**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

### **FORM10-Q**

| **x**                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                                                                                                                               | ** **                                                                                     |
| **For the  quarterly period ended March 31, 2007**                                                                                       |
|                                                                                                                                     |                                                                                           |
| **OR**                                                                                                                                   |
|                                                                                                                                     |                                                                                           |
| **o**                                                                                                                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                     |                                                                                           |
| **For the  transition period from          to         ** |

 

**CommissionFile No**.  **001-31332**

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# **LIQUIDMETAL TECHNOLOGIES, INC.**

** (**Exact name of Registrant as specified inits charter**)**

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

 

**30452Esperanza**

**RanchoSanta Margarita, California 92688**

(address of principalexecutive office, zip code)

**25800Commercentre Dr.**

**LakeForest, CA 92630**

(former address ofprincipal executive office)

Registrant’s telephonenumber, including area code: **(949) 635-2100**

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days.

Yes  x    No  o

Indicateby check whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated  filer x | Non-accelerated filer o |
|---------------------------|----------------------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act).  Yes   o    No  x

#### As of March 31, 2007, there were 44,631,768 shares of the registrant’scommon stock, $0.001 par value, outstanding.

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****MARCH 31,2007**

**FORWARD-LOOKING INFORMATION**

Statements in this reportconcerning the future sales, expenses, profitability, financial resources,product mix, market demand, product development and other statements in thisreport concerning the future results of operations, financial condition andbusiness of Liquidmetal Technologies, Inc. are “forward-looking” statements asdefined in the Securities Act of 1933 and Securities Exchange Act of 1934.Investors are cautioned that the Company’s actual results in the future maydiffer materially from those projected in the forward-looking statements due torisks and uncertainties that exist in the Company’s operations and businessenvironment, including competition, need for increased acceptance of products,ability to continue to develop and extend our brand identity, ability toanticipate and adapt to a competitive market, ability to effectively managerapidly expanding operations, amount and timing of operating costs and capitalexpenditures relating to expansion of our business, operations andinfrastructure, ability to provide superior customer service, dependence uponkey personnel and the like. The Company’s most recent filings with theSecurities and Exchange Commission, including Form 10-K, contain additionalinformation concerning many of these risk factors, and copies of these filingsare available from the Company upon request and without charge.

2

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**TABLE OF CONTENTS**
| **PART I**                           |                                                                                                      |   |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------|--------|
|                                 |                                                                                                      |   |   |
|                                 | Item  1 – Financial Statements                                                                       |   |   |
|                                 | Condensed Consolidated Balance Sheets (unaudited)                                                         |   |   |
|                                 | Condensed Consolidated Statements of Operations and  Comprehensive Income (Loss) (unaudited)              |   |   |
|                                 | Condensed Consolidated Statements of Shareholders’  Deficiency (unaudited)                           |   |   |
|                                 | Condensed Consolidated Statements of Cash Flows  (unaudited)                                              |   |   |
|                                 | Notes to Condensed Consolidated Financial Statements  (unaudited)                                         |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 3 – Quantitative and Qualitative Disclosures  about Market Risk                                 |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item  4 – Controls and Procedures                                                                    |   |   |
|                                 |                                                                                                      |   |   |
| **PART II – Other Information** |                                                                                                      |   |
| ** **                           | ** **                                                                                                |   |   |
|                                 | Item 1 – Legal Proceedings                                                                           |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 1A – Risk Factors                                                                               |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 2 – Unregistered Sales of Equity Securities and  Use of Proceeds                                |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 3 – Defaults Upon Senior Securities                                                             |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 4 – Submission of Matters to a Vote of Security  Holders                                        |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 5 – Other Information                                                                           |   |   |
|                                 |                                                                                                      |   |   |
|                                 | Item 6 – Exhibits                                                                                    |   |   |
|                                 |                                                                                                      |   |   |
| Signatures                           |                                                                                                      |   |
|                                 |                                                                                                      |   |   |
| Certifications                       |                                                                                                      |   |

 

3

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### **PART I**

### **FINANCIAL INFORMATION**

**Item 1 – Financial Statements**

**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands,except share data)**
| ** **                                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                               |       |               |       |                  |       |
| Current assets:                                                                                                                                                                    |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                  | 2,937      |                  | $          | 144 |   |
| Restricted cash                                                                                                                                                                    |       | 2,083              |       | —                |       |
| Trade accounts  receivables, net of allowance for doubtful accounts of $65 and $82                                                                                                 |       | 3,086              |       | 3,934                 |       |
| Inventories                                                                                                                                                                        |       | 2,541              |       | 3,765                 |       |
| Prepaid expenses  and other current assets                                                                                                                                         |       | 996                |       | 830                   |       |
| Total current  assets                                                                                                                                                              |       | 11,643             |       | 8,673                 |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Property, plant and  equipment, net                                                                                                                                                |       | 11,077             |       | 12,095                |       |
| Idle equipment                                                                                                                                                                     |       | 191                |       | 194                   |       |
| Other intangibles, net                                                                                                                                                             |       | 1,156              |       | 1,170                 |       |
| Investment in joint  venture                                                                                                                                                       |       | 220                |       | 3                     |       |
| Other assets                                                                                                                                                                       |       | 1,088              |       | 109                   |       |
| Total assets                                                                                                                                                                       |       | 25,375             |       | 22,244                |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS'  DEFICIENCY**                                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                               |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                               |       |               |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                                             |       | 7,696              |       | 9,802                 |       |
| Deferred revenue                                                                                                                                                                   |       | 125                |       | 202                   |       |
| Short-term debt                                                                                                                                                                    |       | 1,493              |       | 2,669                 |       |
| Long-term debt,  current portion, net of debt discounts of $1,647 and $3,636                                                                                                       |       | 11,849             |       | 14,480                |       |
| Warrant  liabilities                                                                                                                                                               |       | 2,934              |       | 2,662                 |       |
| Conversion  feature liabilities                                                                                                                                                    |       | 3,434              |       | 1,838                 |       |
| Other  liabilities, current portion                                                                                                                                                |       | 178                |       | 177                   |       |
| Total current  liabilities                                                                                                                                                         |       | 27,709             |       | 31,830                |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Long-term debt, net of  current portion and debt discounts of $9,893 and $0                                                                                                        |       | 6,406              |       | 225                   |       |
| Other long-term  liabilities, net of current portion                                                                                                                               |       | 582                |       | 552                   |       |
| Total  liabilities                                                                                                                                                                 |       | 34,697             |       | 32,607                |       |
|                                                                                                                                                                               |       |               |       |                  |       |
| Shareholders'  deficiency:                                                                                                                                                         |       |               |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,631,768 issued and outstanding  at March 31, 2007 and 44,311,768 issued and outstanding at December 31, 2006 |       | 45                 |       | 44                    |       |
| Additional  paid-in capital                                                                                                                                                        |       | 136,776            |       | 136,031               |       |
| Accumulated  deficit                                                                                                                                                               |       | (148,530           | )          | (149,047              | )          |
| Accumulated  other comprehensive income                                                                                                                                            |       | 2,387              |       | 2,609                 |       |
| Total  shareholders' deficiency                                                                                                                                                    |       | (9,322             | )          | (10,363               | )          |
|                                                                                                                                                                               |       |               |       |                  |       |
| Total liabilities and  shareholders’ deficiency                                                                                                                               |       | $                  | 25,375     |                  | $          | 22,244 |   |

 

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

4

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

### **CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

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

**(unaudited)**
| ** **                                             | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                                                         | ** ** | **(Restated)** | ** ** |
| ** **                                             | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                                                  | 5,067      |   | $ | 6,555 |   |
| Cost of sales                                          |       | 6,441                                                              |       | 5,324 |   |
|                                                   |       |                                                               |       |   |   |
| Gross profit                                           |       | (1,374                                                             | )          | 1,231 |   |
|                                                   |       |                                                               |       |   |   |
| Operating  expenses                                    |       |                                                               |       |   |   |
| Selling, general, and administrative                   |       | 2,532                                                              |       | 2,705 |   |
| Research and development                               |       | 263                                                                |       | 203 |   |
| Total operating expenses                               |       | 2,795                                                              |       | 2,908 |   |
| Loss from  operations                                  |       | (4,169                                                             | )          | (1,677 | ) |
|                                                   |       |                                                               |       |   |   |
| Loss from  extinguishments of debt                     |       | (648                                                               | )          | — |   |
| Change in value  of warrants, gain (loss)              |       | 3,692                                                              |       | (1,289 | ) |
| Change in value  of conversion feature, gain (loss)    |       | 4,344                                                              |       | (1,783 | ) |
| Other income                                           |       | —                                                             |       | 480 |   |
| Interest expense                                       |       | (2,763                                                             | )          | (1,782 | ) |
| Interest income                                        |       | 61                                                                 |       | 2 |   |
|                                                   |       |                                                               |       |   |   |
| Income (loss)  from continuing operations              |       | 517                                                                |       | (6,049 | ) |
|                                                   |       |                                                               |       |   |   |
| Net income  (loss)                                     |       | 517                                                                |       | (6,049 | ) |
|                                                   |       |                                                               |       |   |   |
| Other  comprehensive income (loss):                    |       |                                                               |       |   |   |
| Foreign exchange translation (loss) gain               |       | (222                                                               | )          | 100 |   |
| Comprehensive income (loss)                            |       | $                                                                  | 295        |   | $ | (5,949 | ) |
|                                                   |       |                                                               |       |   |   |
| Net income  (loss) per share basic and diluted:        |       |                                                               |       |   |   |
| Income (loss) per share basic and diluted              |       | $                                                                  | 0.01       |   | $ | (0.14 | ) |
|                                                   |       |                                                               |       |   |   |
| Number of weighted  average shares - basic and diluted |       | 44,925                                                             |       | 42,817 |   |

 

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

5

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIENCY**

###### **For the Three months ended March 31, 2007**

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

**(unaudited)**
| ** **                        | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional   Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-----------|------------|
|                              |       |               |       |              |       |                                   |       |                     |       |                                          |       |      |       |
| **Balance,  December 31, 2006**   |       | 44,311,768         |       | 44                |       | 136,031                                |       | (149,047                 | )          | 2,609                                         |       | (10,363   | )          |
| Conversion of notes payable       |       | 320,000            |       | 1                 |       | 516                                    |       | —                   |       | —                                        |       | 517       |       |
| Stock-based compensation          |       | —             |       | —            |       | 229                                    |       | —                   |       | —                                        |       | 229       |       |
| Foreign exchange translation gain |       | —             |       | —            |       | —                                 |       | —                   |       | (222                                          | )          | (222      | )          |
| Net loss                          |       | —             |       | —            |       | —                                 |       | 517                      |       | —                                        |       | 517       |       |
| **Balance, March 31, 2007**       |       | 44,631,768         |       | $                 | 45         |                                   | $          | 136,776                  |       | $                                             | (148,530   | )         | $          | 2,387 |   | $ | (9,322 | ) |
|                                   |            |                    |            |                   |            |                                        |            |                          |            |                                               |            |           |            |  |  |  |  |  |

 

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

6

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**LIQUIDMETALTECHNOLOGIES, INC.  AND SUBSIDIARIES**

### **CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

**(unaudited)**
| ** **                                                                                | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | ** **                                                         | ** ** | **(Restated)** | ** ** |
| **Operating  activities:**                                                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                                                  | 517        |   | $ | (6,049 | ) |
|                                                                                      |       |                                                               |       |   |   |
| Adjustments to reconcile loss from operations to net  cash used for operating activities: |       |                                                               |       |   |   |
| Gain on disposal of asset                                                                 |       | 1                                                                  |       | — |   |
| Depreciation and amortization                                                             |       | 881                                                                |       | 782 |   |
| Loss on extinguishment of debt                                                            |       | 648                                                                |       | — |   |
| Amortization of debt discount                                                             |       | 1,735                                                              |       | 1,413 |   |
| Stock-based compensation                                                                  |       | 229                                                                |       | 224 |   |
| Bad debt (recovery) expense                                                               |       | (17                                                                | )          | 28 |   |
| Warranty expense                                                                          |       | 207                                                                |       | 74 |   |
| Loss (gain) from change in value of warrants                                              |       | (3,692                                                             | )          | 1,289 |   |
| Loss (gain) from change in value of conversion  feature                                   |       | (4,344                                                             | )          | 1,783 |   |
|                                                                                      |       |                                                               |       |   |   |
| Changes in operating assets and liabilities:                                              |       |                                                               |       |   |   |
| Trade accounts receivable                                                                 |       | 865                                                                |       | (1,174 | ) |
| Inventories                                                                               |       | 1,224                                                              |       | (16 | ) |
| Prepaid expenses and other current assets                                                 |       | (231                                                               | )          | 48 |   |
| Other assets                                                                              |       | (1,109                                                             | )          | 17 |   |
| Accounts payable and accrued expenses                                                     |       | (2,314                                                             | )          | 1,388 |   |
| Deferred revenue                                                                          |       | (77                                                                | )          | (868 | ) |
| Other liabilities                                                                         |       | 32                                                                 |       | (107 | ) |
| Net cash used for operating activities                                                    |       | (5,445                                                             | )          | (1,168 | ) |
|                                                                                      |       |                                                               |       |   |   |
| **Investing  Activities:**                                                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                       |       | (5                                                                 | )          | (145 | ) |
| Proceeds from the sale of property and equipment                                          |       | 10                                                                 |       | — |   |
| Investment in patents and trademarks                                                      |       | (16                                                                | )          | (39 | ) |
| Investment in joint venture                                                               |       | (217                                                               | )          | — |   |
| Net cash used for investing activities                                                    |       | (228                                                               | )          | (184 | ) |
|                                                                                      |       |                                                               |       |   |   |
| **Financing  Activities:**                                                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Proceeds from borrowings                                                                  |       | 19,894                                                             |       | 3,995 |   |
| Repayment of borrowings                                                                   |       | (9,265                                                             | )          | (2,581 | ) |
| Repayment of other liabilities                                                            |       | —                                                             |       | (33 | ) |
| Restricted cash                                                                           |       | (2,083                                                             | )          | — |   |
| Net cash provided by financing activities                                                 |       | 8,546                                                              |       | 1,381 |   |
| Effect of foreign exchange translation                                                    |       | (80                                                                | )          | (158 | ) |
| Net increase (decrease) in cash and cash equivalents                                      |       | 2,793                                                              |       | (129 | ) |
|                                                                                      |       |                                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 144                                                                |       | 1,392 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                                                  | 2,937      |   | $ | 1,263 |   |
|                                                                                      |       |                                                               |       |   |   |
| Supplemental  cash flow information                                                       |       |                                                               |       |   |   |
| Interest paid                                                                             |       | $                                                                  | 354        |   | $ | 293 |   |
| Taxes paid                                                                                |       | $                                                                  | —     |   | $ | — |   |

 

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

7

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**LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued**

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

**(unaudited)**

During the three months ended March 31, 2007, $400 of the Company’s 7%senior convertible notes due July 2007 was converted into 320,000 shares of theCompany’s common stock at a conversion price of $1.25 per share.

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

8

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### **NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For the ThreeMonths Ended March 31, 2007 and 2006**

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

**(unaudited)**

**1.****         Basis of Presentation / Description of Business**

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“generally accepted accounting principles”) for interim financialinformation and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  In theopinion of management, all adjustments (consisting only of normal recurringaccruals) considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the three months ended March 31, 2007 are not necessarily indicative of theresults that may be expected for any future periods or the year ending December31, 2007.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commission onMarch 16, 2007.

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

The Companyclassifies operations into two reportable segments: Liquidmetal alloyindustrial coatings and bulk Liquidmetal alloys (see Note 9). Liquidmetal alloyindustrial coatings are used primarily as a protective coating for industrialmachinery and equipment, such as drill pipe used by the oil drilling industryand boiler tubes used by coal-burning power plants. Bulk Liquidmetal alloysinclude potential market opportunities to manufacture and sell products andcomponents for electronic devices, medical devices, defense applications, andsporting goods.  In addition, the bulkLiquidmetal alloys segment includes tooling and prototype sampling.  In addition, such alloys are used to generateresearch and development services revenue for developing uses related primarilyto defense and medical applications as well as potential license fees,royalties, and other compensation from strategic partnering transactions.

Stock-based compensation

The Company previously appliedAccounting Principles Board (“APB”) Opinion No. 25 for options when theexercise price of options granted to employees is less than the fairvalue of the underlying stock on the date of grant.  As permitted, the Company had previouslyelected to adopt provisions of Statement of Financial Accounting Standard (“SFAS”)No. 123, *Accounting for Stock-BasedCompensation*for optionsgranted to non-employees who perform services for the Company and thedisclosure-only provisions of options granted to employees.

In December 2004, the FASB issued SFASNo. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123R”), which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, (“SFAS 123”)and supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, (“APB 25”). SFAS 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues. Under SFAS 123R, the Company is required to measure the cost ofemployee services received in exchange for stock options and similar awardsbased on the grant-date fair value of the award and recognize this cost in theincome statement over the period during which an employee is required toprovide service in exchange for the award. The pro forma disclosures previouslypermitted under SFAS 123 are no longer an alternative to financialstatement recognition. The Company adopted SFAS 123R on January 1,2006 using the modified prospective method and recorded $229 for the threemonth period ended March 31, 2007, of non-cash charges for stock compensationrelated to amortization of the fair value of restricted stock and unvestedstock options representing an increase from the stock compensation that wouldhave been recorded under APB 25 and SFAS 123. Under this method, the Companywill recognize compensation cost, on a prospective basis, for the portion ofoutstanding awards for which the requisite service has not yet been rendered asof January 1, 2006 and any new grants, based upon the grant-date fairvalue of those awards calculated under SFAS 123 for pro forma disclosurepurposes. Accordingly, we have not restated prior period amounts.

9

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The fair value ofeach option grant is estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants for the three months ended March 31, 2007 and 2006, respectively: expectedvolatility of approximately 100% for all periods; dividend yield of 0% for allperiods; expected option life of approximately 5 years; and a risk-freeinterest rate ranging from 4.30% to 4.82%.

**2.****         Basis of Presentation and Recent AccountingPronouncements**

Translationof Foreign Currency

The Companyapplies **FASB No.52, Foreign Currency Translation**, for translating foreigncurrency into US dollars in our consolidation of the financialstatements.  Upon consolidation of the Company’s foreign subsidiaries intothe Company’s consolidated financial statements, any balances with thesubsidiaries denominated in the foreign currency are translated at the exchangerate at period-end. The financial statements of Liquidmetal Korea have beentranslated based upon Korean Won as the functional currency. Liquidmetal Korea’sassets and liabilities were translated using the exchange rate at period endand income and expense items were translated at the average exchange rate forthe reporting period. The resulting translation adjustment was included inother comprehensive income (loss).

RecentAccounting Pronouncements

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities Including an amendment of FASB Statement No. 115(SFAS 159),” which permits entities to choose to measure many financialinstruments and certain other items at fair value. The effective date of SFAS159 will be the first quarter of 2008. The Company is currently evaluating the provisions of SFAS 159 and doesnot expect the adoption of this new standard to have a material impact on itsconsolidated financial statements.

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

**3. Liquidity**

The Company has experienced losses from continuingoperations during the last three fiscal years and has an accumulated deficit of$148,530 as of March 31, 2007.  Cash usedfor operations for the three months ended March 31, 2007 was $5,445 and cashflow from operations will likely be negative throughout fiscal year 2007.  As of March 31, 2007, the Company’s principalsources of liquidity are $2,937 of cash and $3,086 of trade accountsreceivable.  Such conditions raisesubstantial doubt that the Company will be able to continue as a going concern.  These operating results occurred while theCompany was developing and continues to develop, commercialize, and manufactureproducts from an entirely new and unique technology.  These factors have placed a significantstrain on the financial resources of the Company.  The ability of the Company to overcome thesechallenges depends on its ability to correct its production inefficiencies,reduce its operating costs, generate higher revenue, achieve positive cash flowfrom continuing operations and continued sources of debt and equity financing.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties.

Further, the Company borrowed $3,667,which was offset by repayments of $3,843, under a factoring, loan, and securityagreement executed on April 21, 2005 to fund its working capital requirementsduring the three months ended March 31, 2007.

On January 3, 2007, the Company completed a privateplacement of $16,300 in principal amount of 8% Convertible Subordinated Notesdue January 2010 (the “January 2010 Notes”). The January 2010 Notes were issuedfor aggregate cash in the amount of $12,850, in payment of a total of $3,377 inprincipal and accrued but unpaid interest under our previously issued 7% SeniorSecured Convertible Notes due August 2007 and our  8% UnsecuredSubordinated Notes, and $73 cash discount (see Note 7).

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We anticipate that the $12,850 aggregate cash raised in theprivate placement will be sufficient to pursue our current operating planonly through the third quarter of 2007, and we will therefore requireadditional funding at or prior to that time. As a result of the foregoing, we are actively seeking additional sourcesof capital and seeking to restructure and/or modify existing indebtedness.  The amount of funding that we seek and thetiming of such fundraising efforts will depend on the extent to which we areable to increase revenues through obtaining additional purchase orders for ourproducts and/or the extent to which we can restructure or modify our debt.  Because we cannot be certain that we will beable to obtain adequate funding from debt, equity, or other traditionalfinancing sources, we are also actively exploring several strategic financingoptions, including the possible sale of our manufacturing plant in South Korea(which would then be replaced with a smaller facility), potential licensing andoutsourcing of manufacturing operations including those in South Korea andChina, and the possible sale of our Liquidmetal Coatings business.  We cannot guarantee that adequate funds willbe available when needed, and if we do not receive sufficient capital, we maybe required to alter or reduce the scope of our operations.

**4. Inventories**

Inventories are accounted for using the moving averagebasis and at standard cost, which approximate cost on a first-in, first-outbasis and are valued at the lower of cost or market.  Inventories were comprised of the following:
|                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
|               |       |               |       |                  |       |
| Raw materials      |       | $                  | 1,020      |                  | $          | 966 |   |
| Work in process    |       | 660                |       | 1,729                 |       |
| Finished goods     |       | 861                |       | 1,070                 |       |
| Total  inventories |       | $                  | 2,541      |                  | $          | 3,765 |   |

 

**5. Idle Equipment**

Idle equipment consists of certain equipment held bythe Company for use in expansion of bulk alloy parts manufacturing.  Whilethe equipment may be used internally to meet future capacity requirements,considering our current revenue and foreseeable production requirements, theCompany does not anticipate utilizing this equipment internally in the nearfuture.  Total amount of idle equipmentremaining was $191 as of March 31, 2007 and $194 as of December 31, 2006.

During the three months ended March 31, 2007, theCompany disposed of $34 of its equipment for proceeds of $10.

**6.  Product Warranty**

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As ofMarch 31, 2007, the Company used 5% of bulk alloy product sales as an estimateof warranties to be claimed.  Thepercentage is based on industry averages and historical information.  During the three months ended March 31, 2007,and 2006, the Company recorded $207 and $42 of warranty expense,respectively.  The product warrantyaccrual balance is included in accounts payable and accrued expenses.

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**7.  Notes Payable**

Senior ConvertibleNote

On March 3, 2004, the Company issued $9,924 of 6%senior convertible notes due 2007 (the “March Notes”) to investor groups in atransaction led by Michigan Venture Capital Co., Ltd, a South Korea-basedinstitutional investment firm, and IndiGo Ventures LLC, a New York-basedinvestment firm (the “Placement Agents”) that served as a financial advisor tothe Company for the transaction.  Thenotes were collateralized by the patents held by the Company and secondpriority mortgage interest in plant facilities and certain equipment in SouthKorea.  The notes were convertible at anytime into common stock at a price of $3.00 per share.  Investors in the private placement and thePlacement Agents received warrants to purchase an aggregate amount of up toapproximately 1.2 million shares of common stock, exercisable at $3.00 pershare for varying periods but no later than 100 days following theeffectiveness of a registration statement covering the resale of sharesissuable upon exercise of the warrants. The conversion and warrant exerciseprice are subject to price adjustments for anti-dilution purposes. In addition,the investors had the right to call for repayment of the notes prior tomaturity at any time after the second anniversary of the closing of thetransaction.

Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,” EITF 00-27, “Applicationof Issue No. 98-5 to Certain Convertible Instruments,” and EITF 05-2 “TheMeaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,”the original fair value of the embedded conversion feature of $7,595 have beenrecorded as conversion feature liabilities as the debt is considerednon-conventional convertible debt. The original fair value was computed usingthe Black-Scholes model under the following assumptions: (1) expected life of 3years; (2) volatility of 82%; (3) risk free interest of 2.15% and dividend rateof 0%.  The fair value of the conversionfeature on the date of issuance has been recorded as debt discount to beamortized over the life the debt.

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original fair value of the 1.2 million warrants of $1,302 has beenrecorded as warrant liabilities as the shares issuable under the warrants havenot been registered.  The original fairvalue was computed using the Black-Scholes pricing model under the followingassumptions: (1) expected life of 3 years; (2) volatility of 82%, (3) risk freeinterest of 0.95% and dividend rate of 0%.

In March 2004, the original fair value of the embeddedconversion feature of $7,595 and the original fair value of the 0.6 millionwarrants issued to investors of $584, and the original fair value of 0.6million warrants issued to Placement Agents of $718 were recorded as discountsof the convertible note.  In addition,$581 direct costs incurred relating to issuance of the convertible note wererecorded as debt issuance cost in other assets.

During 2004, the Company redeemed $4,465 of theoutstanding note balance in cash.  Theredemption resulted in a write down of debt issuance costs and debt discount of$3,571 to interest expense and a reduction in conversion feature liabilities of$914 from cancellation of the embedded conversion feature of the redeemed notesto additional paid in capital during the year ended December 31, 2004.  Further, 500,000 of warrants originallyissued to a financial advisor for the transaction expired during June 2004 and163,748 of unexercised warrants originally issued to investors were cancelledas a result of the Company’s redemption of the note balances during the yearended December 31, 2004.  The 663,748total expired and canceled warrants immediately prior to the expiration andcancellation resulted in a reduction of warrant liability of $7 and $279 toadditional paid in capital and change in value of warrants, respectively, duringthe year ended December 31, 2004.

On August 19, 2004, the Company completed a privateexchange offer for its March Notes with the remaining holders after theredemption.  Under terms of the exchangeoffer, approximately $5,460 in aggregate principal amount of the March Noteshave been exchanged for an aggregate of (i) $2,730 of 6% Senior Secured NotesDue 2007 (the “July 2007 Notes”) and (ii) $2,730 of 10% Senior Secured NotesDue 2005 (the “July 2005 Notes”), collectively referred to as “Exchange Notes”.  The Exchange Notes are collateralized bycertain patents owned by the Company and second priority mortgage interest inplant facilities and certain equipment at our South Korea plant.  The July 2005 Notes had a maturity date ofJuly 29, 2005, and a conversion price of $2.00 per share (compared to aconversion price of $3.00 per share under the March Notes).  The July 2005 Notes have been exchanged andredeemed subsequent to the close of the second quarter of 2005 (see 2005 SeniorConvertible Notes below). The July 2007 Notes have a maturity date of July 29,2007, and a conversion price of $1.00 per share.   The conversion prices of the July 2007 Notesand July 2005 Notes are subject to price 

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adjustments for anti-dilution purposes.  Further, the exchange notes are convertibleinto Common Stock, at the option of the Company, if at any time after theissuance of the notes, the closing per share price of the Common Stock exceeds$4.00 (as adjusted for stock splits, reverse splits, stock dividends, andrecapitalizations) for 30 consecutive trading days, and further provided thatthere has been effective registration during such period.  The convertible price of the Exchange Notesis subject to price adjustment for anti-dilution purposes.  As of March 31, 2007, the convertible priceof the July 2007 Notes remained unchanged at $1.00 per share.  Holders of the July 2007 Notes also have theright to call for repayment of the July 2007 Notes prior to maturity at anytime after the second anniversary of the closing of the exchange offer.  The July 2007 Notes have been amendedsubsequent to the close of the second quarter of 2005 to provide for an AmendedRegistration Rights Agreement, and Amended and Restated Security Agreement (see2005 Senior Convertible Notes below).

A total of 563,151 warrants to purchase our commonstock at an exercise price of $3.00 per share—all of which were previouslyissued in connection with the purchase of the March Notes—have been amended toprovide for an extended expiration date of March 1, 2006.  There are no outstanding warrants at March31, 2007.

The exchange offer was treated as an extinguishment ofthe March Notes in accordance with Emerging Issues Task Force No. 96-19, “DebtorsAccounting for a Modification or Exchange of Debt Instruments.”  The exchange resulted in a $2,941 loss fromextinguishment of the March Notes, which consisted of write down of $352 ofdeferred issue costs in other assets, $670 of debt discount, and an increase of$1,919 in conversion feature liability as a result of the change in carryingvalue of exchanged notes.

In connection with the private exchange offer, theCompany issued $250 of private placement notes to certain Placement Agents asissuance costs.  Of the $250 notes issued,$125 was paid in the form of long-term notes which is due in 2007 with interestrate of 6% per annum (July 2007 Notes) and $125 was paid in the form ofshort-term notes which is due in 2005 with interest rate of 10% per annum (July2005 Notes).  The July 2005 and July 2007Notes are convertible into Common Stock at $2.00 and $1.00, respectively, andhave the same terms as the Exchange Notes issued to the investors.  Further, $143 of original fair value of the embeddedconversion feature of $250 notes issued to Placement Agents was recorded asconversion feature liabilities during August 2004.

The Company was obligated, pursuant to a RegistrationRights Agreement, as amended by the Exchange Notes, between the Company, thePlacement Agents and the note holders to file a registration statement with theSecurities and Exchange Commission (“SEC”) to register the shares of CommonStock issuable upon conversion of the notes payable and the related warrantswithin 90 days following the effective closing date of the exchange notes (July29, 2004), and to use best efforts to cause such registration statement tobecome effective within 60 days following the SEC’s first written comments onthe registration statement.  Further, ifthe Company is not in compliance with the registration or listing requirements,the holders have rights to late registration payments equal to between 2% and3% of the purchase price paid for the unconverted notes for the first 30business days of late registration, and 1% and 3% percent for each 30 businessdays thereafter, but no more than 18% of the purchase price of the unconvertednote balance.

Interest payments are due quarterly, and failure tomake timely interest payments will result in increase in interest rate to 10%and 14% on the 6% and 10% senior convertible notes (“Default Rates”).  The Default Rates became effective on April1, 2005 from non-payment of a scheduled interest payment.  As of March 31, 2007, the Company hascomplied with all scheduled interest payments.

On August 9, 2005, the July 2005 Notes, accruedinterest and late registration fees were redeemed in cash and exchanged for 7%Convertible Secured Promissory Notes due August 2007  (see 2005 Senior Convertible Notes below).

During the year ended December 31, 2006, $286 of theJuly 2007 Notes were converted into 285,750 of the Company’s common stock at aconversion price of $1.00 per share.

The Company’s gross outstanding loan balance of theJuly 2007 Notes totaled $2,083, as of March 31, 2007 and December 31, 2006, respectively.  As of March 31, 2007 and December 31, 2006,un-amortized discounts for conversion feature and warrants totaled $224 and$391, respectively, and other asset debt issuance costs totaled $8 and $14,respectively.  Interest expense for theamortization of debt issuance cost and discount on note was $174 and $223 forthe quarters ended March 31, 2007 and 2006, respectively.  As of March 31, 2007, the effective interestrate of the July 2007 Notes was 34.5%.

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Pursuant to Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities,” the Company is required to report a value of the conversionliability as a fair value and record the fluctuation to the fair value of theconversion feature liability to current operations.  The change in the fair value of theconversion feature liability resulted in a gain of $31 and a loss of $802 forthe three months ended March 31, 2007 and 2006, respectively.  The fair value of conversion featuresoutstanding at March 31, 2007 and December 31, 2006 was $1,188 and $1,218.  The fair value of conversion features ofoutstanding at March 31, 2007 was computed using the Black-Scholes model underthe following assumptions: (1) 0.33 years; (2) volatility of 55%; (3) risk freeinterest of 5.04% and dividend rate of 0%.

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock”, the original relative fair values of the warrants of $1,302 have beenrecorded as warrant liability.  Inaddition, the Company is required to report a value of the warrant as a fairvalue and record the fluctuation to the fair value of the warrant liability tocurrent operations.  The change in fairvalue of warrants resulted in a loss of $3 for the three months ended March 31,2006.  The warrant has expired as ofDecember 31, 2006.

Convertible Notes

On June 13,2005, the Company completed a private placement (the “June 2005 PrivatePlacement”) of 10% Convertible Unsecured Notes Due June 13, 2006 in theaggregate principal amount of $3,250 (the “June 2006 Notes”), together withwarrants to purchase up to an aggregate of 893,750 shares of the Company’scommon stock (the “Warrants”).

The June 2006Notes issued by the Company in the June 2005 Private Placement are unsecuredand was due on the earlier of June 13, 2006 or the consummation of afollow-on equity or debt offering or restructuring transaction pursuant towhich the Company receives gross proceeds of at least $4,000.  Prior tomaturity, the June 2006 Notes are interest-only, with interest payments duequarterly, at the rate of 10% per year.  The June 2006 Notes can beprepaid by the Company at any time without penalty.  If, within 120 daysfollowing the issue date of the June 2006 Notes, the Company either fails toredeem the notes for the principal amount and accrued interest thereon or failsto close a “Qualified Financing,” then the June 2006 Notes will thereafter beconvertible at a conversion price equal to seventy five percent (75%) of theclosing price of the Company’s common stock on the first trading dayimmediately preceding the conversion date.  A “Qualified Financing “ isdefined in the June 2006 Notes as any debt or equity financing of the Companyresulting in aggregate gross proceeds to the Company of at least $5,000 and inwhich the holders of at least sixty percent (60%) of the aggregate principalamount of the Company’s July 2007 Notes either (i) agree that the equityor debt securities to be issued in such financing shall be pari passu in orderof payment to the July 2007 Notes held by them or (ii) exchange their July2007 Notes for new securities in the financing transaction.  On August 9, 2005, the Company successfullycompleted Qualified Financing, which resulted in exchange and redemption of theConvertible Notes (see 2005 Senior Convertible Notes below).  As a result, the June 2006 Notes never becameconvertible.

 As a part ofthe June 2005 Private Placement, the Company issued warrants to the purchasersof the June 2006 Notes giving them the right to purchase up to an aggregate of812,500 shares of the Company’s common stock.  In addition, warrants topurchase 81,250 shares of the Company’s common stock were issued to theplacement agent in the transaction.  The warrants have an originalexercise price of $2.00 per share, provided that upon the consummation of thefirst ensuing public or private equity or debt offering or restructuringtransaction in which the Company receives gross proceeds of at least $3,250(including without limitation any restructuring of the Company’s July 2005Notes), the exercise price will be automatically adjusted downward (but notupward) as of the closing date of such offering or restructuring transaction sothat it is equal to the lowest effective common stock purchase price paid forany securities issued by the Company to the investors in such offering orrestructuring transaction.  The warrants will expire on June 13, 2010and are subject to exercise price adjustment for anti-dilution purposes.  The exercise price of the warrants wasreduced to $1.91. per share and total number of warrants was increased 935,873as of March 31, 2007 as a result of our January 2007 private placement (seeConvertible Subordinated Notes below).

The original fairvalue of the 893,750 warrants totaled $1,160 and was computed using theBlack-Scholes pricing model under the following assumptions: (1) expected lifeof 5 years; (2) volatility of 118%, (3) risk free interest of 3.87% anddividend rate of 0%.  In accordance withEmerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to Certain

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ConvertibleInstruments” the embedded beneficial conversion feature of the debt was notrecorded as the debt is considered contingently convertible at the time ofissuance, and as a result of the completion of the Qualified Financing the debtsubsequent to the close of the second quarter, the debt was determined to benot convertible. In June 2005, the fair value of the 812,500 warrants issued toinvestors of $1,055 was recorded as discounts of the convertible note.  In addition $105 relating to the fair valueof the 81,250 warrants issued to the Placement Agents and $278 direct costsincurred relating to issuance of the convertible note were recorded as debtissuance cost as a contra liability account in debt discount and other assets,respectively, and will be amortized using the effective interest rate methodover the life of the loan.

On August 9, 2005,the June 2006 Notes were redeemed in cash and exchanged for 7% ConvertibleSecured Promissory Notes due August 2007 (see 2005 Senior Convertible Notesbelow).  The exchange offer was treatedas an extinguishment of the June 2006 Notes in accordance with Emerging IssuesTask Force No. 96-19, “Debtors Accounting for a Modification or Exchange ofDebt Instruments.”  The exchange resultedin a $1,247 loss from extinguishment of the June 2006 Notes as of December 31,2005, which consists of write down of $240 of deferred issue costs in otherassets, $92 of contra liability deferred issuance costs, and $915 of debtdiscount as a result of the change in carrying value of exchanged notes.

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $1,160 have been recorded as warrant liability.  In addition, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in a gain of $281 and a loss $302 for the three months ended March 31,2007 and 2006, respectively.  The fairvalue of warrants outstanding at March 31, 2007 and December 31, 2006 was $206and $487, respectively.  The fair valueof warrants outstanding at March 31, 2007 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 3.2 years; (2)volatility of 55%, (3) risk free interest of 4.54% and dividend rate of 0%.

2005 Senior Convertible Notes

On August 9, 2005, the Company completeda private placement (the “August 2005 Private Placement”) of $9,878 inprincipal amount of new 7% Convertible Secured Promissory Notes due August 2007(the “August 2007 Notes”).  The issuanceconsisted of $5,000 cash, exchange of $1,284 in principal amount of the July2005 Notes, the exchange of $2,996 in principal amount of the June 2006 Notes,satisfaction of accrued interest and late registration fees in the amount of$589 on the July 2005 Notes, and satisfaction of accrued interest of $9 on theJune 2006 Notes.  The August 2007 Noteswere issued pursuant to a Securities Purchase Agreement dated effective as ofAugust 2, 2005 among the Company, the purchasers of the August 2007 Notes, andthe holders of July 2005 Notes and June 2006 Notes of the Company.

Interest payments are due quarterly, andfailure to make timely interest payments will result in increase in interestrates to 14% per annum on the August 2007 Notes (“Default Rates”).  As of March 31, 2007, the Company has madetimely interest payments.

The August 2007 Notes are convertibleinto shares of the Company’s common stock at $2.00 per share Pursuant to anAmended and Restated Security Agreement. The convertible price of the August 2007 Notes is subject priceadjustment for anti-dilution purposes. As of March 31, 2007, the convertible price of the August 2007 Notes wasreduced to $1.91 per share.

Further, pursuant to Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock,”EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”and EITF 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ inEITF Issue No. 00-19,” the original fair value of the embedded conversionfeature of $4,808 have been recorded as conversion feature liability as thedebt is considered nonconventional convertible debt. The original fair valuewas computed using the Black-Scholes model under the following assumptions: (1)expected life of 2 years; (2) volatility of 93%; (3) risk free interest of4.06% and dividend rate of 0%.  Inaddition, the Company is required to report a value of the conversion liabilityas a fair value and record the fluctuation to the fair value of the conversionfeature liability to current operations. The change in the fair value of the conversion feature liabilityresulted in a gain of $342 and a loss of $981 for the three months ended March31, 2007 and 2006, respectively.  The 

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fair value of conversion features outstanding at March 31,2007 and December 31, 2006 was $12 and $619, respectively.  The fair value of conversion featureoutstanding at March 31, 2007 was computed using the Black-Scholes model underthe following assumptions: (1) 0.34 year; (2) volatility of 55%, (3) risk freeinterest of 5.04% and dividend rate of 0%.

The August 2007 Notes are secured bysubstantially all assets of the Company and rank senior to all otherobligations of the Company, other than the Company’s loan with Kookmin Bank ofSouth Korea (or any refinancing of such loan), the July 2007 Notes, purchasemoney asset financing, trade creditors in the ordinary course of business, andany inventory or receivables-based credit facility that the Company may obtainin the future, provided that the amount of the credit facility does not exceed50% of eligible inventory and 80% of eligible receivables. The August 2007Notes will automatically convert into common stock if the Company’s commonstock has an average closing price of more than $5.00 per share during 30consecutive trading days.

The Company also issued warrants to thepurchasers of the August 2007 Notes and placement agents giving them the rightto purchase up to 2,469,470 and 414,495 shares of Company common stock,respectively, with an exercise price of $2.00 per share, which is subject to price adjustment for anti-dilutionpurposes .  As of March 31, 2007, theexercise price of the warrants was reduced to $1.91 per share and total numberof warrants was increased to 3,019,881. The warrants will expire on August 2, 2010.

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”, the original fair values of the warrants of $4,068 havebeen recorded as warrant liability, which was computed using the Black-Scholespricing model under the following assumptions: (1) expected life of 5 years;(2) volatility of 93%; (3) risk free interest of 4.17% and dividend rate of0%.  In addition, the Company is requiredto report a value of the warrant as a fair value and record the fluctuation tothe fair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in a gain of $918 and a loss of $985 for the three months ended March31, 2007 and 2006, respectively.  The fair value of warrantsoutstanding at March 31, 2007 and December 31, 2006 was $694 and $1,612,respectively.  The fairvalue of the warrants outstanding at March 31, 2007 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 3.34years; (2) volatility of 55%; (3) risk free interest of 4.54% and dividend rateof 0%.

In connection with the August 2005Private Placement, the Company entered into an amended and restatedregistration rights agreement with the holders of the July 2007 Notes, theholders of the August 2007 Notes, and the holders of the above-describedoutstanding warrants.  This amended andrestated registration rights agreement replaced all other registration rightsagreements previously entered into by us in connection with the private sale byus of convertible notes and warrants. Under the amended and restated registration rights agreement, theCompany is required to file a resale registration statement for the sharesunderlying all of our outstanding convertible notes and warrants, as describedabove, by October 31, 2005, to enable the resale of such shares by the sellingstockholders on a delayed or continuous basis under Rule 415 of the SecuritiesAct.  The Company is then required tocause such registration statement to become effective within 60 days after wereceive the first written comments on the registration statement from the SEC,or if the SEC notifies us that it will not review the registration statement,within five days after such notification. The Company will be subject to certain monetary penalties, as set forthin the registration rights agreement, if the registration statement is notfiled or does not become effective on a timely basis.  Specifically, if the Company does not filethe registration statement on a timely basis, we will be obligated to pay alate filing fee to the selling stockholders in the amount of 3% of the warrantexercise price on each of the warrants held by them plus 3% of the principalamount of the outstanding notes held by them. This fee will be payable for each period of 30 business days that thefiling of the registration statement is made past the required filing date, andthe payments will be due 10 business days following the end of each 30-dayperiod.  If the registration statementhas not been declared effective by the required effective date, the Companywill be obligated to pay a monthly late registration fee to the sellingstockholders in the amount of 2% of the aggregate warrant exercise prices andaggregate note principal amounts for the first 30 business days after therequired effective date, and 1% for each 30-business day period thereafteruntil the registration statement is declared effective.  Notwithstanding the foregoing, the latefiling fees and late registration fees will not exceed 18% of the aggregatewarrant exercise prices and aggregate note principal amounts.

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The Company filed its RegistrationStatement on December 9, 2005 and on August 7, 2006, the registration statementbecame effective.  As of March 31, 2007,the Company has accrued $1,633 and paid $923 of the late filing andregistration fees and the remaining $710 is included in accounts payable andaccrued liabilities.

On January 3, 2007 as part of a privateplacement offer, as amended, $2,290 of August 2007 Notes and $116 of lateregistration fees were exchanged for 8% Convertible Subordinated Notes dueJanuary 2010 (see Convertible Subordinated Notes below).   As part of the January 2007 privateplacement offer, as amended, the Company entered into conversion agreementswith the holders of August 2007 Notes totaling $400 of principal providing forthe conversion of such notes at a reduced conversion price of $1.25 per share.

As of March 31, 2007 and December 31,2006, our gross outstanding loan balance of the August 2007 Notes totaled$7,188 and $9,878, respectively.  As ofMarch 31, 2007 and December 31, 2006, un-amortized discounts for embeddedconversion feature and warrants totaled $1,022 and $2,441, respectively, andother asset debt issuance costs totaled $58 and $139, respectively, and contraliability debt issuance cost totaled $72 and $172, respectively.  Interest expense for the amortization of debtissuance cost and discount on note was $962 for the three months ended March31, 2007.  As of March 31, 2007, theeffective interest rate for the August 2007 Notes was 17.5%.

SubordinatedPromissory Note

On March 17, 2006, the Company issued a$1,000 10% subordinated promissory note due October 16, 2006 (the “October 2006Note”) to Atlantic Realty Group, Inc., a company controlled by Jack Chitayat, aformer director of the Company.  OnSeptember 30, 2006, the October 2006 Note was amended to mature on November 15,2006 and was subsequently amended again to mature on November 30, 2006. The October 2006 Note is unsecured and subordinated to all prior indebtednessof the Company.  All accrued interest and unpaid principal under the notewere due November 30, 2006.  The proceeds from the October 2006 Note is tobe used solely for working capital purposes.  In connection with theOctober 2006 Note, the Company issued warrants to purchase an aggregate amountof up to 125,000 shares of common stock, exercisable at $2.00 per share. The warrants will expire on March 17, 2009, and include price adjustment provisionsfor anti-dilution purposes.  As of March 31, 2007, the exercise price ofthe warrants remained unchanged at $2.00 per share. There are no registrationrights of the shares issuable from the exercise of the warrants.  Further,cashless exercise of the warrants is permitted.

Pursuant to EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” the original fair value of the warrants of $84 have beenrecorded as warrant liability as the warrant holders can elect to settle thewarrants in cash, which was computed using Black-Scholes pricing model underthe following assumptions: (1) expected life of 2.96 years; (2) volatility of84%; (3) risk free interest of 4.64% and dividend rate of 0%.  In addition,the Company is required to report a value of the warrants as a fair value andrecord the fluctuation to the fair value of the warrant liability to currentoperations.  The change in the fair value of the warrants resulted in again of $36 and of $1 for the three months ended March 31, 2007 and 2006,respectively.  Thefair value of warrants outstanding at March 31, 2007 and December 31, 2006 was$14 and $50, respectively.  The fairvalue of warrants outstanding at March 31, 2007 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 1.96years; (2) volatility of 55%, (3) risk free interest of 4.58% and dividend rateof 0%. Interest expense for the amortization of discount on the note was $0 and$13 for the three months ended March 31, 2007, and 2006, respectively.

During the quarter ended March 31, 2007,$1,000 of October 2006 Note was redeemed in cash as part of a private placementoffer of 8% Convertible Subordinated Notes due January 2010 (see Convertible SubordinatedNotes below).

Unsecured SubordinatedNotes

On May 17, 2006, the Company completed a privateplacement of 8% unsecured subordinated notes (the “May 2006 Private Placement”)in the aggregate principal amount of $3,625 (the “August 2007 SubordinatedNotes”), together with warrants to purchase up to an aggregate of 705,233shares of the Company’s common stock.  OnSeptember 21, 2006, and December 1, 2006 the Company completed an additionalprivate placement under the terms of the May 2006 Private Placement in theaggregate principal amount of $500 and $459, respectively, together withwarrants to purchase up to an aggregate of 96,900 and 88,857 shares of theCompany’s common stock, respectively. The May 2006 Private Placement, was made solely to “accredited investors”including Ricardo Salas, the Company’s former President and Chief ExecutiveOfficer.  Mr. Salas held $559 of theAugust 2007 Subordinated Notes.

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The August 2007 Subordinated Notes are unsecured andwill become due on the earlier of August 17, 2007 or the consummation of afollow-on equity or debt offering pursuant to which the Company receives grossproceeds of at least $6,000 to be used for working capital purposes andrepayment of debt, but excluding financings for the purpose of purchasingcapital assets (a “Follow-On Financing”). Interest on the unpaid principal balance of each August 2007Subordinated Note accrues at the rate of 8% per annum from May 17, 2006 untilmaturity date.  The August 2007 SubordinatedNotes can be prepaid by the Company at any time without penalty.

The August 2007 Subordinated Notes is subordinate inright of payment and in all other respects to the July 2007 Notes, the August2007 Notes, and any other notes that may be issued by the Company after May 17,2006 in exchange for or in satisfaction of any July 2007 Notes or August 2007Notes (collectively, the “Senior Notes”). Notwithstanding the maturity date of the August 2007 Subordinated Notes,the Company will not make any payments of principal, interest or otherwiseunder the August 2007 Subordinated Notes until all amounts due and payableunder the Senior Notes have been satisfied in full (whether through cashpayments or conversion).

The August 2007 Subordinated Notes also gives theinvestors the opportunity to participate in a Follow-On Financing at adiscounted rate.  If a holder of theAugust 2007 Subordinated Notes elects to participate in a Follow-On Financing,the holder of the Note will be entitled to purchase the securities beingoffered in the Follow-On Financing at a discount of 7% of the gross per sharepurchase price (in the case of an offering of common stock or preferred stock)or 7% of the face amount of the security being sold (in the case of an offeringof debt securities).

As part of the August 2007 Private Placement, theCompany issued warrants to the purchasers of the Notes giving them right topurchase up to an aggregate of 892,247 shares of the Company’s commonstock.  In addition, warrants to purchase80,717 shares of the Company’s common stock were issued to the placement agentin the transaction.  The warrants have anexercise price of $2.58 per share, which is subject to price adjustment foranti-dilution purposes.  The exerciseprice of the warrants was reduced to $2.33 per share and total amount ofwarrants was increased to 1,077,480 as of March 31, 2007.  The warrants will expire on May 17, 2011.

Pursuant to EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” the original fair value of the warrants of $905 for the May 17, 2006placement have been recorded as warrant liability, as the warrant holders canelect to settle the warrants in cash, which was computed using Black-Scholespricing model under the following assumptions: (1) expected life of 5.00 years;(2) volatility of 80%; (3) risk free interest of 5.03% and dividend rate of0%.  The original fair value of thewarrants of $89 for the September 21, 2006 placement have been recorded aswarrant liability, as the warrant holders can elect to settle the warrants incash, which was computed using Black-Scholes pricing model under the followingassumptions: (1) expected life of 4.65 years; (2) volatility of 76%; (3) riskfree interest of 4.60% and dividend rate of 0%. The original fair value of the warrants of $59 for the December 1, 2006placement have been recorded as warrant liability, as the warrant holders canelect to settle the warrants in cash, which was computed using Black-Scholespricing model under the following assumptions: (1) expected life of 4.46 years;(2) volatility of 67%; (3) risk free interest of 4.39% and dividend rate of 0%.

In addition, the Company is required to report a valueof the warrant as a fair value and record the fluctuation to the fair value ofthe warrant liability to current operations. The change in the fair value of the warrants resulted in a gain of $261for the three months ended March 31, 2007. The fair value of warrants outstanding at March 31, 2007 and December31, 2006 was $252 and $513.The fair value of the warrants outstanding at March31, 2007 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 4.13 years; (2) volatility of 55%; (3) riskfree interest of 4.54% and dividend rate of 0%.

On January 3, 2007 as part of a private placementoffer, as amended, $925 of August Subordinated 2007 Notes and $45 of accruedinterest  were exchanged for 8%Convertible Subordinated Notes due January 2010 (see Convertible SubordinatedNotes below).   Additionally, $650 ofAugust Subordinated 2007 Notes and $26 of accrued interest were redeemed incash during the three months ended March 31, 2007.

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Our gross outstanding loan balance of the August 2007Subordinated Notes totaled $3,009 and $4,585 as of March 31, 2007 and December31, 2006, respectively.  As of March 31,2007, un-amortized discounts for warrants totaled $329 and other asset deferredissuance costs totaled $83.  Interestexpense for the amortization of discount on the note and deferred issuance costwas $218 for the three months ended March 31, 2007.  As of March 31, 2007, the effective interestrate for the August 2007 Subordinated Notes was 37.6%.

ConvertibleSubordinated Notes

On January 3,2007, the Company completed a private placement of 8% Convertible SubordinatedNotes due January 2010 (the “January 2010 Notes”).  As a result of anApril 2007 amendment to this transaction, the Company ultimately issued $16,300in principal amount of January 2010 Notes (see Note 13).  The January 2010Notes were issued for aggregate cash in the amount of $12,850, in payment of atotal of $3,377 in principal and accrued but unpaid interest under ourpreviously issued 7% Senior Secured Convertible notes due August 2007 (“August2007 Notes”) and our 8% Unsecured Subordinated notes (the “August 2007Subordinated Notes”), and $73 cash discount.

The payment of thepreviously issued notes was treated as an extinguishment of the debt inaccordance with Emerging Issues Task Force No. 96-19, “Debtors Accounting for aModification or Exchange of Debt Instruments.” The placement resulted in a $648 loss from extinguishment of debt, whichconsisted of write down of $64 of deferred issue costs, $733 of debt discount,and decrease of $149 in conversion feature liability as a result of the changein carrying value of exchanged notes.

The January 2010Notes were originally convertible into the Company’s common stock at $1.55 pershare.  As a part of the private placement, the Company issued warrants tothe purchasers of the notes giving them the right to purchase up to anaggregate of 5,257,921 shares of our common stock at an exercise price of $1.93per share. In connection with the private placement, the Company also issued tothe placement agent for the transaction warrants to purchase an aggregate of248,710 shares of our common stock at an exercise price of $1.55 pershare.  The warrants will expire on January 3, 2012 and are subject toexercise price adjustment for anti-dilution purposes.  The Company is requiredto set aside $2,083 of the proceeds from the private placement for payment ofthe 6% Senior Secured Convertible notes due July 2007 (the “July 2007 Notes”).

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,” EITF 00-27, “Application of Issue No. 98-5 to Certain ConvertibleInstruments,” and EITF 05-2 “The Meaning of ‘Conventional Convertible DebtInstrument’ in EITF Issue No. 00-19,” the original fair value of the embeddedconversion feature of $6,205 have been recorded as conversion feature liabilityas the debt is considered nonconventional convertible debt. The original fairvalue was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.6 to 3 years; (2) volatility of 55%; (3)risk free interest of 4.69% to 4.76% and dividend rate of 0%.  In addition, the Company is required toreport a value of the conversion liability as a fair value and record thefluctuation to the fair value of the conversion feature liability to currentoperations.  The change in the fair valueof the conversion feature liability resulted in a gain of $3,971 for the threemonths ended March 31, 2007.  The fairvalue of conversion feature outstanding at March 31, 2007 of $2,234 wascomputed using the Black-Scholes model under the following assumptions: (1)expected life of 1.3 to 2.6 years; (2) volatility of 55%, (3) risk freeinterest of 4.54% to 4.90% and dividend rate of 0%.

Pursuant to EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the original fair values of thewarrants of $3,964 have been recorded as warrant liability, which was computedusing the Black-Scholes pricing model under the following assumptions: (1)expected life of 5 years; (2) volatility of 55%; (3) risk free interest of4.68% and dividend rate of 0%.  Inaddition, the Company is required to report a value of the warrant as a fairvalue and record the fluctuation to the fair value of the warrant liability tocurrent operations.  The change in thefair value of the warrants resulted in a gain of $2,197 for the three monthsended March 31, 2007.  The fair value ofthe warrants outstanding at March 31, 2007 of $1,768 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of 4.76years; (2) volatility of 55%; (3) risk free interest of 4.54% and dividend rateof 0%.

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The original fairvalue of the embedded conversion feature of $6,205 and the original fair valueof the 5,257,921 warrants issued to investors of $3,764, the original fairvalue of 248,710 warrants issued to Placement Agents of $200, and $73 cashdiscount were recorded as discounts of the convertible note.  In addition, $951 direct costs incurredrelating to issuance of the convertible note was recorded as debt issuance costin other assets.

The January 2010Notes were issued pursuant to a Securities Purchase Agreement, dated January 3,2007, between the Company and the purchasers of the January 2010 Notes (the “JanuaryPurchase Agreement”).  Under the terms of the original January PurchaseAgreement, the Company agreed to repay or otherwise satisfy, within 5 daysafter the closing of the private placement, approximately $15,461 of theCompany’s outstanding debt under previously issued promissory notes, includingthe August 2007 Notes, the Atlantic Note, and New Bridge Notes (the “DebtSatisfaction Covenant”).  The Company originally agreed to this covenantbased on assurances that a substantial number of holders of the August 2007Notes would elect to convert their August 2007 Notes at a reduced conversionprice following the private placement under a note conversion agreementproposed by the Company, but most of such holders ultimately elected not toproceed with such conversion.  Accordingly, in an effort to preservefunds, the Company has not yet repaid the indebtedness as required by theoriginal January Purchase Agreement, and in April 2007, the Company enteredinto an amendment to the January Purchase Agreement providing that the Companywill have until October 1, 2007 (or such earlier date on which the indebtednessto be repaid is due) to comply with the Debt Satisfaction Covenant (see Note13).

The January 2010Notes bear interest at 8% per annum with interest payable quarterly in arrearsin cash, or, at our option, in the form of additional January 2010 Notes (inwhich case the interest rate will be 10% per annum). The ability to payinterest with additional January 2010 Notes is subject to specified conditions,including the existence of an effective registration statement covering theresale of the shares issued in payment of interest and certain minimum tradingvolumes in the stock to be issued. From and after an event of default under theJanuary 2010 Notes and for so long as the event of default is continuing, theJanuary 2010 Notes will bear default interest at a rate of 12% per annum (or15% per annum if we elect to pay interest with additional January 2010 Notes).

Beginning July 31,2008 and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cash or, atthe Company’s election, with shares of our common stock. The ability to pay theredemption amounts with shares of common stock will be subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of the redemption amountand certain minimum trading volumes in the stock to be issued. Any unconvertedJanuary 2010 Notes will become due on December 31, 2009, although the Company willhave the right at any time after 18 months following the issuance of theJanuary 2010 Notes to redeem the January 2010 Notes in whole or in part for acash redemption price of 105% of the portion of the principal amount beingredeemed plus all accrued and unpaid interest thereon. The January 2010 Notesare unsecured and are subordinate to the July 2007 Notes and to certain securedfinancing from commercial lenders incurred by the Company in the future. The terms of the 2010 Notes also provide that the Company will be required tomaintain a sufficient bank balance to provide for the timely repayment of ourJuly 2007 Notes.

In connection withthe January 2007 private placement, the Company entered into a RegistrationRights Agreement with the purchasers of the January 2010 Notes under which theCompany is required, on or before 45 days after the closing of the privateplacement, to use commercially reasonable efforts to file a registrationstatement with the SEC covering the resale of the shares of the common stockissuable pursuant to the January 2010 Notes and warrants and to usecommercially reasonable efforts to have the registration declared effective atthe earliest date (but in no event later than 90 days after filing if there isno SEC review of the registration statement, or 120 days if there is an SECreview).  The Company will be subject tomonetary penalties up to a maximum amount of 18% of the aggregate amount ofNotes sold in the Private Placement if the registration statement is not filedor does not become effective on a timely basis. The monetary penalties willaccrue at the rate of 1% per month of the then-outstanding principal amount ofthe January 2010 Notes. In the event that the Company is unable to include inthe registration statement all shares of our common stock issuable pursuant tothe January 2010 Notes and warrants, then we will be required to file up to twoadditional registration statements to register the resale of any sharesexcluded from the originally filed registration statement and to pay theforegoing monetary penalties on the January 2010 Notes convertible into theexcluded shares until the resale of such excluded shares is covered by aneffective registration statement or until such shares can be sold under SECRule 144.  As of March 31, 2007, an aggregate of $20 in monetary penaltiesunder the Registration Rights Agreement had already been paid to investors,while an additional $214 thousand in such penalties were accrued but unpaid.

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On March 22, 2007,one of the purchasers of the January 2010 Notes (holding January 2010 Notes inthe aggregate amount of $2.0 million) sent the Company an event of defaultnotice (“Event of Default Notice”) indicating that the Company had defaultedunder the January Purchase Agreement (and therefore under the January 2010Note) by failing to comply with the Debt Satisfaction Covenant.  Thisholder did not execute the April 2007 amendment to the January PurchaseAgreement.  In general, upon a breach of the January 2010 Notes or JanuaryPurchase Agreement, a holder of the January 2010 Notes may require us to redeemthe January 2010 Notes at a price equal to the greater of (i) the conversionamount to be redeemed and (ii) the product of (A) the conversion rate withrespect to such conversion amount in effect at such time as the purchaser ofthe January 2010 Note delivers an Event of Default Redemption Notice (asdefined below) and (B) the closing sale price of our common stock on the dateimmediately preceding such event of default.  Under the terms of theJanuary 2010 Notes and January Purchase Agreement, the Company has ten (10)business days after the receipt of an Event of Default Notice to cure a default(see Note 13).

In addition,because the Company repaid $1,763 of principal and interest under the October2006 Note and certain August 2007 Subordinated Notes in January and February2007 without first repaying the August 2007 Notes and July 2007 Notes, theCompany may also be in breach of the August 2007 Notes and July 2007 Notes.

The Company’sgross outstanding loan balance of the January 2010 Notes totaled $16,300 as ofMarch 31, 2007.  As of March 31, 2007,un-amortized discounts for conversion feature, warrants, and cash discounttotaled $9,894, and other asset debt issuance costs totaled $918.  Interest expense for the amortization of debtissuance cost and discount on note was $382 for the three months ended March31, 2007.  As of March 31, 2007, theeffective interest rate of the January 2010 Notes was 54%.

FactoringAgreement

The Companyentered into a Factoring, Loan, and Security Agreement (the “Agreement”) with afinancing company on April 21, 2005, which allows for borrowings of up to$1,500.  The Agreement expires on April21, 2006, and automatically renews annually thereafter. All borrowings aresecured by outstanding receivables specifically assigned to the financingcompany.  Assigned receivables areconsidered “Approved” or “Non-Approved” by the financing company.  In January 2007, the Company entered into asecond amendment to the Agreement to provide for increased borrowings againstnon-approved receivables assigned of 80%. Borrowings made against non-approved receivables assigned are limited to$1,000 and total borrowings made on approved and non-approved receivablesassigned are limited to $5,000.  Further,the amendment provides for interest charges of 0.5% plus prime rate of interestless 2%.  The agreement will continueuntil February 1, 2008 and will renew annually thereafter.  Payments on assigned receivables are receiveddirectly by the financing company, and applied to outstanding advances.  All outstanding advances and uncollectedassigned receivables are subject to fees and interest charges ranging from0.55% to 1.5% plus prime rate as published by the Wall Street Journal, with aminimum annual fee of $30. All receivables assigned and advances made aresubject to return and recall by the financing company, respectively.  As such, the advances have been classified asshort-term secured borrowings in accordance with SFAS No. 140 “Accounting forTransfer and Servicing of Financial Assets and Extinguishments of Liabilities.”  For the three months ended March 31, 2007,the Company borrowed $3,667 and repaid $3,843 under the Agreement.  The total outstanding advance made under theagreement is $1,493 and $1,669 as of March 31, 2007 and December 31, 2006,respectively, which is presented as short-term debt.   The weighted average rate of interest forborrowings made under the Agreement was 9.71% for the three months ended March31, 2007.  As of March 31, 2007, theCompany’s availability for future borrowing under the agreement is $3,507,which is contingent on approval of eligible receivables by the financingcompany.

In February 2007, the Company entered into anagreement to deposit cash of $2,083 with a rate of prime rate of interest less2% with the financing company.  Theagreement is effective until July 27, 2007 and the cash deposit will be used topay down principal amount of the July 2007 Notes. Additionally, the financingcompany reserves the right to offset outstanding advances against the cashdeposit. As a result, the $2,083 cash deposit is presented as restricted cashas of March 31, 2007.

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KookminNote

On February 4, 2003, our Korean subsidiary received6,500,000 in South Korean Won, or approximately $5,488, under a loan fromKookmin Bank of South Korea.  The loanbears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximumof 21%, depending on the length of time the repayment is delayed.  As of March 31, 2007, the interest rate wasincreased to 9.2% from delayed interest payments made.  This loan is collateralized by the plantfacilities and certain equipment in South Korea.  During the first eighteen months from theorigination date, interest was payable on a monthly basis.  In October 2003, the Company paid $873 ofprincipal at the request of Kookmin Bank due to the sale of machines that hadbeen part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that the Companypay an additional $866 of principal by February 2004 due to the Company’scurrent credit rating.  The Company madetwo payments on the requested additional loan pay down in November and December2003 of $320 and $205, respectively.  Theremaining payment of $341 was subsequently made in February 2004.  Beginning in September 2004, the Company isrequired to make equal monthly installments of principal and interest to repaythe remaining balance through February 2008.  Principal payments made to Kookmin Banktotaled $556 for the three months ended March 31, 2007, which includes $23 offoreign exchange translation loss.  Theoutstanding loan balance totaled $1,218 and $1,796, of which $1,218 and $225 isincluded in current portion of long-term debt, as of March 31, 2007 andDecember 31, 2006, respectively.

**8.     Stock Compensation Plan**

During the three months ended March 31, 2007, underthe Company’s 2002 Non-employee Director Stock Option Plan, which provides forthe grant of stock options to non-employee directors, the company granted70,000 of the Company’s common shares for an average exercise price of$1.53.  Further, all options under thisplan have exercise prices equal to the fair market value on the date of grant.

The Company cancelled 99,250 options during the threemonths ended March 31, 2007, for terminated employees and directors.

**9.****         Segment Reporting and GeographicInformation**

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information,*requires companies to provide certaininformation about their operating segments. In April 2002, the Company began classifying operations into tworeportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetalalloys.  The Liquidmetal alloy industrialcoatings are used primarily as a protective coating for industrial machineryand equipment, such as drill pipe used by the oil drilling industry and boilertubes used by coal burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture andsell casing components for electronic devices, medical devices, sporting goods,tooling, prototype sampling, defense applications and metal processingequipment.  The expenses incurred by thebulk Liquidmetal alloy segment are manufacturing, research and developmentcosts, and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloyproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated withresearch and development services are included in the bulk Liquidmetal alloysegment.  The accounting policies of thereportable segments are the same as those described in Note 4 to theconsolidated financial statements included in the Company’s Form 10-K filedwith the Securities and Exchange Commission on March 16, 2007.

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Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following tables:
| ** **                                                         | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three Months  Ended March 31, 2007                                 |       |         |       |                |       |                    |       |
| Revenue to external customers                                      |       | $            | 2,724      |                | $          | 2,343                   |       | $ | 5,067 |   |
| Gross profit (loss)                                                |       | 1,259        |       | (2,633              | )          | (1,374                  | )          |
| Income (loss) before interest expense and  discontinued operations |       | 795          |       | (2,744              | )          | (1,949                  | )          |
| Total identifiable assets at end of period                         |       | 1,552        |       | 15,899              |       | 17,451                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Three Months  Ended March 31, 2006                                 |       |         |       |                |       |                    |       |
| Revenue to external customers                                      |       | $            | 2,384      |                | $          | 4,171                   |       | $ | 6,555 |   |
| Gross profit                                                       |       | 990          |       | 241                 |       | 1,231                   |       |
| Income (loss) before interest expense and  discontinued operations |       | 805          |       | (386                | )          | 419                     |       |
| Total  identifiable assets at end of period                        |       | 878          |       | 17,488              |       | 18,366                  |       |

 

Reconcilinginformation between reportable segments and the Company’s consolidated totalsis shown in the following table:
|                                                                                   | ** ** | **For the Three Months** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                        | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | ** **                              | ** ** | **(Restated)** | ** ** |
|                                                                              |       |                                    |       |   |   |
| Total segment  income (loss) before minority interest, interest expense           |       | $                                       | (1,949     | ) | $ | 419 |   |
| General and administrative expenses, excluded                                     |       | (2,220                                  | )          | (1,616 | ) |
|                                                                              |       |                                    |       |   |   |
| Consolidated  loss before interest, other income, income taxes, minority interest |       | (4,169                                  | )          | (1,197 | ) |
| Loss from extinguishments of debt                                                 |       | (648                                    | )          | — |   |
| Change in value of warrants, net                                                  |       | 3,692                                   |       | (1,289 | ) |
| Change in value of conversion feature                                             |       | 4,344                                   |       | (1,783 | ) |
| Interest expense                                                                  |       | (2,763                                  | )          | (1,782 | ) |
| Interest income                                                                   |       | 61                                      |       | 2 |   |
| Consolidated net income  (loss)                                                   |       | $                                       | 517        |   | $ | (6,049 | ) |

 

Included in bulkalloy segment income for the three months ended March 31, 2006 is $480 of otherincome recognized from termination of a distribution agreement in March 2006.

Excluded generaland administrative expenses are attributable to the Company’s corporateheadquarters.  These expenses primarilyinclude corporate salaries, consulting, professional fees and facilitycosts.  Research and development expensesare included in the operating costs of the segment that performed the researchand development.

Revenues from sales to companies in the United Stateswere $2,928 and $2,266 during the three months ended March 31, 2007 and 2006,respectively.  The revenue related to theUnited States of America was earned under defense-related research anddevelopment contracts, sales of coatings products, and sales of Liquidmetalbulk alloy products.

During the three months ended March 31, 2007, theCompany had revenues from companies outside of the United States of $2,139 ofwhich $554 represented sales to companies located in South Korea.  During the three months ended March 31, 2006,the Company had revenues from companies outside of the United States of $4,289of which $1,782 represented sales to companies located in South Korea. The revenue related to sales to companies outside of the United States was frombulk alloy products.

Long-lived assetsinclude net property, plant, and equipment, and net intangible assets. TheCompany had long-lived assets of $1,382 and $1,439 located in the United Statesat March 31, 2007 and December 31, 2006, respectively. The Company hadlong-lived assets of $10,816 and $11,799 located in South Korea at March 31,2007 and December 31, 2006, respectively.

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Reconcilinginformation between reportable segments and the Company’s consolidated totalsis shown in the following table:

|                                           | ** ** | **March 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **2007**           | ** ** |
|                                      |       |               |       |
| Total segment  assets                     |       | $                  | 17,451     |   |
| Cash and cash equivalents                 |       | 2,693              |       |
| Restricted cash                           |       | 2,083              |       |
| Prepaid expenses and other current assets |       | 824                |       |
| Other property, plant and equipment       |       | 223                |       |
| Intangibles, net                          |       | 1,156              |       |
| Other assets                              |       | 1,031              |       |
| Total consolidated  assets                |       | $                  | 25,461     |   |

 

Assets excluded from segment assets include assetsattributable to the Company’s corporate headquarters.  The Company’s largest assets consist ofprepaid expenses and other current assets and intangible assets, which consistprimarily of the Company’s patents and trademarks.

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

Basic earnings per share (“EPS”) is computed bydividing earnings (loss) attributable to common shareholders by the weightedaverage number of common shares outstanding for the periods. Diluted EPSreflects the potential dilution of securities that could share in the earnings.

Options to purchase 7,763,341 shares of common stockat prices ranging from $0.77 to $15.00 per share were outstanding atMarch 31, 2007, but were not included in the computation of diluted EPSfor the same period as the inclusion would have been antidilutive.  Warrants to purchase 10,664,865 shares ofcommon stock, with exercise prices between $1.55 and $2.33 per shareoutstanding at March 31, 2007 were not included in the computation of dilutedEPS for the same period as the inclusion would have been antidilutive.  Additionally, 20,663,897 shares of commonstock issuable upon conversion of the Company’s convertible notes withconversion prices between $1.00 and $1.91 per share outstanding at March 31,2007 were not included in the computation of diluted EPS for the period as theinclusion would have been antidilutive.

**11.****     ****Commitments and Contingencies**

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

In April 2006, wereached agreements-in-principle to settle our previously-disclosed consolidatedsecurities class action and shareholder derivative actions for a total of$7,500; $7,025 for the class action and $475 for the derivative actions.  In addition, we will commit to maintain orimplement various corporate governance measures in connection with thesettlement of the derivative actions.

The consolidated class action arose from a number of lawsuits filed in2004 against our company and certain of our former and current directors andofficers on behalf of persons who purchased our common stock betweenMay 21, 2002 and May 13, 2004.  These actions, which werebrought under the federal securities laws, alleged that the Prospectusissued in connection with our initial public offering in May 2002 containedmaterial misrepresentations and omissions regarding our historical financialcondition and regarding a personal stock transaction by our former chiefexecutive officer.  They also alleged that our company and certain of ourpresent and former officers and directors engaged in improper revenuerecognition with 

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respect to certainof our business transactions, failed to maintain adequate internal controls,and knowingly disclosed unrealistic but favorable information about marketdemand for and commercial viability of our products to artificially inflate thevalue of our stock.  On October 19, 2006,the presiding judge entered an Order giving final approval of the class actionsettlement.  In connection with thesettlement, our directors and officers’ liability insurers contributed $7,025to a settlement fund, from which approved claims of eligible class members willbe paid in accordance with a court-approved plan of allocation.  Taking into account the insurancecontribution, the net cost of the settlement to our company is approximately$475, which is the insurance deductible we paid over several quarters ending inthe third quarter of 2005, and which was previously recorded as a charge.

In addition, inMay 2004, two shareholder derivative actions were filed in the SuperiorCourt of Orange County, California and later consolidated.  Shortlythereafter, one additional shareholder derivative action was filed in theUnited States District Court for the Middle District of Florida, TampaDivision.  These derivative actions were brought by certain shareholdersagainst certain of our present and former officers and directors as well as ourcompany (as a nominal defendant).  The suits alleged that the defendantsbreached various fiduciary duties and otherwise violated state law based primarilyupon the same facts and circumstances underlying thefederal securities class action.  On August 2, 2006, plaintiffs’counsel in the California derivative action filed a Notice of Settlement in theSuperior Court.  The action is presentlystayed while the parties’ counsel negotiate and prepare formal settlementdocuments.  Final documentation andapproval of the settlement of the derivative actions remains outstanding.

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

On January 3,2007, we completed a private placement of new 8% Convertible Subordinated Notesdue January 2010 (the “January 2010 Notes”) that, as amended, provided for theissuance of $16,300 in principal amount of January 2010 Notes.  The January 2010 Notes were issued pursuantto a Securities Purchase Agreement, dated January 3, 2007, between our companyand the purchasers of the January 2010 Notes (the “January Purchase Agreement”).  Under the terms of the original JanuaryPurchase Agreement, we agreed to repay or otherwise satisfy, within 5 daysafter the closing of the private placement, approximately $15,461 of our outstandingdebt under previously issued promissory notes, including the August 2007 Notes,the Atlantic Note, and New Bridge Notes (the “Debt Satisfaction Covenant”).  We originally agreed to this covenant basedon assurances that a substantial number of holders of the August 2007 Noteswould elect to convert their August 2007 Notes at a reduced conversion pricefollowing the private placement under a note conversion agreement proposed byus, but most of such holders ultimately elected not to proceed with suchconversion.  Accordingly, in an effort topreserve funds, we have not yet repaid the indebtedness as required by theoriginal January Purchase Agreement, and in April 2007, we entered into anamendment to the January Purchase Agreement providing that we will have untilOctober 1, 2007 (or such earlier date on which the indebtedness to be repaid isdue) to comply with the Debt Satisfaction Covenant.

On March 22, 2007,one of the purchasers of the January 2010 Notes (holding January 2010 Notes inthe aggregate amount of $2,000) sent us an event of default notice (“Event ofDefault Notice”) indicating that we had defaulted under the January PurchaseAgreement (and therefore under the January 2010 Note) by failing to comply withthe Debt Satisfaction Covenant.  Thisholder did not execute the April 2007 amendment to the January PurchaseAgreement.  In general, upon a breach ofthe January 2010 Notes or January Purchase Agreement, a holder of the January2010 Notes may require us to redeem the January 2010 Notes at a price equal tothe greater of (i) the conversion amount to be redeemed and (ii) the product of(A) the conversion rate with respect to such conversion amount in effect atsuch time as the purchaser of the January 2010 Note delivers an Event of DefaultRedemption Notice (as defined below) and (B) the closing sale price of ourcommon stock on the date immediately preceding such event of default.  Under the terms of the January 2010 Notes andJanuary Purchase Agreement, we have ten (10) business days after the receipt ofan Event of Default Notice to cure a default. On April 6, 2007, the holder which sent the Event of Default Noticefurther sent us an event of default redemption notice (“Event of DefaultRedemption Notice”).  The Event ofDefault Redemption Notice states that the holder has elected to require us toredeem its January 2010 Note for a price equal to $2,000 (the amount of theJanuary 2010 Note) plus accrued and unpaid interest.

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On April 16, 2007,we were served with a complaint filed by the holder in the Federal DistrictCourt in Minnesota to collect this amount. We will have until May 25, 2007 toformally respond to the complaint. Although we believe that, as a result of the April 2007 amendment to theJanuary Purchase Agreement, we may not be obligated to redeem the holder’sJanuary 2010 Note because we are now in compliance with the Debt SatisfactionCovenant, a court of law may conclude otherwise, and we are therefore currentlyworking to resolve this matter.

In March 1996, the Company entered into a distributionagreement whereby it granted to a third party exclusive rights to market andsell golf products incorporating Liquidmetal Technology to certain Japanesesporting equipment companies.  The thirdparty paid the Company a $1,000 distribution fee as part of this agreement, ofwhich a portion was refundable according to a formula based on the gross profitearned by the third party.  The remainingunearned distribution fee of $830 had not been refunded.  On March 28, 2003, the distribution agreementwas terminated and the Company entered into a new agreement to pay to the samethird party a commission on the net sales price of all Liquidmetal golfequipment that is shipped by the Company or its affiliates to Japanese golf companiesfor sale into the Japanese end-market. This commission was to be applied to golf equipment shipped by theCompany or its affiliates during the period beginning on March 28, 2003 andending on March 28, 2006.  If, by March28, 2006, the Company has not paid $350 in commission payments, the balancebetween commission paid and $350 were to be paid by April 30, 2006, therebyguaranteeing the third party a $350 minimum payment during the term of theagreement.  As of March 31, 2007 theCompany has paid $15 of commission.  Asof March 31, 2007, $325 remains as liability and is included in accountspayable and accrued liabilities.

On June 26,2006, the Company entered into a joint venture agreement with SAGA, SpA inPadova, Italy, (“SAGA”) a specialist precision parts manufacturer.  Thejoint venture is named Liquidmetal SAGA Italy, Srl (“LSI”).  The Companyalso entered into an exclusive manufacturing license agreement for the eyewearindustry with LSI.  Under the joint venture agreement, the Company hasoption to buy ownership interest in LSI, initially, of 19.9% to up to50%.  In December 2006, the Company exercised the 19.9% interest in LSIand will have two years to purchase the additional interest at a nominalprice. In January 2007, the Company contributed $217 to into LSI asadditional investment.  The contribution did not change the Company’s19.9% interest in LSI. Underthe licensing agreement, at any time following 18 months after the effectivedate of the agreement, LSI may exercise its option to sell to the Companycertain business assets including manufacturing equipment acquired under thejoint venture.  During year endedDecember 31, 2006, the Company recognized revenues of $702 of Liquidmetalalloys sold to SAGA for use in the joint venture.  Companyanticipates the alloys to be fully utilized by the joint venture prior to the18 month period.  There were no revenuesrecognized from the joint venture for the three-months ended March 31, 2007.

**12.****    Related Party Transactions**

InJune 2003, the Company entered into an exclusive, ten-year license agreementwith LLPG, Inc. (“LLPG”), a corporation headed by, Jack Chitayat, a formerdirector of the Company.  Under the terms of the agreement, LLPG has theright to commercialize Liquidmetal alloys, particularly precious-metal basedcompositions, in jewelry and high-end luxury product markets.  TheCompany, in turn, will receive royalty payments over the life of the contracton all Liquidmetal products produced and sold by LLPG.  In conjunction withits technology licensing contract, LLPG purchased two proprietary Liquidmetalalloy melting machines and three proprietary Liquidmetal alloy casting machinesfor a total purchase price of $2,000.

InDecember 2006, the Company entered into an amended license agreement with LLPG,which extends the license agreement to fifteen years at reduced royalty rates. Additionally, the amended license agreement includes a $400 terminationfee to be paid out in quarterly installments in 2007.  The termination feewill be recognized as revenue when received in 2007.  There were no revenues recognized under thelicensing agreement during the three months ended March 31, 2007 and 2006.

TheCompany has a license agreement with California Institute of Technology (“Caltech”)under which we exclusively license from Caltech certain inventions andtechnology relating to amorphous alloys.  Professor William Johnson, amember of the Company’s board of directors, is a professor at Caltech, andsubstantially all of the amorphous alloy technology licensed to us under theCaltech license agreement was developed in Professor Johnson’s Caltechlaboratory.   Additionally, the Company reimburses Caltech forlaboratory expenses incurred by Professor Johnson’s Caltech laboratory, whichduring the three months ended March 31, 2007 and 2006, amounted to $0 and $30,respectively.

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Additionally, the Company is a party to a consultingagreement with Mr. Johnson.  Under thisagreement, Mr. Johnson provides consulting services on an as-needed basisthrough 2004 as it relates to marketing and development Liquidmetal alloy.  During 2005, the agreement continued on amonth to month basis.  In April 2006, theCompany entered into an agreement with Mr. Johnson effective from January 1,2006 through December 31, 2006.  During the three months ended March 31, 2007 and 2006, theCompany incurred $16 and $15 in consulting fees from Mr. Johnson, respectively.

The Company is a party to a consulting agreement withChitnis Consulting, Inc., which is owned 100% by Shekhar Chitnis, a formerdirector and executive officer of the Company. Under this agreement, the Company engaged Chitnis Consulting to provideconsulting services on an as-needed basis through December 31, 2005.  On January 1, 2006, the term of the agreementwas extended to December 31, 2006 and on January 1, 2007, the term of theagreement was once again extended to December 31, 2007.  During thethree months ended March 31, 2007 and 2006, the Company incurred $0 inconsulting fees from Chitnis Consulting for both periods.

In November 2004, the Company enteredinto an agreement with John Kang, our Chairman of the Board, in which Mr. Kangagreed that certain stock transactions by him in 2002 involving the Company’scommon stock should have resulted in a liability under Section 16(b) of theSecurities Exchange Act of 1934, as amended (“Section 16(b)”).  These transactions include Mr. Kang’s privatesale of 285,715 shares of his personal Liquidmetal Technologies common stock toGrowell Metal Co., Ltd. in February 2002, prior to our initial publicoffering.  They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to Growell Metalin February 2002 regarding the guaranteed minimum value of the stock purchasedby Growell Metal in February 2002 (the purchases and dispositions incident tothis agreement occurred in August and November 2002, respectively).  Lastly, the transactions include open-marketpurchases of an aggregate of 89,300 shares of the Company’s common stock madeby Mr. Kang in August 2002.

TheAudit Committee of our Board of Directors conducted an independent inquiry intothe above-described transactions with the aid of independent legal counsel and,as a result of such inquiry, the Audit Committee concluded that thetransactions should have resulted in a liability to the Company under Section16(b) in the amount of $302.  Mr. Kanghas acknowledged this liability, and in an agreement negotiated between Mr.Kang and the Audit Committee and approved by the full Board, Mr. Kang will paythis liability through periodic installments in 2005 and 2006.  As a result, the Company accrued for the $302receivable in other assets and other income as of December 31, 2004.  The above-described transactions involvingGrowell Metal was reported on a new Form 4 filed by Mr. Kang onNovember 15, 2004, and the open-market purchases were previously reported on atimely basis in August 2002.  As of March31, 2007, the outstanding amount of the receivable was $235 and is included inprepaid and other current assets.

During 2006, the Companypurchased production supplies and molds from Grace Metal, Lead Metal, and SDM,which are controlled by James Kang, a former director and officer of theCompany.  The Company purchased a totalof $141 for the three months ended March 31, 2007, of which $112 is included inaccounts payable and accrued liabilities at March 31, 2007.

** 13. Subsequent Events**

In April 2007, the Company entered into an agreementto purchase the assets of a coatings application business effective June 1,2007 for approximately $750.

In April 2007, the Company entered into a recessionagreement with certain holders of the 7% Senior Convertible Notes Due August2007, which affirmed the exchange of $1,500 of the notes for 8% ConvertibleSubordinated Convertible Notes due January 2010 (the “January 2010 Notes”).  As a result of this agreement, the totalprincipal amount of the January 2010 Notes was increased to $16,300 (see Note7).

In April 2007, theCompany entered into an amendment to the Security Purchase Agreement (the “JanuaryPurchase Agreement”), dated January 3, 2007, with certain of the holders of theCompany’s January 2010 Notes.  Under theterms of the January Purchase Agreement, the Company agreed to satisfy, within 5 days after the closing of theprivate placement, through either repayment or conversion, approximately$15,461 of the Company’s outstanding debt under previously issued 

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promissory notes, including the 7% Senior Convertible Notes Due August2007 (the “Debt Satisfaction Covenant”).  The Company originally agreed tothis covenant based on assurances that a substantial number of holders of theAugust 2007 Notes would elect to convert their 7% Senior Convertible Notes DueAugust 2007 at a reduced conversion price following the private placement undera note conversion agreement proposed by the Company, but most of such holdershave elected not to proceed with such conversion.  Accordingly, in aneffort to preserve funds, the Company has not yet repaid the indebtedness asrequired by the January Purchase Agreement. Under the April 2007 amendment, theCompany will have until October 1, 2007 (or such earlier date on which theindebtedness to be repaid is due) to comply with the Debt SatisfactionCovenant.  In addition, the April 2007 amendment provides that thepurchasers of the January 2010 Notes have the right to require the Company toredeem such notes prior to maturity in the event that the Company sell itsLiquidmetal Coatings business unit, sell its manufacturing facility in SouthKorea, and/or engage in any debt or equity financing, provided that theforegoing transactions result in aggregate cumulative proceeds of $25,000, andit also provides that the Company will be obligated to grant to the purchasersof such notes a *pari passu* security interest inany collateral (if any) that is used to secure our next private placement ofconvertible notes.  As required by the January Purchase Agreement, theApril 2007 amendment was executed by the holders of more than fifty percent(50%) of the outstanding principal amount of the Notes.  Additionally, theApril 2007 amendment provides for a reduced warrant exercise price of $1.55 pershare (compared to $1.93 per share) and reduced conversion price of $1.10 pershare (compared to conversion price of $1.55 per share), subject to adjustmentfor anti-dilution.  As a result, the total number warrants issued toholders of our January 2010 Notes were increased to 7,408,881.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

*Thismanagement’s discussion and analysis should be read in conjunction with thecondensed consolidated financial statements and notes included elsewhere inthis report on Form 10-Q.*

*Thismanagement’s discussion and analysis, as well as other sections of this reporton Form 10-Q, may contain “forward-looking statements” that involve risksand uncertainties, including statements regarding our plans, future events, objectives,expectations, forecasts, or assumptions. Any statement that is not a statementof historical fact is a forward-looking statement, and in some cases, wordssuch 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 actualoutcomes and results to differ materially from the anticipated outcomes orresults, and undue reliance should not be placed on these statements. Theserisks and uncertainties include, but are not limited to, the matters discussedunder the caption “Factors Affecting Future Results” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006 and other risks anduncertainties discussed in filings made with the Securities and ExchangeCommission (including risks described in subsequent reports on Form 10-Q,Form 10-K, Form 8-K, and other filings). Liquidmetal Technologiesdisclaims any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.*

**Overview**

We are a materials technology company that develops and commercializesproducts made from amorphous alloys.  OurLiquidmetal® family of alloys consists of a variety of coatings, powders, bulkalloys, and composites that utilize the advantages offered by amorphous alloytechnology.  We develop, manufacture, andsell products and components from bulk amorphous alloys that are incorporatedinto the finished goods of our customers, and we also market and sell amorphousalloy industrial coatings.  We alsopartner with third-party licensees and distributors to develop andcommercialize Liquidmetal alloy products. We have the exclusive right to develop, manufacture, and sell what webelieve are the only commercially viable bulk amorphous alloys.

Amorphousalloys are unique materials that are distinguished by their ability to retain arandom atomic structure when they solidify, in contrast to the crystallineatomic structure that forms in ordinary metals and alloys when they solidify.Liquidmetal alloys possess a combination of performance, processing, and costadvantages that we believe makes them preferable to other materials in avariety of applications. The amorphous atomic structure of our alloys enablesthem to overcome certain performance limitations caused by inherent weaknessesin crystalline atomic structures, thus facilitating performance and processingcharacteristics superior in many ways to those of their crystallinecounterparts. For example, our zirconium-titanium Liquidmetal alloys areapproximately 250% stronger than commonly used titanium alloys, such asTi-6Al-4V, but they have processing characteristics similar in many respects toplastics. We believe these advantages could result in Liquidmetal alloyssupplanting other incumbent materials in a wide variety of applications.Moreover, we believe these advantages will enable the introduction of entirelynew products and applications that are not possible or commercially viable withother materials.

Our revenuesare derived from two principal operating segments: Liquidmetal alloy industrialcoatings and bulk Liquidmetal alloy products. Liquidmetal alloy industrial coatings are used primarily as a protectivecoating for industrial machinery and equipment, such as drill pipe used by theoil drilling industry and boiler tubes used in coal-burning power plants. Thehistorical operating information for fiscal year 2001 is based substantially onsales of Liquidmetal alloy coatings. In the second half of 2002, we beganproducing bulk Liquidmetal alloy components and products for incorporation intoour customers’ finished goods. Bulk Liquidmetal alloy segment revenue includessales of parts or components of electronic devices, medical products, andsports and leisure goods, tooling and prototype parts (including demonstrationparts and test samples) for customers with products in development, productlicensing and arrangements, and research and development revenue relatingprimarily to defense and medical applications. We expect that these sources of revenue will continue to significantlychange the character of our revenue mix.

The cost of sales for our Liquidmetal coatings segment consistsprimarily of the costs of outsourcing our manufacturing to third parties.Consistent with our expectations, our cost of sales has been increasing overhistorical results as we further build our bulk Liquidmetal alloy business.Although we plan to continue outsourcing the manufacturing of our coatings, wewill internally manufacture many products derived from our bulk Liquidmetalalloys.

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Selling, general, and administrative expenses currently consistprimarily of salaries and related benefits, stock-based compensation, severancecosts, travel, consulting and professional fees, depreciation and amortization,insurance, office and administrative expenses, and other expenses related toour operations.

Research and development expenses represent salaries, related benefitsexpense, depreciation of research equipment, consulting and contract services,expenses incurred for the design and testing of new processing methods,expenses for the development of sample and prototype products, and other expensesrelated to the research and development of Liquidmetal alloys. Costs associatedwith research and development activities are expensed as incurred. We plan toenhance our competitive position by improving our existing technologies anddeveloping advances in amorphous alloy technologies. We believe that ourresearch and development efforts will focus on the discovery of new alloycompositions, the development of improved processing technology, and theidentification of new applications for our alloys.

On August 4, 2004, the Company established a plant in the city of Weihaiin Shandong province of China under Weihai Liquidmetal Company Limited, whichis 100% owned by Liquidmetal Korea, to facilitate our bulk alloy manufacturingbusiness.  Weihai Liquidmetal isconsolidated into Liquidmetal Technologies with all intercompany transactionseliminated.

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

**CriticalAccounting Policies and Estimates**

The preparation of condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions that affect reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. These estimates and assumptions are based on historical experience andvarious other factors that are believed to be reasonable under thecircumstances.  Actual results coulddiffer materially from these estimates under different assumptions orconditions.

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

·              Exchange rate fluctuations

·              Warrantyaccrual

·              Allowance for doubtful accounts

·              Inventories at lower of cost or net realizablevalue

·              Deferred tax assets

·              Valuation of derivatives of warrants andembedded conversion features

Our Annual Report on Form 10-K for the year endedDecember 31, 2006, containsfurther discussions on our critical accounting policies and estimates.

The company adopted Statement of Financial AccountingStandards No. 123, Share-Based Payment (“SFAS 123R”), onJanuary 1, 2006. This new standard requires companies to expense the fairvalue of employee stock options and similar awards. The company adopted SFAS123R using the modified prospective transition method. Therefore, stock basedcompensation expense measured in accordance with SFAS 123R was recorded duringthe first quarter of 2006, but the prior year consolidated statement of incomewas not restated. The adoption of SFAS 123R resulted in incremental expense of$0.2 million for the three months ended March 31, 2007 and 2006.

**Resultsof Operations**

Comparison of the three months ended March 31, 2007 and 2006

*Revenue*. Revenue decreased $1.5 million to$5.1 million for the three months ended March 31, 2007 from $6.6 millionfor the three months ended March 31, 2006. The decrease consisted of a decrease of $1.8 million from the sales andprototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers as a result of decreased demand from electronic casingsapplications, offset by an increase of $0.3 million from sales of our coatingsproducts as a result of increase in demand from oil drilling applications.

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*Costof Sales*. Cost of sales increased to $6.4 million, or 127% ofrevenue, for the three months ended March 31, 2007 from $5.3 million, or81% of revenue, for the three months ended March 31, 2006.  The increase was a result of decreases inbulk Liquidmetal alloy business. Significant portions of our manufacturing costs continue to remainfixed.  We believe that highermanufacturing volumes and greater mix of higher-margin products in the futurewill cause the gross profit to improve over time.  The cost to manufacture parts from our bulkLiquidmetal alloys is variable and differs based on the unique design of eachproduct.  However, the cost of sales forthe products sold by the coatings business segment is generally consistentbecause the Liquidmetal coatings products are produced by third parties andsold wholesale to various industries.

*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses decreased to $2.5 million, or 50% of revenue, forthe three months ended March 31, 2007 from $2.7 million, or 41% ofrevenue, for the three months ended March 31, 2006.  This decrease was primarily a result ofdecrease in wages and expenses of $0.1 million, and a decrease in travel andadvertising expenses $0.1 million.

*Researchand Development Expenses*. Research and development expensesincreased to $0.3 million, or 5% of revenue, for the three months endedMarch 31, 2007 from $0.2 million, or 3% of revenue, for the three monthsended March 31, 2006.  The increase isprimarily due to an increase in wages and expenses and professional fees of$0.1 million The Company continues to perform research and development of newLiquidmetal alloys and related processing capabilities, develop newmanufacturing techniques, and contract with consultants to advance thedevelopment of Liquidmetal alloys.

*Lossfrom Extinguishments of Debt. *Loss from extinguishments of debt increasedto $0.6 million, or 13% of revenue, for the three months ended March 31, 2007from $0 for the three months ended March 31, 2006.  The $0.6 million loss from extinguishment ofdebt was recognized from the extinguishment of certain of our convertible andsubordinated notes in January 2007.

*Changein Value of Warrants. *Change in value of warrants increased to again of $3.7 million, or 73% of revenue, for the three months ended March 31,2007 from a loss of $1.3 million, or 20% of revenue, for the three months endedMarch 31, 2006.  The change in value ofwarrants consisted of warrants issued from convertible notes and subordinatednotes funded between 2004 and 2007 primarily as a result of fluctuations in ourstock price.

*Changein Value of Conversion Feature.*Change in the value of our conversion feature liability from our seniorconvertible debt funded in March 2004 and exchanged in August 2004, August 2005and January 2007 resulted in a change in value of conversion feature gain of$4.3 million, or 86% of revenue, during the three months ended March 31, 2007from a loss of $1.8 million or 27% of revenue, for the three months ended March31, 2006, primarily as a result of fluctuations in our stock price.

*OtherIncome.*Other incomewas $0.5 million, or 7% of revenue, for the three months ended March 31, 2006from termination of a distribution agreement with a Japanese sporting goodsdistributor originally entered into in March 1996.  There were no amounts recognized as otherincome during the three months ended March 31, 2007.

*InterestExpense*. Interest expense was $2.8 million, or 55% ofrevenue, for the three months ended March 31, 2007 and was $1.8 million, or 27%of revenue, for the three months ended March 31, 2006.  Interest expense consists primarily ofinterest accrued on the Kookmin Bank loan funded in 2003, convertible debtsfunded in 2004, 2005, and 2007, subordinated notes funded in 2006, fees chargedfrom short-term borrowings under the April 2005 factoring, loan, and securityagreement, as well as amortization of debt issuance costs and discount on theconvertible and subordinated debt.  Theincrease was primarily due to higher debt balance, increased debt discountamortization, increases in fees from borrowings made under the April 2005 factoring,loan, and security agreement, and interest costs accrued for late filingpenalties during the three months ended March 31, 2007.

*Interest Income.* Interest income was $61 thousand for the threemonths ended March 31, 2007 and was $2 thousand for the three months endedMarch 31, 2006 from interest earned on cash deposits.

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**Liquidityand Capital Resources**

Our cash used for operating activities was $5.4million for the three months ended March 31, 2007 and $1.2 million for thethree months ended March 31, 2006.  Ourworking capital deficit decreased from $ $23.2 million at December 31, 2006 to$16.1 million at March 31, 2007.  TheCompany’s working capital deficit decrease of $7.1 million was primarilyattributable to increase in cash and cash equivalent of $2.8 million, increasein restricted cash of $2.1 million, increase in other assets of $1 milliondecrease in accounts payable and accrued liability of $2.1 million, decrease inshort term debt of $1.2 million, decrease in current portion of long-term debtof $2.6 million, offset by decrease in trade accounts receivable of $0.9million, inventories of $1.2 million, decrease in property, plant and equipmentof $1.0 million, and increase in conversion feature liabilities of $1.6million.

Our cash used in investing activities was $0.2 millionfor the three months ended March 31, 2007 primarily for investments in jointventure.

Our cash provided by financing activities was $8.5million for the three months ended March 31, 2007.  The Company received net $3.7 million inborrowings from factoring agreement executed in April 2005. The proceeds fromborrowings have been used to meet working capital requirements.   The Company has $3.5 million available forfuture borrowings under the factoring agreement, which is contingent onapproval of eligible receivables by the financing company.

On January 3, 2007, the Company completed a privateplacement of $16.3 million in principal amount of 8% Convertible SubordinatedNotes due January 2010 (the “January 2010 Notes”). The January 2010 Notes were issuedfor aggregate cash in the amount of $12.9 million, in payment of a total of$3.4 million in principal and accrued but unpaid interest under our previouslyissued 7% Senior Secured Convertible Notes due August 2007 and our  8%Unsecured Subordinated Notes.

We anticipate that the $12.9 million aggregate cash raisedin the private placement will be sufficient to pursue our currentoperating plan only through the third quarter of 2007, and we will thereforerequire additional funding at or prior to that time.  As a result of the foregoing, weare actively seeking additional sources of capital and seeking to restructureand/or modify existing indebtedness.  Theamount of funding that we seek and the timing of such fundraising efforts willdepend on the extent to which we are able to increase revenues throughobtaining additional purchase orders for our products and/or the extent towhich we can restructure or modify our debt. Because we cannot be certain that we will be able to obtain adequatefunding from debt, equity, or other traditional financing sources, we are alsoactively exploring several strategic financing options, including the possiblesale of our manufacturing plant in South Korea (which would then be replacedwith a smaller facility), potential licensing and outsourcing of manufacturingoperations including those in South Korea and China, and the possible sale ofour Liquidmetal Coatings business.  Wecannot guarantee that adequate funds will be available when needed, and if wedo not receive sufficient capital, we may be required to alter or reduce thescope of our operations.

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**ContractualObligations**

The following table summarizes the Company’s obligations andcommitments as of March 31, 2007:
| ** **                                          | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                         | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contractual Cash Obligations (1)** | ** ** | **Total**                                                          | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5 Years** | ** ** |
|                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Long-term debt  (2)                                 |       | $                                                                  | 29,796     |   | $ | 13,496 |   | $ | 16,300 |   | $ | — |   | $ | — |   |
| Short-term debt  (3)                                |       | 1,493                                                              |       | 1,493 |   | — |   | — |   | — |   |
| Operating leases  and rents                         |       | 1,701                                                              |       | 94 |   | 1,095 |   | 512 |   | — |   |
| Consulting  services payable                        |       | 47                                                                 |       | 47 |   | — |   | — |   | — |   |
| Dongyang                                            |       | 12                                                                 |       | 12 |   | — |   | — |   | — |   |
| Nichimen                                            |       | 335                                                                |       | 335 |   | — |   | — |   | — |   |
|                                                |       | $                                                                  | 33,384     |   | $ | 15,477 |   | $ | 17,395 |   | $ | 512 |   | $ | — |   |

 

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(1)Contractual cash obligations include Long-Term Debt comprised of: $2,083 ofSenior Convertible Notes issued in 2004 and $7,186 of Senior Convertible Notesissued in 2005, $3,009 of Unsecured Subordinated Notes issued in 2006, $16,300of Convertible Unsecured Notes issued in 2007, and $1,218 of Kookmin Bank Loan,Short-Term Debt comprised of $1,493 outstanding advances received underfactoring, loan, and security agreement, future minimum lease payments undercapital and operating leases, and purchase commitments from consultants,payments due from our discontinued equipment manufacturing business (Dongyang),and minimum payments due under a distribution agreement (Nichimen).

(2)Does not include interest payments of $4,055; and un-amortized discounts forconversion feature and warrants of $11,540 of our notes.

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

**OffBalance Sheet Arrangements**

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

On June 26,2006, we entered into a joint venture agreement with SAGA, SpA in Padova,Italy, (‘SAGA”) a specialist precision parts manufacturer.  The jointventure is named Liquidmetal SAGA Italy, Srl (“LSI”).  We also enteredinto an exclusive manufacturing license agreement for the eyewear industry withLSI.  Under the joint venture agreement, we have the option to buyownership interest in LSI, initially, of 19.9% to up to 50%.  In December2006, we have purchased 19.9% interest in the joint venture.  Under thelicensing agreement, at any time following 18 months after the effective dateof the agreement, LSI may exercise its option to sell us certain businessassets including manufacturing equipment acquired under the jointventure.  During the year ended December 31, 2006, we recognized revenuesof $0.7 million of Liquidmetal alloys sold to SAGA for use in the jointventure.  We anticipate the alloys to be fully utilized by the joint ventureprior to the 18 month period.

**Item 3 – Quantitative and Qualitative Disclosures aboutMarket Risk**

We areexposed to various market risks in conducting the business of the Company, andwe anticipate that this exposure will increase as a result of our plannedgrowth.  In an effort to mitigate lossesassociated with these risks, we may at times enter into derivative financialinstruments, although we have not historically done so.  These may take the form of forward salescontracts, option contracts, foreign currency exchange contracts, and interestrate swaps.  We have not, and do notintend to, engage in the practice of trading derivative securities for profit.

*Interest Rates.*  We are exposed to market risks relating tochanges in interest rates as our borrowings are subject to the volatility ofinterest rate risk.

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*Commodity Prices. *We are exposed to pricerisk related to anticipated purchases of certain commodities used as rawmaterials by our businesses, including titanium and zirconium.  Although we do not currently enter intocommodity future, forward, and option contracts to manage the fluctuations inprices of anticipated purchases, we may enter into such contacts in the futureas our business grows and as our purchases of these raw materials increase.

*Foreign Exchange Rates.*  As a result of our operation of amanufacturing facility in South Korea, a substantial portion of our costs willbe denominated in the South Korean won. Consequently, fluctuations in the exchange rates of the South Korean wonto the U.S. dollar will affect our costs of goods sold and operating marginsand could result in exchange losses. Although we do not currently enter into foreign exchange hedgetransactions, we may do so in the future as our business grows.

**Item 4 –Controls and Procedures**

Evaluation of Disclosure Controls and Procedures.  Basedon an evaluation of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Exchange Act) as of March 31, 2007, the end ofthe period covered by this report, our Chief Executive Officer and VicePresident of Finance have concluded that the disclosure controls and procedureswere effective.

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

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**PART II**

**OTHERINFORMATION**

**Item1 – Legal Proceedings**

Securities ClassAction and Shareholder Derivative Actions

In April 2006, wereached agreements-in-principle to settle our previously-disclosed consolidatedsecurities class action and shareholder derivative actions for a total of $7.5million; $7.0 million for the class action and $0.5 million for the derivativeactions.  In addition, we will commit tomaintain or implement various corporate governance measures in connection withthe settlement of the derivative actions.

The consolidatedclass action arose from a number of lawsuits filed in 2004 against our companyand certain of our former and current directors and officers on behalf ofpersons who purchased our common stock between May 21, 2002 andMay 13, 2004.  These actions, which were brought under the federalsecurities laws, alleged that the Prospectus issued in connection with ourinitial public offering in May 2002 contained material misrepresentationsand omissions regarding our historical financial condition and regarding apersonal stock transaction by our former chief executive officer.  Theyalso alleged that our company and certain of our present and former officersand directors engaged in improper revenue recognition with respect to certainof our business transactions, failed to maintain adequate internal controls,and knowingly disclosed unrealistic but favorable information about marketdemand for and commercial viability of our products to artificially inflate thevalue of our stock.  On October 19, 2006,the presiding judge entered an Order giving final approval of the class actionsettlement.  In connection with thesettlement, our directors and officers’ liability insurers contributed $7.0million to a settlement fund, from which approved claims of eligible classmembers will be paid in accordance with a court-approved plan ofallocation.  Taking into account theinsurance contribution, the net cost of the settlement to our company isapproximately $0.5 million, which is the insurance deductible we paid overseveral quarters ending in the third quarter of 2005, and which was previouslyrecorded as a charge.

In addition, inMay 2004, two shareholder derivative actions were filed in the SuperiorCourt of Orange County, California and later consolidated.  Shortlythereafter, one additional shareholder derivative action was filed in theUnited States District Court for the Middle District of Florida, TampaDivision.  These derivative actions were brought by certain shareholdersagainst certain of our present and former officers and directors as well as ourcompany (as a nominal defendant).  The suits alleged that the defendantsbreached various fiduciary duties and otherwise violated state law basedprimarily upon the same facts and circumstances underlying thefederal securities class action.  On August 2, 2006, plaintiffs’counsel in the California derivative action filed a Notice of Settlement in theSuperior Court.  The action is presentlystayed while the parties’ counsel negotiate and prepare formal settlementdocuments.  Final documentation andapproval of the settlement of the derivative actions remains outstanding.

Department ofJustice Investigation

In August 2006,the United States Department of Justice (“DOJ”) instituted a grand juryproceeding in the Middle District of Florida to investigate, among otherthings, alleged accounting improprieties in relation to certain of our businesstransactions and a personal stock transaction by our former chief executiveofficer.  The grand jury proceeding isbased primarily upon the same underlying facts and circumstances as alleged inthe federal class action and shareholder derivative actions.  To date, subpoenas for the production ofdocuments and/or grand jury testimony have been issued to our company and severalpresent and former officers and directors. We are cooperating with the DOJ in its investigation.

Noteholder Lawsuit

On January 3,2007, we completed a private placement of new 8% Convertible Subordinated Notesdue January 2010 (the “January 2010 Notes”) that, as amended, provided for theissuance of $16.3 million in principal amount of January 2010 Notes.  The January 2010 Notes were issued pursuantto a Securities Purchase Agreement, dated January 3, 2007, between our companyand the purchasers of the January 2010 Notes (the “January Purchase Agreement”).  Under the terms of the original JanuaryPurchase Agreement, we agreed to repay or otherwise satisfy, within 5 daysafter the closing of the private placement, approximately $15.5 million of ouroutstanding debt under previously issued promissory notes, including the August2007 Notes, the Atlantic Note, and New Bridge Notes (the “Debt SatisfactionCovenant”).  We originally agreed to thiscovenant based on assurances that a substantial number of holders of the August2007 Notes would elect to convert their August 2007 Notes at a reducedconversion price following the private placement under a note conversionagreement 

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proposed by us,but most of such holders ultimately elected not to proceed with suchconversion.  Accordingly, in an effort topreserve funds, we have not yet repaid the indebtedness as required by theoriginal January Purchase Agreement, and in April 2007, we entered into anamendment to the January Purchase Agreement providing that we will have untilOctober 1, 2007 (or such earlier date on which the indebtedness to be repaid isdue) to comply with the Debt Satisfaction Covenant.

On March 22, 2007,one of the purchasers of the January 2010 Notes (holding January 2010 Notes inthe aggregate amount of $2.0 million) sent us an event of default notice (“Eventof Default Notice”) indicating that we had defaulted under the January PurchaseAgreement (and therefore under the January 2010 Note) by failing to comply withthe Debt Satisfaction Covenant.  Thisholder did not execute the April 2007 amendment to the January PurchaseAgreement.  In general, upon a breach ofthe January 2010 Notes or January Purchase Agreement, a holder of the January2010 Notes may require us to redeem the January 2010 Notes at a price equal tothe greater of (i) the conversion amount to be redeemed and (ii) the product of(A) the conversion rate with respect to such conversion amount in effect atsuch time as the purchaser of the January 2010 Note delivers an Event ofDefault Redemption Notice (as defined below) and (B) the closing sale price ofour common stock on the date immediately preceding such event of default.  Under the terms of the January 2010 Notes andJanuary Purchase Agreement, we have ten (10) business days after the receipt ofan Event of Default Notice to cure a default. On April 6, 2007, the holder which sent the Event of Default Noticefurther sent us an event of default redemption notice (“Event of DefaultRedemption Notice”).  The Event ofDefault Redemption Notice states that the holder has elected to require us toredeem its January 2010 Note for a price equal to $2.0 million (the amount ofthe January 2010 Note) plus accrued and unpaid interest.  On April 16, 2007, we were served with acomplaint filed by the holder in the Federal District Court in Minnesota tocollect this amount. We will have until May 25, 2007 to formally respond to thecomplaint.  Although we believe that, asa result of the April 2007 amendment to the January Purchase Agreement, we maynot be obligated to redeem the holder’s January 2010 Note because we are now incompliance with the Debt Satisfaction Covenant, a court of law may concludeotherwise, and we are therefore currently working to resolve this matter.

**Item 1A –Risk Factors**

Inaddition to the risk factors included in our Annual Report on Form 10-K for theyear ended December 31, 2006, the following is an additional risk factor thatcould adversely affect our business, results of operations or financialcondition:

***One of the investors in our January 2007 privateplacement has demanded the redemption of its note issued in the privateplacement.***

The January 2010 Notes issued in our January 2007 privateplacement were issued pursuant to a Securities Purchase Agreement, datedJanuary 3, 2007, between our company and the purchasers of the January 2010Notes (the “January Purchase Agreement”). Under the terms of the original January Purchase Agreement, we agreed torepay or otherwise satisfy, within 5 days after the closing of the privateplacement, approximately $15.5 million of our outstanding debt under previouslyissued promissory notes, including the August 2007 Notes (the “DebtSatisfaction Covenant”).  We originallyagreed to this covenant based on assurances that a substantial number ofholders of previously issued notes would elect to convert such notes at areduced conversion price following the January 2007 private placement under anote conversion agreement proposed by us, but most of such holders ultimatelyelected not to proceed with such conversion. Accordingly, in an effort to preserve funds, we have not yet repaid theindebtedness as required by the original January Purchase Agreement, and inApril 2007, we entered into an amendment to the January Purchase Agreementproviding that we will have until October 1, 2007 (or such earlier date onwhich the indebtedness to be repaid is due) to comply with the DebtSatisfaction Covenant.

OnMarch 22, 2007, one of the purchasers of the January 2010 Notes (holdingJanuary 2010 Notes in the aggregate amount of $2.0 million) sent us an event ofdefault notice (“Event of Default Notice”) indicating that we had defaultedunder the January Purchase Agreement (and therefore under the January 2010Note) by failing to comply with the Debt Satisfaction Covenant.  This holder did not execute the April 2007amendment to the January Purchase Agreement. In general, upon a breach of the January 2010 Notes or January PurchaseAgreement, a holder of the January 2010 Notes may require us to redeem theJanuary 2010 Notes at a price equal to the greater of (i) the conversion amountto be redeemed and (ii) the product of (A) the conversion rate with respect tosuch conversion amount in effect at such time as the purchaser of the January2010 Note delivers an Event of Default Redemption Notice (as defined below) and(B) the closing sale price of our common stock on the date immediatelypreceding such event of default.  Underthe terms of the January 2010 Notes and January Purchase Agreement, we have ten(10) business days after the receipt of an Event of Default Notice to cure adefault.  On April 6, 2007, the holderwhich sent the Event of Default Notice further sent us an event of defaultredemption notice (“Event of Default Redemption Notice”).  The Event of Default Redemption Notice statesthat the holder has elected to require us to redeem its January 2010 Note for aprice equal to $2,000,000 (the amount of the January 2010 Note) plus accruedand unpaid interest.  On April 16, 2007,we were served with a

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complaintfiled by the holder in the Federal District Court in Minnesota to collect thisamount. We will have until May 25, 2007 to formally respond to the complaint.  Although we believe that, as a result of theApril 2007 amendment to the January Purchase Agreement, we may not be obligatedto redeem the holder’s January 2010 Note because we are now in compliance withthe Debt Satisfaction Covenant, a court of law may conclude otherwise, and weare therefore currently working to resolve this matter.

Also,because we repaid $1.8 million in principal and interest in January andFebruary 2007 under certain subordinated bridge notes without first repayingthe August 2007 Notes and July 2007 Notes, we may also be deemed to be inbreach of the August 2007 Notes and July 2007 Notes, which case they would alsohave the right to accelerate such notes and foreclose on their securityinterest if the breach is not cured within thirty days of notice ofdefault.  The August 2007 Notes and July2007 Notes are secured by substantially all of the assets of our company.  If we fail to pay such notes, either atmaturity or upon acceleration, then the noteholders may elect to foreclose uponthe assets securing the notes.

**Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds**

In February 2007, we entered into conversion agreementswith certain holders of our August 2007 Notes holding $0.4 million of principalproviding for the conversion of such notes at a reduced conversion price of$1.25 per share and issued 320,000 shares of our common stock.  This transaction was exempt from theregistration requirements of the Securities Act of 1933, as amended, pursuantto Section 4(2) of the Securities Act, as such transaction did not involve anypublic offering, was made without general solicitation or advertising, and theholders were accredited investors with access to all relevant informationnecessary to evaluate the investment and represented to us that the shares werebeing acquired for investment.

**Item 3 -Defaults Upon Senior Securities**

OnMarch 22, 2007, one of the purchasers of the 8% Convertible Subordinated NotesDue January 2010 (the “January 2010 Notes”), holding January 2010 Notes in theaggregate amount of $2.0 million, sent us an event of default notice (“Event ofDefault Notice”) indicating that we had defaulted under the January PurchaseAgreement (and therefore under the January 2010 Note) by failing to comply withthe Debt Satisfaction Covenant.  Thisholder did not execute the April 2007 amendment to the January PurchaseAgreement.  In general, upon a breach ofthe January 2010 Notes or January Purchase Agreement, a holder of the January2010 Notes may require us to redeem the January 2010 Notes at a price equal tothe greater of (i) the conversion amount to be redeemed and (ii) the product of(A) the conversion rate with respect to such conversion amount in effect atsuch time as the purchaser of the January 2010 Note delivers an Event ofDefault Redemption Notice (as defined below) and (B) the closing sale price ofour common stock on the date immediately preceding such event of default.  Under the terms of the January 2010 Notes andJanuary Purchase Agreement, we have ten (10) business days after the receipt ofan Event of Default Notice to cure a default. On April 6, 2007, the holder which sent the Event of Default Noticefurther sent us an event of default redemption notice (“Event of DefaultRedemption Notice”).  The Event ofDefault Redemption Notice states that the holder has elected to require us toredeem its January 2010 Note for a price equal to $2.0 million (the amount ofthe January 2010 Note) plus accrued and unpaid interest.  On April 16, 2007, we were served with acomplaint filed by the holder in the Federal District Court in Minnesota tocollect this amount. We will have until May 25, 2007 to formally respond to thecomplaint.  Although we believe that, asa result of the April 2007 amendment to the January Purchase Agreement, we maynot be obligated to redeem the holder’s January 2010 Note because we are now incompliance with the Debt Satisfaction Covenant, a court of law may concludeotherwise, and we are therefore currently working to resolve this matter.

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Also,because we repaid $1.8 million in principal and interest in January andFebruary 2007 under certain subordinated bridge notes without first repayingthe August 2007 Notes and July 2007 Notes, we may also be deemed to be inbreach of the August 2007 Notes and July 2007 Notes, which case they would alsohave the right to accelerate such notes and foreclose on their securityinterest if the breach is not cured within thirty days of notice of default.  The August 2007 Notes and July 2007 Notes aresecured by substantially all of the assets of our company.  If we fail to pay such notes, either atmaturity or upon acceleration, then the noteholders may elect to foreclose uponthe assets securing the notes.

**Item 4 - Submissionof Matters to a Vote of Security Holders**

None

**Item 5 –Other Information**

There were no mattersrequired to be disclosed in a current report on Form 8-K during the fiscalquarter covered by this report that were not so disclosed.

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**Item 6 –Exhibits**

The following documentsare filed as an exhibit to this Report:
| Exhibit Number | ** ** | **Description of Document**                                                                                                                                            |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                   |
| 10.1           |       | Standard Industrial / Commercial Single-Tenant  Lease, dated February 13, 2007, between Liquidmetal Technologies, Inc. and  30452 Esperanza LLC.                       |
|           |       |                                                                                                                                                                   |
| 10.2           |       | Lease, dated March 19, 2007, between Liquidmetal  Technologies, Inc. and Larry Ruffino and Roland Ruffino.                                                             |
|           |       |                                                                                                                                                                   |
| 31.1           |       | Certification of the President and Chief Executive  Officer, Larry Buffington, as required by Section 302 of Sarbanes-Oxley Act  of 2002                               |
|           |       |                                                                                                                                                                   |
| 31.2           |       | Certification of Principal Financial Officer, Won  Chung, as required by Section 302 of Sarbanes-Oxley Act of 2002                                                     |
|           |       |                                                                                                                                                                   |
| 32.1           |       | Certification of Principal Executive Officer, Larry  Buffington, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002 |
|           |       |                                                                                                                                                                   |
| 32.2           |       | Certification of Principal Financial Officer, Won  Chung, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of Sarbanes-Oxley Act of 2002        |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.
|                     |   | LIQUIDMETAL TECHNOLOGIES                     |   |   |
|---------------------|--------|----------------------------------------------|--------|--------|
|                |   | (Registrant)                                 |   |   |
|                |   |                                         |   |   |
| Date: May 15,  2007 |   | /s/ Larry Buffington                         |   |   |   |
|                |   | Larry Buffington                             |   |   |
|                |   | President and Chief Executive Officer        |   |   |
|                |   | (Principal Executive Officer)                |   |   |
|                |   |                                         |   |   |
|                |   |                                         |   |   |
| Date: May 15,  2007 |   | /s/ Won Chung                                |   |   |   |
|                |   | Won Chung                                    |   |   |
|                |   | Vice President of Finance                    |   |   |
|                |   | (Principal Financial and Accounting Officer) |   |   |

 

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