adopted the 2002
Non-employee Director Stock Option Plan (2002 Director Plan). Only
non-employee directors are eligible for grants under the 2002 Director Plan. A
total of 1,000,000 shares of the Companys Common Stock may be granted under
the 2002 Director Plan. There are 200,000 options outstanding under the 2002
Equity Plan as of December 31, 2002.

Additionally, the Company has 2,866,670 options outstanding at December
31, 2002 which were granted outside the 1996 Company Plan, 2002 Equity Plan and
2002 Director Plan. Included in these options are options granted during the

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

period ended December 31, 2001 of 1,021,507 to Paul Azinger who was contracted
to perform services for the retail golf segment. The expense pertaining to
these options was recorded in the discontinued retail golf segment (see Note
14).

The Company applies APB Opinion No. 25 for options when the exercise price
of options granted to employees is less than the fair value of the underlying
stock on the date of grant. The Company applies SFAS No. 123 for options
granted to non-employees who perform services for the Company. Stock-based
compensation expense was recognized as follows for the year ended December 31,
2002:

|                           |       |   |                    |     |         |   |       |       |  |   |       |       | 
|-------------------------- | ----- | - | ------------------ | --- | ------- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |       |   | In accordance with
|                           |       |   |                   
|                           |       |   | APB Opinion        |     | SFAS    |   |       |       | 
|                           |       |   | No. 25             |     | No. 123 |   | Total
|                           |       |   |                    |     |         |   |      
|General and administrative |       | $ | 172                |     |         | $ |      |       |  | $ | 172   |      
|Research and development   |       |   | 49                 |     |         |   | 1,449 |       |  |   | 1,498 |      
|                           |       |   |                    |     |         |   |       |       |  |   |       |      
|                           | Total |   | $                  | 221 |         |   | $     | 1,449 |  |   | $     | 1,670 | 
|                           |       |   |                    |     |         |   |       |       |  |   |       |      

Stock-based compensation expense was recognized as follows for the year
ended December 31, 2001:

|                           |       |   |                    |    |         |   |       |     |  |   |     |     | 
|-------------------------- | ----- | - | ------------------ | -- | ------- | - | ----- | --- |  | - | --- | --- | 
|                           |       |   | In accordance with
|                           |       |   |                   
|                           |       |   | APB Opinion        |    | SFAS    |   |       |     | 
|                           |       |   | No. 25             |    | No. 123 |   | Total
|                           |       |   |                    |    |         |   |      
|General and administrative |       | $ | 61                 |    |         | $ |      |     |  | $ | 61  |    
|Research and development   |       |   |                   |    |         |   | 332   |     |  |   | 332 |    
|                           |       |   |                    |    |         |   |       |     |  |   |     |    
|                           | Total |   | $                  | 61 |         |   | $     | 332 |  |   | $   | 393 | 
|                           |       |   |                    |    |         |   |       |     |  |   |     |    

Had the Company determined compensation cost based on the fair value at
the grant date for stock options consistent with the method of SFAS No. 123,
the Companys income (loss) from continuing operations and basic and diluted
income (loss) per share from continuing operations would have been as follows
(in thousands, except loss per share information):

|                                                                      |             |  |                          |         |      |  |      |         |   |  |   |        |  
|--------------------------------------------------------------------- | ----------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                      |             |  | Years Ended December 31,
|                                                                      |             |  |                         
|                                                                      |             |  | 2002                     |         | 2001 |  | 2000
|                                                                      |             |  |                          |         |      |  |     
|Income (loss) from continuing operations:                             |             |  |                          |         |      |  |      |         |   |  |   |       
|                                                                      | As reported |  | $                        | (19,908 | )    |  | $    | (5,164  | ) |  | $ | 125    |  
|                                                                      | Pro forma   |  |                          | (26,280 | )    |  |      | (11,411 | ) |  |   | (7,056 | )
|Basic and diluted income (loss) per share from continuing operations: |             |  |                          |         |      |  |      |         |   |  |   |       
|                                                                      | As reported |  |                          | (0.51   | )    |  |      | (0.15   | ) |  |   | 0.00   |  
|                                                                      | Pro forma   |  |                          | (0.68   | )    |  |      | (0.34   | ) |  |   | (0.23  | )

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the years ended December 31,
2002, 2001, and 2000, respectively: expected volatility of 100% for all
periods; dividend yield of 0.0% for all periods; expected option life of
approximately 5 years; and a risk-free interest rate ranging from 1.8% to 6.2%.

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The following table summarizes the Companys stock option transactions for
the three years ended December 31, 2002:

|                                         |           |  |           |            |         |   |          |       | 
|---------------------------------------- | --------- |  | --------- | ---------- | ------- | - | -------- | ----- | 
|                                         |           |  |           |            |         |   | Weighted
|                                         |           |  | Number of |            | Average
|                                         |           |  | Shares    |            | Price  
|                                         |           |  |           |            |        
|Options outstanding at December 31, 1999 |           |  | 3,112,915 |            |         | $ | 1.49     |      
|                                         | Granted   |  |           | 2,648,397  |         |   |          | 4.26  | 
|                                         | Exercised |  |           |           |         |   |          |      | 
|                                         | Forfeited |  |           |           |         |   |          |      | 
|                                         |           |  |           |            |         |   |          |      
|Options outstanding at December 31, 2000 |           |  | 5,761,312 |            |         |   | 2.77     |      
|                                         | Granted   |  |           | 4,308,623  |         |   |          | 5.46  | 
|                                         | Exercised |  |           | (1,822,586 | )       |   |          | 1.32  | 
|                                         | Forfeited |  |           | (80,646    | )       |   |          | 1.55  | 
|                                         |           |  |           |            |         |   |          |      
|Options outstanding at December 31, 2001 |           |  | 8,166,703 |            |         |   | 4.53     |      
|                                         | Granted   |  |           | 643,202    |         |   |          | 13.71 | 
|                                         | Exercised |  |           | (299,873   | )       |   |          | 1.68  | 
|                                         | Forfeited |  |           | (327,684   | )       |   |          | 4.04  | 
|                                         |           |  |           |            |         |   |          |      
|Options outstanding at December 31, 2002 |           |  | 8,182,348 |            |         | $ | 5.37     |      
|                                         |           |  |           |            |         |   |          |      

The weighted average fair value of options granted during the years ended
December 31, 2002, 2001, and 2000, was $10.41, $3.30, and $5.02, respectively.
There were 4,345,933 options with a weighted average exercise price of $4.37
exercisable at December 31, 2002, 3,165,171 options with a weighted average
exercise price of $3.83 exercisable at December 31, 2001, and 4,017,215 options
with a weighted average exercise price of $2.77 exercisable at December 31,
2000.

Included in the above tables are certain options granted where their
exercise prices were below the fair market value of the common stock at the
measurement date (in-the-money). In-the-money options of 1,198,927 with a
weighted average fair value of $4.27 were outstanding at December 31, 2002.
In-the-money options of 1,214,411 with a weighted average fair value of $4.35
were outstanding at December 31, 2001. There were no in-the-money options at
December 31, 2000.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the Companys stock options outstanding and
exercisable by ranges of option prices as of December 31, 2002:

|                    |  |                     |           |                    |  |              |                  |             |          |              |           |  |          |  |           |  |  |   |       |  | 
|------------------- |  | ------------------- | --------- | ------------------ |  | ------------ | ---------------- | ----------- | -------- | ------------ | --------- |  | -------- |  | --------- |  |  | - | ----- |  | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     |           |                    |  |              | Weighted Average |             | Weighted |              | Number of |  | Weighted
|Range of            |  | Number of options   |           | Remaining Contract |  | Average      |                  | Options     |          | Average     
|Option Price        |  | Outstanding         |           | Life (Years)       |  | Option Price |                  | Exercisable |          | Option Price
|                    |  |                     |           |                    |  |              |                  |             |          |             
|$0.00 - $1.55       |  |                     | 1,650,543 |                    |  |              | 6.4              |             |          | $            | 1.31      |  |          |  | 790,434   |  |  | $ | 1.47  | 
|1.56 -   3.10       |  |                     | 571,098   |                    |  |              | 6.3              |             |          |              | 2.55      |  |          |  | 554,968   |  |  |   | 2.54  | 
|3.11 -   4.65       |  |                     | 2,261,299 |                    |  |              | 8.0              |             |          |              | 4.65      |  |          |  | 1,956,131 |  |  |   | 4.65  | 
|4.66 -   6.20       |  |                     | 2,711,294 |                    |  |              | 8.4              |             |          |              | 6.20      |  |          |  | 906,346   |  |  |   | 6.20  | 
|6.21 -   7.75       |  |                     | 10,444    |                    |  |              | 9.7              |             |          |              | 7.10      |  |          |  |          |  |  |   |      | 
|7.76 -   9.30       |  |                     | 31,574    |                    |  |              | 9.2              |             |          |              | 8.94      |  |          |  | 3,226     |  |  |   | 9.30  | 
|9.31 - 10.85        |  |                     | 150,000   |                    |  |              | 9.9              |             |          |              | 10.58     |  |          |  |          |  |  |   |      | 
|10.86 - 12.40       |  |                     | 344,912   |                    |  |              | 8.5              |             |          |              | 12.40     |  |          |  | 134,828   |  |  |   | 12.40 | 
|12.41 - 13.95       |  |                     |          |                    |  |              |                 |             |          |              |          |  |          |  |          |  |  |   |      | 
|13.96 - 15.50       |  |                     | 451,184   |                    |  |              | 9.3              |             |          |              | 15.04     |  |          |  |          |  |  |   |      | 

14. Discontinued Operations

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

In connection with the discontinuance of the retail golf operations, the
Company incurred an estimated loss on disposal of $11,949 for the year ended
December 31, 2001. The estimated loss on disposal was comprised of an accrual
for estimated operating losses of $1,688 during the phase-out period, $1,847
related to inventory adjustments, $4,947 of accrued stock compensation costs,
$2,438 in fees to be paid to Paul Azinger prior to the termination of the
endorsement agreement, $930 due to other asset write-downs and $100 in
severance and other disposal expenses. As of December 31, 2002, $1,000
remained payable to Paul Azinger, representing the early termination fee on the
endorsement agreement. This amount was paid in full in January 2003.

For the year ended December 31, 2002, the Company had a net gain change in
estimate of $1,556 on the disposal of the discontinued retail golf segment that
was primarily due to a change in estimated value of stock-based compensation.
The change in estimated value of the stock-based compensation was a result of
the cumulative decrease in the fair market value of the common shares
underlying the options granted to Paul Azinger of $2,129 and a decrease of $250
in the estimate of fees related to the termination of the endorsement
agreement. Additionally, there was a $98 gain due to the reversal of the
accumulated foreign exchange gains after the liquidation of Liquidmetal Golf
Europe Inc, and a decrease in the estimated warranty cost of $128. These gains
were partially offset by other changes in the estimated loss on disposal that
included $530 of additional operating expenses, a $57 increase in the
allowance for doubtful accounts and $462 primarily for the reduction of the
estimated disposal value of work-in-process inventory and equipment.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net liabilities of the discontinued retail golf segment have been
segregated on the balance sheets presented, the components of which are as
follows:

|                                           |                             |                   |        |              |       |      |        |       |       | 
|------------------------------------------ | --------------------------- | ----------------- | ------ | ------------ | ----- | ---- | ------ | ----- | ----- | 
|                                           |                             |                   |        | December 31,
|                                           |                             |                   |        |             
|                                           |                             |                   |        | 2002         |       | 2001
|                                           |                             |                   |        |              |       |     
|Assets:                                    |                             |                   |        |              |       |      |        |      
|                                           | Cash                        |                   | $      |             |       |      | $      | 317   |      
|                                           | Accounts receivable, net    |                   |        |             |       |      |        | 321   |      
|                                           | Inventories                 |                   |        |             |       |      |        | 1,468 |      
|                                           | Property and equipment, net |                   |        |             |       |      |        | 78    |      
|                                           |                             |                   |        |              |       |      |        |      
|                                           |                             | Total assets      |        |              |      |      |        |       | 2,184 | 
|                                           |                             |                   |        |              |       |      |        |      
|Liabilities:                               |                             |                   |        |              |       |      |        |      
|                                           | Current liabilities         |                   |        | 1,148        |       |      |        | 9,676 |      
|                                           |                             |                   |        |              |       |      |        |      
|                                           |                             | Total liabilities |        |              | 1,148 |      |        |       | 9,676 | 
|                                           |                             |                   |        |              |       |      |        |      
|Net liabilities of discontinued operations |                             | $                 | (1,148 | )            |       | $    | (7,492 | )    
|                                           |                             |                   |        |              |       |      |        |      

The results of operations for all periods presented have been restated for
discontinued operations. The operating results of the discontinued operations
are as follows:

|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |        |        |  
|---------------------------------------------------------- | ------------------------- | --------------- | ----- | ------------------------ | ----- | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | -
|                                                           |                           |                 |       | Years Ended December 31,
|                                                           |                           |                 |       |                         
|                                                           |                           |                 |       | 2002                     |       | 2001 |         | 2000   
|                                                           |                           |                 |       |                          |       |      |         |        
|Net sales                                                  |                           | $               |      |                          |       | $    | 3,333   |         |         | $ | 6,707  |       
|Cost of sales                                              |                           |                 |      |                          |       |      | 2,185   |         |         |   | 4,683  |       
|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |       
|                                                           |                           | Gross profit    |       |                          |      |      |         |         | 1,148   |   |        |        | 2,024  |  
|Operating expenses                                         |                           |                 |      |                          |       |      | 7,121   |         |         |   | 10,962 |       
|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |       
|Loss from operations                                       |                           |                 |      |                          |       |      | (5,973  | )       |         |   | (8,938 | )     
|Gain (loss) on disposal                                    |                           |                 | 1,556 |                          |       |      | (11,949 | )       |         |   |       |       
|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |       
|                                                           |                           | Net gain (loss) |       |                          | 1,556 |      |         |         | (17,922 | ) |        |        | (8,938 | )
|Foreign exchange translation gain (loss) during the period |                           |                 | (98   | )                        |       |      | 2       |         |         |   | 96     |       
|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |       
|                                                           | Comprehensive gain (loss) |                 | $     | 1,458                    |       |      | $       | (17,920 | )       |   | $      | (8,842 | )     
|                                                           |                           |                 |       |                          |       |      |         |         |         |   |        |       

Accounts Receivable.Liquidmetal Golf had a factoring agreement that
provided for the sale and transfer of a substantial portion of the accounts
receivable of the retail golf operations. Liquidmetal Golf accounted for a
portion of the factored receivable balances as a sale when the factor assumed
the risk of collection for certain approved accounts. For certain accounts that
the factor did not assume the risk of collection, Liquidmetal Golf accounted
for these factored receivables as a financing arrangement and recorded a
liability for this portion of the factored receivable balances. At December
31, 2002 and 2001, Liquidmetal Golf had a payable to the factor of $48 and $79,
respectively. At December 31, 2001, Liquidmetal Golf had an allowance for
doubtful accounts of $1,401. At December 31, 2002, the accounts receivable
balance had been written-off entirely.

Stock Compensation Plan.Historically, Liquidmetal Golf granted its own
options to employees, directors and consultants under a stock option plan
(1997 Golf Plan) approved by Liquidmetal Golfs Board of Directors pursuant
to which Liquidmetal Golf could have granted stock options exercisable over a
period determined by the Board of Directors to purchase up to 500,000 shares of
common stock of Liquidmetal Golf. In connection with the Companys plan to
discontinue the retail golf operations, the Company does not intend to issue
additional options under the 1997 Golf Plan.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liquidmetal Golf applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, Liquidmetal Golf recognized compensation
when the exercise price of the options was less than the fair value of the
underlying stock on the date of grant. Liquidmetal Golf recognized stock
compensation expense for options granted to employees of $81 and $852 for the
years ended December 31, 2001 and 2000, respectively. The compensation expense
for these options had been fully charged to operations as of December 31, 2001.
There was no compensation expense recorded during the year ended December 31,
2002.

Additionally,
Liquidmetal Technologies recorded stock option-based
compensation and a cumulative addition to paid-in capital of $3,604 related to
options issued in 2001 to Paul Azinger for shares of common stock of
Liquidmetal Technologies. As the endorsement services related to this option
grant provided a benefit to Liquidmetal Golf, the stock compensation expense
was recorded by Liquidmetal Golf. Prior to the discontinuance of the retail
golf operations, Liquidmetal Golf had recorded stock compensation expense of
$786 for services received during 2001. Additionally, the loss on disposal
during the year ended December 31, 2001 includes $4,947 of estimated stock
compensation expense to be incurred prior to the planned termination of the
endorsement agreement. During the year ended December 31, 2002, a $2,129
decrease in the estimated stock compensation was recorded due to the cumulative
decrease in the fair market value of the common shares underlying the options
granted to Paul Azinger. At December 31, 2002, the unamortized stock
compensation (a contra-equity account) balance had been fully amortized.

Had compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123,
Liquidmetal Golfs net gain (loss) would have been as follows:

|            |  |                          |       |      |  |      |         |   |  |   |        |  
|----------- |  | ------------------------ | ----- | ---- |  | ---- | ------- | - |  | - | ------ | -
|            |  | Years Ended December 31,
|            |  |                         
|            |  | 2002                     |       | 2001 |  | 2000
|            |  |                          |       |      |  |     
|As reported |  | $                        | 1,556 |      |  | $    | (17,922 | ) |  | $ | (8,938 | )
|Pro forma   |  |                          | 1,522 |      |  |      | (18,154 | ) |  |   | (9,346 | )

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the fiscal years ended
December 31, 2002, 2001, and 2000: expected volatility of 100% for all periods;
dividend yield of 0.0% for all periods; expected option life of approximately 5
years; and a risk-free interest rate ranging from 5.2% to 6.2%, as appropriate.

The following table summarizes Liquidmetal Golfs stock option
transactions for the three years ended December 31, 2002:

|                                         |           |  |           |          |         |   |          |      | 
|---------------------------------------- | --------- |  | --------- | -------- | ------- | - | -------- | ---- | 
|                                         |           |  |           |          |         |   | Weighted
|                                         |           |  | Number of |          | Average
|                                         |           |  | Shares    |          | Price  
|                                         |           |  |           |          |        
|Options outstanding at December 31, 1999 |           |  | 391,250   |          |         | $ | 4.55     |     
|                                         | Granted   |  |           | 75,755   |         |   |          | 0.01 | 
|                                         | Exercised |  |           |         |         |   |          |     | 
|                                         | Forfeited |  |           | (8,500   | )       |   |          | 8.00 | 
|                                         |           |  |           |          |         |   |          |     
|Options outstanding at December 31, 2000 |           |  | 458,505   |          |         |   | 3.74     |     
|                                         | Granted   |  |           |         |         |   |          |     | 
|                                         | Exercised |  |           | (148,255 | )       |   |          | 0.25 | 
|                                         | Forfeited |  |           |         |         |   |          |     | 
|                                         |           |  |           |          |         |   |          |     
|Options outstanding at December 31, 2001 |           |  | 310,250   |          |         |   | 5.41     |     
|                                         | Granted   |  |           |         |         |   |          |     | 
|                                         | Exercised |  |           |         |         |   |          |     | 
|                                         | Forfeited |  |           | (65,000  | )       |   |          | 7.50 | 
|                                         |           |  |           |          |         |   |          |     
|Options outstanding at December 31, 2002 |           |  | 245,250   |          |         | $ | 4.87     |     
|                                         |           |  |           |          |         |   |          |     

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted average fair value of options granted during the year ended
December 31, 2000 was $7.99. There were 222,875 options with a weighted average
exercise price of $4.55 exercisable at December 31, 2002; 235,625 options with
a weighted average exercise price of $4.04 exercisable at
December 31, 2001; and
213,688 options with a weighted average exercise price of $2.93 exercisable at
December 31, 2000.

Included in the above tables are certain options granted where their
exercise prices were below the fair market value of the common stock at the
grant date (in-the-money). In-the-money options of
131,250, 146,250, and
294,505 with weighted average fair values of $5.74, $5.74, and $6.32 were
outstanding at December 31, 2002, 2001, and 2000, respectively.

The following table summarizes Liquidmetal Golfs stock options
outstanding and exercisable by the different exercise prices at December 31,
2002:

|               |      |                   |                   |              |                    |                   |                   |      |  |  |         |         | 
|-------------- | ---- | ----------------- | ----------------- | ------------ | ------------------ | ----------------- | ----------------- | ---- |  |  | ------- | ------- | 
|               |      |                   | Number of Options |              | Weighted Average   |                   | Number of Options
|               |      |                   | Outstanding at    |              | Remaining Contract |                   | Exercisable at   
|Exercise Price |      | December 31, 2002 |                   | Life (Years) |                    | December 31, 2002
|               |      |                   |                   |              |                    |                  
|$              | 0.50 |                   |                   | 131,250      |                    |                   |                   | 4.33 |  |  |         | 131,250 | 
|$              | 8.00 |                   |                   | 89,500       |                    |                   |                   | 6.50 |  |  |         | 67,125  | 
|$16.00         |      |                   | 22,000            |              |                    |                   | 5.33              |      |  |  | 22,000  |        
|$24.00         |      |                   | 2,500             |              |                    |                   | 5.58              |      |  |  | 2,500   |        
|               |      |                   |                   |              |                    |                   |                   |      |  |  |         |        
|               |      |                   | 245,250           |              |                    |                   |                   |      |  |  | 222,875 |        
|               |      |                   |                   |              |                    |                   |                   |      |  |  |         |        

Endorsement Agreements.The Company has entered into various endorsement
agreements with professional golfers to promote Liquidmetal Golfs line of golf
equipment products, whereby the Company pays the professional golfers annual
compensation and win incentives based on specific performance criteria in each
agreement. The expense associated with these contracts is recorded as a selling
expense. The compensation incurred under these agreements was $1,137 and $60
during the years ended December 31, 2001 and 2000, excluding the
stock option-based compensation expense associated with the Paul Azinger contract of $3,604
and additional fees to be paid under this contract prior to termination of
$2,188 which are included in the loss from disposal of the discontinued retail
golf segment. The majority of these agreements expired on December 31, 2001.
The Paul Azinger agreement was due to expire on December 31, 2005; however, the
Company terminated the contract on January 1, 2003.

15. Income Taxes

For all the financial statement periods presented, there was no provision for
domestic income taxes. However, there was approximately $123 of tax
expense related to foreign taxes incurred by Dongyang, a 51% owned
subsidiary.

The significant components of deferred assets were as follows:

|                                  |                               |                     |        |                          |         |      |        |        |         |   |        |        |         |  
|--------------------------------- | ----------------------------- | ------------------- | ------ | ------------------------ | ------- | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                  |                               |                     |        | Years Ended December 31,
|                                  |                               |                     |        |                         
|                                  |                               |                     |        | 2002                     |         | 2001 |        | 2000  
|                                  |                               |                     |        |                          |         |      |        |       
|Non-employee stock compensation   |                               | $                   | 2,412  |                          |         | $    | 2,642  |        |         | $ | 240    |       
|Inventory reserves                |                               |                     |       |                          |         |      | 941    |        |         |   | 340    |       
|Allowance for bad debt            |                               |                     | 663    |                          |         |      | 565    |        |         |   | 136    |       
|Loss from discontinued operations |                               |                     | 410    |                          |         |      | 1,077  |        |         |   |       |       
|Loss carry forwards               |                               |                     | 23,749 |                          |         |      | 15,300 |        |         |   | 11,369 |       
|Other                             |                               |                     | 404    |                          |         |      | 233    |        |         |   | 40     |       
|                                  |                               |                     |        |                          |         |      |        |        |         |   |        |       
|                                  | Total deferred tax asset      |                     |        | 27,638                   |         |      |        | 20,758 |         |   |        | 12,125 |        
|                                  |                               | Valuation allowance |        |                          | (27,638 | )    |        |        | (20,758 | ) |        |        | (12,125 | )
|                                  |                               |                     |        |                          |         |      |        |        |         |   |        |       
|                                  | Total deferred tax asset, net |                     | $      |                         |         |      | $      |       |         |   | $      |       |        
|                                  |                               |                     |        |                          |         |      |        |        |         |   |        |       

The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U.S. Federal
income tax rate of 34% to income (loss) before income taxes:

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                         |  |                          |        |      |  |      |        |    |  |  |        |   
|---------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |        | 2001 |  | 2000
|                                         |  |                          |        |      |  |     
|Federal tax expense                      |  |                          | (34.00 | )%   |  |      | (34.00 | )% |  |  | (34.00 | )%
|State tax expense, net                   |  |                          | (3.36  | )%   |  |      | (5.56  | )% |  |  | (5.37  | )%
|Foreign income not subject to income tax |  |                          | 13.73  | %    |  |      |       |    |  |  |       |   
|Other                                    |  |                          | 1.34   | %    |  |      | 0.28   | %  |  |  | 1.84   | % 
|Increase in valuation allowance          |  |                          | 22.96  | %    |  |      | 39.28  | %  |  |  | 37.53  | % 
|                                         |  |                          |        |      |  |      |        |    |  |  |        |   
|Total tax provision                      |  |                          | 0.67   | %    |  |      | 0.00   | %  |  |  | 0.00   | % 
|                                         |  |                          |        |      |  |      |        |    |  |  |        |   

As of December 31, 2002, the Company had approximately $62,800 of net
operating loss (NOL) carry forwards for U.S. federal income tax purposes. In
addition, the Company has state NOL carry forwards of approximately $41,200
expiring in 2007 through 2011. The Company and Liquidmetal Golf filed on a
separate company basis for both federal and state income tax purposes.
Accordingly, the NOL carry forwards of one legal entity are not available to
offset income of the other. At December 31, 2002, Liquidmetal Technologies,
Inc. had approximately $28,300 in federal NOL carry forwards, expiring in 2004
through 2022 and approximately $17,200 in state NOL carry forwards, expiring in
2005 through 2012. Liquidmetal Golf, Inc. had approximately $34,500 of federal
NOL carry forwards, expiring in 2005 through 2012 and state NOL carry forwards
of $24,000 expiring in 2005 through 2012. Additionally, as of December 31,
2002, the Company also has foreign NOL carry forwards in Singapore of
approximately $280, which carry forward indefinitely.

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

The ability to realize the tax benefits associated with deferred tax
assets, which includes benefits related to NOLs , is principally dependent
upon the Companys ability to generate future taxable income from operations
and/or to effectuate successful tax planning strategies. The Company has
provided a full valuation allowance for its net deferred tax assets due to the
Companys net operating losses.

16. Segment Reporting and Geographic Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information,requires companies to provide certain information about their
operating segments. In April 2002, the Company began classifying operations
into two reportable segments: Liquidmetal alloy industrial coatings and bulk
Liquidmetal alloys. The Liquidmetal alloy industrial coatings are used
primarily as a protective coating for industrial machinery and equipment, such
as drill pipe used by the oil drilling industry and boiler tubes used by coal
burning power plants. Bulk Liquidmetal alloys include potential market
opportunities to manufacture and sell casing components for electronic devices,
medical devices, sporting goods, tooling and prototyping, and furnace equipment.
In addition, such alloys are used to generate research and development revenue
for developing uses related primarily to defense and medical applications.
Primarily, the expenses incurred by the bulk Liquidmetal alloy segment are
research and development costs and selling expenses associated with identifying
and developing potential market opportunities. Bulk Liquidmetal alloy products
can be distinguished from Liquidmetal alloy coatings in that the bulk
Liquidmetal alloys can have significant thickness, up to approximately one
inch, which allows for their use in a wider variety of applications other than
a thin protective coating applied to machinery and equipment.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information concerning the Companys reportable
segments is shown in the following tables:

|                              |                                                                                      |  |          |       |            |  |        |         |   |  |         |         |  
|----------------------------- | ------------------------------------------------------------------------------------ |  | -------- | ----- | ---------- |  | ------ | ------- | - |  | ------- | ------- | -
|                              |                                                                                      |  |          |       |            |  |        |         |   |  | Segment
|                              |                                                                                      |  | Coatings |       | Bulk Alloy |  | Totals
|                              |                                                                                      |  |          |       |            |  |       
|Year ended December 31, 2002: |                                                                                      |  |          |       |            |  |        |         |   |  |         |        
|                              | Revenue to external customers                                                        |  | $        | 4,587 |            |  | $      | 8,552   |   |  | $       | 13,139  |  
|                              | Gross profit (loss)                                                                  |  |          | 2,171 |            |  |        | 2,289   |   |  |         | 4,460   |  
|                              | Income (loss) before minority interest, interest expense and discontinued operations |  |          | 1,425 |            |  |        | (12,294 | ) |  |         | (10,869 | )
|                              | Total identifiable assets at end of period                                           |  |          | 1,615 |            |  |        | 32,853  |   |  |         | 34,468  |  
|Year ended December 31, 2001: |                                                                                      |  |          |       |            |  |        |         |   |  |         |        
|                              | Revenue to external customers                                                        |  | $        | 3,593 |            |  | $      | 289     |   |  | $       | 3,882   |  
|                              | Gross profit (loss)                                                                  |  |          | 1,714 |            |  |        | 244     |   |  |         | 1,958   |  
|                              | Income (loss) before minority interest, interest expense and discontinued operations |  |          | 915   |            |  |        | (1,841  | ) |  |         | (926    | )
|                              | Total identifiable assets at end of period                                           |  |          | 1,300 |            |  |        | 733     |   |  |         | 2,033   |  
|Year ended December 31, 2000: |                                                                                      |  |          |       |            |  |        |         |   |  |         |        
|                              | Revenue to external customers                                                        |  | $        | 3,901 |            |  | $      | 299     |   |  | $       | 4,200   |  
|                              | Gross profit (loss)                                                                  |  |          | 1,926 |            |  |        | 291     |   |  |         | 2,217   |  
|                              | Income (loss) before minority interest, interest expense and discontinued operations |  |          | 1,373 |            |  |        | (137    | ) |  |         | 1,236   |  

Reconciling information for the statements of operations between
reportable segments and the Companys consolidated totals is shown in the
following table:

|                                                                                                   |                                                                    |   |         |                                  |   |      |         |         |   |   |        |        |   | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | - | ------- | -------------------------------- | - | ---- | ------- | ------- | - | - | ------ | ------ | - | 
|                                                                                                   |                                                                    |   |         | For the Years ended December 31,
|                                                                                                   |                                                                    |   |         |                                 
|                                                                                                   |                                                                    |   |         | 2002                             |   | 2001 |         | 2000   
|                                                                                                   |                                                                    |   |         |                                  |   |      |         |        
|Total segment income (loss) before minority interest, interest expense
and discontinued operations |                                                                    | $ | (10,869 | )                                |   | $    | (926    | )       |   | $ | 1,236  |       
|                                                                                                   | General and administrative expenses, excluded                      |   | (9,263  | )                                |   |      | (3,143  | )       |   |   | (923   | )     
|                                                                                                   |                                                                    |   |         |                                  |   |      |         |         |   |   |        |       
|Consolidated loss before interest expense, minority interest and
discontinued operations           |                                                                    |   | (20,132 | )                                |   |      | (4,069  | )       |   |   | 313    |       
|                                                                                                   | Interest expense                                                   |   |         | (1,113                           | ) |      |         | (1,095  | ) |   |        | (200   | )
|                                                                                                   | Interest income                                                    |   |         | 510                              |   |      |         |        |   |   |        | 12     |  
|                                                                                                   | Gain on sale of marketable securities held-for-sale                |   |         | 832                              |   |      |         |        |   |   |        |       |  
|                                                                                                   | Minority interest in income of consolidated subsidiary             |   |         | 118                              |   |      |         |        |   |   |        |       |  
|                                                                                                   | Income taxes                                                       |   |         | (123                             | ) |      |         |        |   |   |        |       |  
|                                                                                                   | Loss from operations of the discontinued retail golf segment, net  |   |         |                                 |   |      |         | (5,973  | ) |   |        | (8,938 | )
|                                                                                                   | Gain (loss) from disposal of discontinued retail golf segment, net |   |         | 1,556                            |   |      |         | (11,949 | ) |   |        |       |  
|                                                                                                   |                                                                    |   |         |                                  |   |      |         |         |   |   |        |       
|CONSOLIDATED NET LOSS                                                                              |                                                                    | $ | (18,352 | )                                |   | $    | (23,086 | )       |   | $ | (8,813 | )     
|                                                                                                   |                                                                    |   |         |                                  |   |      |         |         |   |   |        |       

Excluded general and administrative expenses are attributable to the
Companys corporate headquarters. These expenses primarily include corporate salaries,
consulting, professional fees and facility costs. Research and development
expenses are included in the operating costs of the segment that performed the
research and development.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciling information for the balance sheets between reportable segments
and the Companys consolidated totals is shown in the following table:

|                          |                                           |   |              |        |      |   |       |       | 
|------------------------- | ----------------------------------------- | - | ------------ | ------ | ---- | - | ----- | ----- | 
|                          |                                           |   | December 31,
|                          |                                           |   |             
|                          |                                           |   | 2002         |        | 2001
|                          |                                           |   |              |        |     
|Total segment assets      |                                           | $ | 34,468       |        |      | $ | 2,033 |      
|                          | Cash and cash equivalents                 |   |              | 24,597 |      |   |       | 1,918 | 
|                          | Marketable securities held-for-sale       |   |              | 3,068  |      |   |       |      | 
|                          | Prepaid expenses and other current assets |   |              | 493    |      |   |       | 967   | 
|                          | Other property, plant and equipment       |   |              | 1,517  |      |   |       | 870   | 
|                          | Intangibles, net                          |   |              | 785    |      |   |       | 723   | 
|                          | Other assets                              |   |              | 77     |      |   |       | 169   | 
|                          |                                           |   |              |        |      |   |       |      
|TOTAL CONSOLIDATED ASSETS |                                           | $ | 65,005       |        |      | $ | 6,680 |      
|                          |                                           |   |              |        |      |   |       |      

Assets excluded from segments include assets attributable to the Companys
corporate headquarters. The largest asset represents the Company's
cash balances, primarily generated from the Company's stock offering.

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

|                         |  |                         |    |      |  |      |    |   |  |  |    |  
|------------------------ |  | ----------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  | 2002                    |    | 2001 |  | 2000
|                         |  |                         |    |      |  |     
|Samsung                  |  |                         | 15 | %    |  |      |   |   |  |  |   |  
|Growell Metal, Inc.      |  |                         | 12 | %    |  |      |   |   |  |  |   |  
|United States of America |  |                         | 10 | %    |  |      |   |   |  |  |   |  
|Grant Prideco            |  |                         | 7  | %    |  |      | 22 | % |  |  | 19 | %
|Praxair/Tata             |  |                         | 4  | %    |  |      | 14 | % |  |  | 13 | %
|Smith International      |  |                         | 3  | %    |  |      | 16 | % |  |  |   |  

The revenue related to the United States of America was earned under three
defense-related research and development contracts. During the years ended
December 31, 2001 and 2000, revenue earned on contracts with the United States
of America represented less than 1% of revenue.

During the year ended
December 31, 2002, the Company had revenue on sales to companies
outside of the United States of $5,700, of which $4,959 represented
sales to companies located in South Korea. During the years ended
December 31, 2001, and 2000, the Company did not generate
significant sales to companies located outside of the United States

Long-lived assets include net property, plant, and equipment, net
intangible assets and goodwill. The Company had long-lived assets of $2,321
and $759 located in the United States at December 31, 2002 and 2001,
respectively. The Company had long-lived assets of $22,154 and $808 located in
Korea at December 31, 2002 and December 31, 2001, respectively.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. Income (Loss) Per Common Share

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

|                                |                             |  |                          |   |      |  |            |   |  |  |            |           | 
|------------------------------- | --------------------------- |  | ------------------------ | - | ---- |  | ---------- | - |  |  | ---------- | --------- | 
|                                |                             |  | Years Ended December 31,
|                                |                             |  |                         
|                                |                             |  | 2002                     |   | 2001 |  | 2000      
|                                |                             |  |                          |   |      |  |           
|Weighted average basic shares   |                             |  | 38,713,878               |   |      |  | 33,323,217 |   |  |  | 30,233,065 |          
|Effect of dilutive securities:  |                             |  |                          |   |      |  |            |   |  |  |            |          
|                                | Stock options               |  |                          |  |      |  |            |  |  |  |            | 1,752,197 | 
|                                | Conversion of notes payable |  |                          |  |      |  |            |  |  |  |            | 1,299,298 | 
|                                |                             |  |                          |   |      |  |            |   |  |  |            |          
|Weighted average diluted shares |                             |  | 38,713,878               |   |      |  | 33,323,217 |   |  |  | 33,284,560 |          
|                                |                             |  |                          |   |      |  |            |   |  |  |            |          

The conversion of preferred stock to common stock was not included in the
computation of diluted EPS for the year ended December 31, 2001 as the
inclusion would be antidilutive. Options to purchase approximately 8,182,607
shares of common stock at prices ranging from $0.78 to $15.50 per share were
outstanding at December 31, 2002, but were not included in the computation of
diluted EPS for the same period because the inclusion would have been
antidilutive. Options to purchase approximately 8,166,667 shares of common
stock at prices ranging from $0.78 to $12.40 per share were outstanding at
December 31, 2001, but were not included in the computation of diluted EPS for
the same period because the inclusion would have been antidilutive. Options to
purchase approximately 3,112,903 shares of common stock at prices ranging from
$0.78 to 2.33 per share were outstanding at December 31, 1999, but were not
included in the computation of diluted EPS for the same period because the
inclusion would have been antidilutive.

Warrants to purchase 645,162 shares of common stock at $4.65 per share
were outstanding at December 31, 2002 and December 31, 2001 but were not
included in the computation of diluted EPS for the same period because the
inclusion would have been antidilutive.

18. Commitments and Contingencies

In 1996, Liquidmetal Technologies entered into a distribution agreement
(the Distribution Agreement) whereby Liquidmetal Technologies granted a third
party company exclusive rights to market and sell golf products incorporating
Liquidmetal technology to Japanese sporting equipment companies.

The Company is not restricted to selling the Liquidmetal Golf clubs or
other brand-name Liquidmetal Golf products to other companies under this
agreement. If the Company begins to market its golf club components into Japan
to finished goods manufacturers, the Company is obligated to sell its
Liquidmetal inserts under this distribution agreement. The third party company
paid Liquidmetal Technologies a $1,000 distribution fee as part of the
Distribution Agreement. A portion of this fee is subject to refund according to
a formula based on the gross profit earned by the third party under the
agreement. In the twelve months ended December 31, 1999, Liquidmetal
Technologies recognized $170 of the distribution fee upon the shipment of
product to the third party company, which is the amount no longer subject to
refund as a result of these shipments. At December 31, 2002 and 2001, $830 was
unearned and recorded as deferred revenue, as the distribution agreement does
not terminate until March 2006. The Company believes this deferred revenue is
no longer refundable and will be considered earned upon future shipment of
products or the termination of the Distribution Agreement.

The Company has employment agreements with certain key officers and
employees that provide for annual salaries and bonus compensation aggregating
approximately $3,988. Additionally, the agreements provide for various
severance payments to these key officers if the Company terminates any of the
key officers and employees without cause, or if certain of the key officers or
employees terminate their own employment upon a change of control of the
Company or for other good reason, as defined in the agreements.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 20,
2002, the Company entered into an agreement with a third-party supplier to purchase raw materials for a total of
$3,488 during 2003.

The Company is from time to time a party to certain legal proceedings arising in
the ordinary course of business. Although outcomes cannot be predicted with
certainty, the Company does not believe that any legal proceeding to
which it is a party
will have a material adverse effect on the Companys financial position, results of
operations, and cash flows.

Operating Leases

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

|             |       |          |         |       | 
|------------ | ----- | -------- | ------- | ----- | 
|             |       |          | Minimum
|December 31, |       | Payments
|             |       |         
|2003         |       | $        | 1,337   |      
|2004         |       |          | 1,091   |      
|2005         |       |          | 893     |      
|2006         |       |          | 874     |      
|2007         |       |          | 393     |      
|Thereafter   |       |          | 164     |      
|             |       |          |         |      
|             | Total |          | $       | 4,752 | 
|             |       |          |         |      

Rent expense was
$955, $322, and $128 for the years ended December 31,
2002, 2001, and 2000, respectively.

19.     401(k) Savings Plan

The Company has a tax-qualified employee savings and retirement plan, or
401(k) plan, which covers all of its employees. Pursuant to the 401(k) plan,
participants may elect to reduce their current compensation, on a pre-tax
basis, by up to 15% of their taxable compensation or of the statutorily
prescribed annual limit, whichever is lower, and have the amount of the
reduction contributed to the 401(k) plan. The 401(k) plan permits the Company,
in its sole discretion, to make additional employer contributions to the 401(k)
plan. However, the Company did not make employer contributions to the 401(k)
plan during any of the periods presented in the accompanying consolidated
financial statements.

20. Related Party Transactions

On July 29, 2002, the Company invested $2,000 in Growell Metal, Inc.
(Growell Metal), a metals processing company located in South Korea and
publicly traded on South Koreas KOSDAQ stock market. The Company acquired
891,100 shares (or approximately 5%) of Growell Metals outstanding common
stock in this transaction. During the fourth quarter of 2002, Growell
Metals spin-off of its electronics division resulted in the
creation of a new company named Growell
Electronics Inc (Growell Electronics). As a result of the spin-off, 30% of
the Companys 891,100 common shares of Growell Metal were exchanged for an
equal number of shares in the common stock of Growell Electronics. During the
year ended December 31, 2002, the Company sold its shares in Growell
Electronics for approximately $1,432, resulting in a realized gain of $832 (See
Note 3). At December 31, 2002, the change in fair value of the investment in
Growell Metal resulted in an unrealized gain of $1,668, which is reported in
comprehensive income in the accompanying consolidated financial statements.
Currently, Growell Metal owns 92,167 shares (or approximately 0.002%) of the
Companys outstanding common stock.

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LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the terms of a technology transfer agreement, the Company has
engaged Growell Metal to produce Liquidmetal alloy ingots (ingots) for the
Company to purchase and use as a raw material in the manufacturing of products
and components made of Liquidmetal alloys. The agreement is for a two-year
period beginning in February 2002. Under the terms of this cost-plus
arrangement, Growell Metal is paid a processing fee plus the cost of the raw
materials used to produce the ingots. During the year ended December 31, 2002,
Growell Metal purchased $3,270 of raw materials from the Companys own raw
material stock to use in the production of the ingots. The Company purchased
$3,669 of ingots from Growell Metal during the year ended December 31, 2002.
The net profit on the sale of the raw materials sold to Growell Metal is netted
against the cost of the ingots purchased from Growell Metal. At December 31,
2002, the Company had a payable to Growell Metal of $90.

During the second quarter of 2002, the Company sold a machine to Growell
Metal for $269 to be used in the production of ingots to be purchased by the
Company. Additionally, during the year ended December 31, 2002, the Company
sold $1,569 of furnace equipment to Growell Metal to produce ingots for the
Company. The accumulated profit on these sales, $80, was deferred and will be
amortized against cost of sales over the remaining term of the technology
transfer agreement between Growell Metal and the Company. During the year
ended December 31, 2002, $24 of the deferred profit was amortized into
cost of sales. At December 31, 2002, the remaining deferred profit balance was
$56 and the related trade receivable balance due from Growell Metal was $160.

While the Company was privately held, the Companys chairman exercised a
portion of his nonqualified stock options. The Company inadvertently did not
collect the federal and state income taxes at the time of the exercise. The
chairman has informed the Company that he has since paid all the necessary
taxes. Management believes the exposure to the Company for penalties and
interest, if any, is insignificant.

Other related party transactions include subordinated promissory notes
issued to certain shareholders, the related interest incurred on the notes and
the repayment of such notes (see Note 11). Additionally, two of the holders of
the shareholder promissory notes are directors and one such note holder is an
officer of the Company.

A company managed and partially owned by one of our directors provides
technical support services and computer equipment to the Company. During the
year ended December 31, 2002, the Company incurred $122 of expenses and
equipment purchases related to this arrangement. At December 31, 2002, the
Company had an outstanding payable related to these transactions of $7.

A company partially owned and managed by an employee of the Company leases
this same employee from the Company for an amount equal to the employees
salary. At December 31, 2002, a receivable of $51 was due to the Company
related to this arrangement.

During 2001, certain shareholders and officers provided a total of $250 in
short-term advances to Liquidmetal Korea that were fully repaid by December 31,
2001.

21. Subsequent Events

On February 4, 2003, Liquidmetal Korea received 6,500,000 in South Korean Won,
or $5,488, in proceeds related to a note payable. The principal and interest
is payable in equal month installments beginning eighteen months from the
origination date until the maturity date on December 30, 2007. The note
payable bears interest at an annual rate of 7.1%. In the event of delayed
repayment, the interest rate increases to a maximum of 21%, depending on the
length of time the repayment is delayed. Since this note payable is
denominated in South Korean Won, the balance will fluctuate with the exchange
rate between the U.S. Dollar and South Korea Won, resulting in the recognition in
foreign exchange gains or losses which are included in other comprehensive
income.

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Schedule II  Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
(in thousands)

|                                         |                              |  |            |        |            |  |            |       |            |  |   |      |   |  |   |        | 
|---------------------------------------- | ---------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------ | 
|                                         |                              |  | Balance at |        | Additions  |  | Write-offs |       | Balance at
|                                         |                              |  | Beginning  |        | Charged to |  | and        |       | End of    
|                                         |                              |  | of Period  |        | Expenses   |  | Payments   |       | Period    
|                                         |                              |  |            |        |            |  |            |       |           
|Allowance for doubtful accounts          |                              |  |            |        |            |  |            |       |            |  |   |      |   |  |   |       
|                                         | Year ended December 31, 2002 |  | $          | 30     |            |  | $          | 366   |            |  | $ | (119 | ) |  | $ | 277    | 
|                                         | Year ended December 31, 2001 |  |            | 5      |            |  |            | 25    |            |  |   |     |   |  |   | 30     | 
|                                         | Year ended December 31, 2000 |  |            |       |            |  |            | 5     |            |  |   |     |   |  |   | 5      | 
|Product warranty accrual                 |                              |  |            |        |            |  |            |       |            |  |   |      |   |  |   |       
|                                         | Year ended December 31, 2002 |  |            |       |            |  |            | 587   |            |  |   | (152 | ) |  |   | 435    | 
|                                         | Year ended December 31, 2001 |  |            |       |            |  |            |      |            |  |   |     |   |  |   |       | 
|                                         | Year ended December 31, 2000 |  |            |       |            |  |            |      |            |  |   |     |   |  |   |       | 
|Deferred tax asset valuation allowance * |                              |  |            |        |            |  |            |       |            |  |   |      |   |  |   |       
|                                         | Year ended December 31, 2002 |  |            | 20,758 |            |  |            | 6,880 |            |  |   |     |   |  |   | 27,638 | 
|                                         | Year ended December 31, 2001 |  |            | 12,125 |            |  |            | 8,633 |            |  |   |     |   |  |   | 20,758 | 
|                                         | Year ended December 31, 2000 |  |            | 9,086  |            |  |            | 3,039 |            |  |   |     |   |  |   | 12,125 | 

*     The deferred tax asset valuation allowance represents a 100% reserve
against the deferred tax asset accounts at December 31, 2002, 2001 and 2000,
respectively.

70