Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

### **FORM 10-Q**

 
| **x**                                                       | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                               |
| **For the quarterly period ended  September 30, 2008** |
| ** **                                                  | ** ** | ** **                                                                                               |
| **OR**                                                      |
| ** **                                                  | ** ** | ** **                                                                                               |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from           to           **

 

**Commission File No. ****001-31332**

 

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# **LIQUIDMETAL TECHNOLOGIES, INC.**

**(**Exact name of Registrant as specified in its charter**)**

 

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

 

**30452 Esperanza**

**Rancho Santa Margarita, CA 92688**

(address of principal executive office, zip code)

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for atleast the past 90 days.

 

Yes  x    No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 ofthe Act).  See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act).

 

Yes   o    No  x

#### ** **

#### **As of October 31, 2008, there were 44,726,295 sharesof the registrant’s common stock, $0.001 par value, outstanding.**

#### ** **

 

 

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**LIQUIDMETAL TECHNOLOGIES, INC.FORM 10-QFOR THE QUARTER ENDED****SEPTEMBER30, 2008**

 

**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 as defined in the Securities Act of 1933 and Securities Exchange Actof 1934. Investors are cautioned that the Company’s actual results in thefuture may differ materially from those projected in the forward-lookingstatements due to risks and uncertainties that exist in the Company’soperations and business environment, including competition, need for increasedacceptance of products, ability to continue to develop and extend our brandidentity, ability to anticipate and adapt to a competitive market, ability toeffectively manage rapidly expanding operations, amount and timing of operatingcosts and capital expenditures relating to expansion of our business,operations and infrastructure, ability to provide superior customer service,dependence upon key personnel and the like. The Company’s most recent filingswith the Securities and Exchange Commission, including Form 10-K, containadditional information concerning many of these risk factors, and copies ofthese filings are available from the Company upon request and without charge.

 

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**TABLE OFCONTENTS**

 
| **PART I - Financial  Information**                                                                   |       |
|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                 |       |
| Item 1 – Financial Statements                                                                         | 4          |
| Condensed Consolidated  Balance Sheets (unaudited)                                                         | 4          |
| Condensed Consolidated  Statements of Operations and Comprehensive Income (Loss) (unaudited)               | 5          |
| Condensed Consolidated  Statements of Shareholders’ Deficiency (unaudited)                            | 6          |
| Condensed Consolidated  Statements of Cash Flows (unaudited)                                               | 7          |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                          | 9          |
|                                                                                                       |       |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 26         |
|                                                                                                       |       |
| Item 3 –  Quantitative and Qualitative Disclosures about Market Risk                                  | 32         |
|                                                                                                       |       |
| Item 4T –  Controls and Procedures                                                                    | 33         |
|                                                                                                       |       |
| **PART II  – Other Information**                                                                 | ** ** |
|                                                                                                       |       |
| Item 1 – Legal Proceedings                                                                            | 34         |
|                                                                                                       |       |
| Item 1A – Risk Factors                                                                                | 34         |
|                                                                                                       |       |
| Item 3 –  Defaults Upon Senior Securities                                                             | 35         |
|                                                                                                       |       |
| Item 5 – Other Information                                                                            | 35         |
|                                                                                                       |       |
| Item 6 – Exhibits                                                                                     | 36         |
|                                                                                                       |       |
| Signatures                                                                                                 | 37         |
|                                                                                                       |       |
| Certifications                                                                                             |       |

 

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### **PART I**

### **FINANCIALINFORMATION**

 

**Item 1 –Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                  | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                        |       |                   |       |                  |       |
| Current assets:                                                                                                                                             |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                      | 59         |                  | $          | 1,180 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $102 and $89                                                                         |       | 4,082                  |       | 5,165                 |       |
| Inventories                                                                                                                                                 |       | 1,274                  |       | 2,298                 |       |
| Prepaid expenses  and other current assets                                                                                                                  |       | 1,058                  |       | 708                   |       |
| Total current  assets                                                                                                                                       |       | 6,473                  |       | 9,351                 |       |
| Property, plant  and equipment, net                                                                                                                         |       | 7,657                  |       | 9,730                 |       |
| Idle equipment                                                                                                                                              |       | 141                    |       | 178                   |       |
| Other  intangibles, net                                                                                                                                     |       | 1,085                  |       | 1,142                 |       |
| Investment in  joint venture                                                                                                                                |       | 306                    |       | 306                   |       |
| Other assets                                                                                                                                                |       | 742                    |       | 1,806                 |       |
| Total assets                                                                                                                                                |       | 16,404                 |       | 22,513                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                        |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                       |       |                   |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                                      |       | 8,733                  |       | 8,056                 |       |
| Deferred revenue                                                                                                                                            |       | 214                    |       | 316                   |       |
| Short-term debt                                                                                                                                             |       | 1,563                  |       | 2,182                 |       |
| Long-term debt,  current portion, net of debt discounts of $8,175 and $838                                                                                  |       | 12,713                 |       | 6,092                 |       |
| Warrant  liabilities                                                                                                                                        |       | 198                    |       | 2,583                 |       |
| Conversion  feature liabilities                                                                                                                             |       | 29                     |       | 2,083                 |       |
| Other  liabilities, current portion                                                                                                                         |       | 54                     |       | 398                   |       |
| Total current  liabilities                                                                                                                                  |       | 23,504                 |       | 21,710                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Long-term debt,  net of current portion and debt discounts of $0 and $9,634                                                                                 |       | 8,636                  |       | 14,588                |       |
| Other long-term  liabilities, net of current portion                                                                                                        |       | 183                    |       | 411                   |       |
| Total  liabilities                                                                                                                                          |       | 32,323                 |       | 36,709                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Minority  interests                                                                                                                                         |       | 571                    |       | 384                   |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Shareholders’  deficiency:                                                                                                                             |       |                   |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,726,295 issued and outstanding  at September 30, 2008 and December 31, 2007 |       | 45                     |       | 45                    |       |
| Additional  paid-in capital                                                                                                                                 |       | 140,049                |       | 137,293               |       |
| Accumulated  deficit                                                                                                                                        |       | (157,834               | )          | (154,710              | )          |
| Accumulated  other comprehensive income                                                                                                                     |       | 1,250                  |       | 2,792                 |       |
| Total  shareholders’ deficiency                                                                                                                        |       | (16,490                | )          | (14,580               | )          |
|                                                                                                                                                        |       |                   |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                                        |       | $                      | 16,404     |                  | $          | 22,513 |   |

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)**

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

**(unaudited)**

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                                  | 5,041      |                                              | $          | 7,106 |   | $ | 17,478 |   | $ | 20,504 |   |
| Cost of sales                                          |       | 3,791                                              |       | 5,194                                             |       | 13,325 |   | 19,321 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Gross profit                                           |       | 1,250                                              |       | 1,912                                             |       | 4,153 |   | 1,183 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Operating  expenses                                    |       |                                               |       |                                              |       |   |   |   |   |
| Selling,  general, and administrative                  |       | 1,417                                              |       | 1,853                                             |       | 4,617 |   | 6,880 |   |
| Research and  development                              |       | 279                                                |       | 331                                               |       | 815 |   | 887 |   |
| Total operating  expenses                              |       | 1,696                                              |       | 2,184                                             |       | 5,432 |   | 7,767 |   |
| Loss from  operations                                  |       | (446                                               | )          | (272                                              | )          | (1,279 | ) | (6,584 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Loss from  extinguishments of debt                     |       | —                                             |       | —                                            |       | — |   | (648 | ) |
| Change in value  of warrants, gain                     |       | 989                                                |       | 220                                               |       | 2,385 |   | 4,476 |   |
| Change in value  of conversion feature, gain           |       | 642                                                |       | 625                                               |       | 2,104 |   | 6,137 |   |
| Other expense                                          |       | —                                             |       | —                                            |       | (17 | ) | — |   |
| Other Income                                           |       | —                                             |       | —                                            |       | 247 |   | 49 |   |
| Interest expense                                       |       | (1,860                                             | )          | (1,991                                            | )          | (5,280 | ) | (7,454 | ) |
| Interest income                                        |       | —                                             |       | 14                                                |       | 3 |   | 121 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Loss before  minority interest                         |       | (675                                               | )          | (1,404                                            | )          | (1,837 | ) | (3,903 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Minority  interests                                    |       | (115                                               | )          | (66                                               | )          | (341 | ) | (66 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Loss from  continuing operations                       |       | (790                                               | )          | (1,470                                            | )          | (2,178 | ) | (3,969 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Net loss                                               |       | (790                                               | )          | (1,470                                            | )          | (2,178 | ) | (3,969 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Other  comprehensive income (loss):                    |       |                                               |       |                                              |       |   |   |   |   |
| Foreign exchange  translation (loss) gain              |       | (729                                               | )          | 122                                               |       | (1,542 | ) | 399 |   |
| Comprehensive  income (loss)                           |       | $                                                  | (1,519     | )                                                 | $          | (1,348 | ) | $ | (3,720 | ) | $ | (3,570 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Net loss per  share basic and diluted:                 |       |                                               |       |                                              |       |   |   |   |   |
| Loss per share  basic and diluted                      |       | $                                                  | (0.02      | )                                                 | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.09 | ) |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Number of  weighted average shares - basic and diluted |       | 44,726                                             |       | 44,652                                            |       | 44,726 |   | 44,736 |   |

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

###### **For the Nine Months Ended September 30,2008**

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

**(unaudited)**

 
| ** **                                     | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Compre-  hensive  Income (loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|--------------------------------------------------------------|------------|-----------|------------|
|                                           |       |               |       |              |       |                             |       |                     |       |                                                         |       |      |       |
| **Balance,  December 31, 2007**           |       | 44,726,295         |       | $                 | 45         |                             | $          | 137,293                  |       | $                                                            | (154,710   | )         | $          | 2,792 |   | $ | (14,580 | ) |
| Stock-based  compensation                      |       | —             |       | —            |       | 469                              |       | —                   |       | —                                                       |       | 469       |       |
| Foreign exchange  translation gain             |       | —             |       | —            |       | —                           |       | —                   |       | (1,542                                                       | )          | (1,542    | )          |
| Distribution to  minority interests            |       | —             |       | —            |       | —                           |       | (946                     | )          | —                                                       |       | (946      | )          |
| Preferred units  capital account of subsidiary |       | —             |       | —            |       | 2,287                            |       | —                   |       | —                                                       |       | 2,287     |       |
| Net loss                                       |       | —             |       | —            |       | —                           |       | (2,178                   | )          | —                                                       |       | (2,178    | )          |
| **Balance,  September 30, 2008**          |       | 44,726,295         |       | $                 | 45         |                             | $          | 140,049                  |       | $                                                            | (157,834   | )         | $          | 1,250 |   | $ | (16,490 | ) |

 

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

 

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**LIQUIDMETALTECHNOLOGIES, INC.  ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| **Operating  activities:**                                                                              | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Net loss                                                                                                |       | $                                                                     | (2,178     | ) | $ | (3,969 | ) |
|                                                                                                    |       |                                                                  |       |   |   |
| Adjustments to  reconcile loss from operations to net cash provided by (used in) operating  activities: |       |                                                                  |       |   |   |
| Gain on disposal  of asset                                                                              |       | (15                                                                   | )          | (49 | ) |
| Minority  interests in income of consolidated subsidiary                                                |       | 341                                                                   |       | 66 |   |
| Depreciation and  amortization                                                                          |       | 1,009                                                                 |       | 2,499 |   |
| Loss on  extinguishment of debt                                                                         |       | —                                                                |       | 648 |   |
| Amortization of  debt discount                                                                          |       | 2,704                                                                 |       | 4,385 |   |
| Stock-based  compensation                                                                               |       | 469                                                                   |       | 575 |   |
| Bad debt (recovery)  expense                                                                            |       | (105                                                                  | )          | 97 |   |
| Warranty  (recovery) expense                                                                            |       | (68                                                                   | )          | 141 |   |
| Gain from change  in value of warrants                                                                  |       | (2,385                                                                | )          | (4,476 | ) |
| Gain from change  in value of conversion feature                                                        |       | (2,104                                                                | )          | (6,137 | ) |
|                                                                                                    |       |                                                                  |       |   |   |
| Changes in  operating assets and liabilities:                                                           |       |                                                                  |       |   |   |
| Trade accounts  receivable                                                                              |       | 1,188                                                                 |       | (1,355 | ) |
| Inventories                                                                                             |       | 1,024                                                                 |       | 1,200 |   |
| Prepaid expenses  and other current assets                                                              |       | (350                                                                  | )          | (86 | ) |
| Other assets                                                                                            |       | 707                                                                   |       | (2,198 | ) |
| Accounts payable  and accrued expenses                                                                  |       | 745                                                                   |       | (1,123 | ) |
| Deferred revenue                                                                                        |       | (102                                                                  | )          | 48 |   |
| Other liabilities                                                                                       |       | (572                                                                  | )          | 102 |   |
|     Net  cash provided by (used in) operating activities                            |       | 308                                                                   |       | (9,632 | ) |
|                                                                                                    |       |                                                                  |       |   |   |
| **Investing  Activities:**                                                                              |       |                                                                  |       |   |   |
| Purchases of  property and equipment                                                                    |       | (1,058                                                                | )          | (1,022 | ) |
| Proceeds from  the sale of property and equipment                                                       |       | (17                                                                   | )          | 400 |   |
| Investment in  patents and trademarks                                                                   |       | (36                                                                   | )          | (78 | ) |
| Investment in  joint venture                                                                            |       | —                                                                |       | (303 | ) |
| Net cash used in  investing activities                                                                  |       | (1,111                                                                | )          | (1,003 | ) |
|                                                                                                    |       |                                                                  |       |   |   |
| **Financing  Activities:**                                                                              |       |                                                                  |       |   |   |
| Proceeds from  borrowings                                                                               |       | 13,327                                                                |       | 39,784 |   |
| Repayment of  borrowings                                                                                |       | (15,577                                                               | )          | (28,375 | ) |
| Proceeds from  issuance of preferred units of subsidiary                                                |       | 2,500                                                                 |       | — |   |
| Redemption of  preferred units of subsidiary                                                            |       | (213                                                                  | )          | — |   |
| Cash  distributions                                                                                     |       | (1,099                                                                | )          | — |   |
| Net cash (used  in) provided by financing activities                                                    |       | (1,062                                                                | )          | 11,409 |   |
| Effect of  foreign exchange translation                                                                 |       | 744                                                                   |       | (203 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                   |       | (1,121                                                                | )          | 571 |   |
|                                                                                                    |       |                                                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                                       |       | 1,180                                                                 |       | 144 |   |
| Cash and cash  equivalents at end of period                                                             |       | $                                                                     | 59         |   | $ | 715 |   |
|                                                                                                    |       |                                                                  |       |   |   |
| Supplemental  cash flow information                                                                     |       |                                                                  |       |   |   |
| Interest paid                                                                                           |       | $                                                                     | 1,608      |   | $ | 2,522 |   |
| Taxes paid                                                                                              |       | $                                                                     | —     |   | $ | — |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

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**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS - continued**

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

**(unaudited)**

 

During the nine months ended September 30, 2007,$400 of the Company’s 7% senior convertible notes due July 2007 wasconverted into 320,000 shares of the Company’s common stock at a conversionprice of $1.25 per share.

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”) for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals)considered necessary for a fair presentation have been included.  All intercompany balances and transactionshave been eliminated.  Operating resultsfor the nine months ended September 30, 2008 are not necessarilyindicative of the results that may be expected for any future periods or theyear ending December 31, 2008.  Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the Company’s Form 10-K filed with the Securitiesand Exchange Commission on April 3, 2008.

 

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

 

The Company classifies operationsinto two reportable segments: Liquidmetal alloy industrial coatings and bulkLiquidmetal alloys (see Note 10). Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipes used by the oil drilling industry and boiler tubes used bycoal-burning power plants. Bulk Liquidmetal alloys include potential marketopportunities to manufacture and sell products and components for electronicdevices, medical devices, defense applications, and sporting goods.  In addition, the bulk Liquidmetal alloyssegment includes tooling and prototype sampling.  Furthermore, 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.

 

InJuly 2007, the Company transferred substantially all of the assets of itsLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the assets andliabilities of the coatings business. The transfer included the thermal spray coatings assets and liabilitiesacquired under a purchase agreement with Foster Wheeler Energy Services in June 2007. The Company holds a 69.25% ownership interest in LMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

**2.****        Basis of Presentation andRecent Accounting Pronouncements**

 

Translationof Foreign Currency

 

The Company applies **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 Technologies Koreahave been translated based upon Korean Won as the functional currency.Liquidmetal Technologies Korea’s assets and liabilities were translated usingthe exchange rate at period end and income and expense items were translated atthe average exchange rate for the reporting period. The resulting translationadjustment was included in other comprehensive loss.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

RecentAccounting Pronouncements

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities including an amendment of FASB Statement No. 115”(“SFAS 159”), which permits entities to voluntarily choose to measure manyfinancial instruments and certain other items at fair value.  SFAS 159 was effective for the Company on January 1,2008.  The Company’s management did notelect to report its financial assets or liabilities at fair value upon adoptionof SFAS 159 and, therefore, SFAS 159 did not have an impact on the Company’sconsolidated financial statement.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS141R amends the requirements for accounting for business combinations. SFAS 141R will be effective after the beginning of the first annual reportingperiod beginning on or after December 15, 2008.  The Company iscurrently evaluating the potential impact of the adoption of SFAS 141R on theCompany’s consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary (minority interest) is an ownership interest in the consolidatedentity that should be reported as equity in the Consolidated FinancialStatements and separate from the parent company’s equity. Among otherrequirements, this statement requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest. It also requires disclosure, on the face of theConsolidated Statement of Operations, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160 will beeffective after the beginning of the first annual reporting period beginning onor after December 15, 2008.  TheCompany is currently evaluating the potential impact of the adoption of SFAS160 on the Company’s consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities – An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161seeks to improve financial reporting for derivative instruments and hedgingactivities by requiring enhanced disclosures regarding the impact on financialposition, financial performance, and cash flows. SFAS 161 will be effective for financialstatements issued for fiscal years beginning after November 15, 2008. TheCompany is currently evaluating the potential impact of the adoption of SFAS161 on the Company’s consolidated financial statements.

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of FSP 142-3is to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows usedto measure the fair value of an asset under SFAS 141(R) and otherU.S. generally accepted accounting principles FSP 142-3 applies to intangibleassets that are acquired individually or with a group of other assets acquiredin business combinations and asset acquisitions. FSP 142-3 also requiresexpanded disclosure related to the determination of intangible asset usefullives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. The Company is currently evaluating the potential impact of FSP 142-3 onits consolidated financial statements.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 162”). SFAS 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. generally accepted accountingprinciples for nongovernmental entities. SFAS 162 will become effective60 days following the SEC’s approval of the Public Company AccountingOversight Board Auditing amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.”The Company is currently evaluating the impact of SFAS 162.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

Other recent accountingpronouncements issued by the FASB (including its Emerging Issues Task Force),the AICPA and the SEC did not or are not believed by management to have amaterial impact on our company’s present or future consolidated financialstatements.

 

**3.****       ****Liquidity**

 

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $157,834 as of September 30,2008.  Cash provided by operations for the nine months ended September 30,2008 was $308; however, cash flow from operations will likely be negativethroughout fiscal year 2008.  As of September 30, 2008, the Company’sprincipal sources of liquidity are $59 of cash and $4,082 of trade accountsreceivable.  Such conditions raise substantial doubt that the Company willbe able to continue as a going concern.  These operating results occurredwhile the Company was developing and continues to develop, commercialize, andmanufacture products from an entirely new and unique technology.  Thesefactors have placed a significant strain on the financial resources of theCompany.  The ability of the Company to overcome these challenges dependson its ability to correct its production inefficiencies, reduce its operatingcosts, generate higher revenue, achieve positive cash flow from continuingoperations and continued sources of debt and equity financing.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

The Company borrowed $12,382, which was offset by repayments of $13,001under a factoring, loan, and security agreement executed on April 21, 2005and a revolving loan agreement executed on July 24, 2007, to fund itsworking capital requirements during the nine months ended September 30,2008.  The Company has $4,081 available for future borrowings under thefactoring agreement, which is contingent on approval of eligible receivables bythe financing company, and it has $743 available for future borrowings underthe revolving loan agreement.

 

On February 22,2008, the Company received $1,714 distribution from its majority ownedsubsidiary, Liquidmetal Coatings, LLC (“LMC”) from which it issued and sold$2,500 in preferred membership units to two existing holders ofLMC common membership units.  The preferred units issued byLMC have an accruing priority return of 14% per year that are priorityover any distribution made by LMC and may be redeemed at any time within fouryears of issuance.  As of September 30,2008, LMC has redeemed $213 of the preferred units and distributed $200 inpriority return to the preferred units holders.

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the fourth quarter of 2008 and will therefore requireadditional funding.  The Company is actively seeking additional sources ofcapital and seeking to restructure and/or modify existing indebtedness. The amount of funding that the Company seeks and the timing of such fundraisingefforts will depend on the extent to which the Company is able to increaserevenues through obtaining additional purchase orders for its products and/orthe extent to which the Company can restructure or modify its debt. Because the Company cannot be certain that it will be able to obtain adequatefunding from debt, equity, or other traditional financing sources, it is alsoactively pursuing several strategic financing options, including the intent tosell its manufacturing plant in South Korea (which would then be replaced witha smaller facility) and additional licensing and outsourcing of ourmanufacturing operations.

 

TheCompany cannot guarantee that adequate funds will be available when needed, andif it does not receive sufficient capital, the Company may be required to alteror reduce the scope of our operations.

 

Additionally, theCompany has approximately $1,192 of principal and accrued interest outstandingas of September 30, 2008, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  The Company intends tofully repay the amounts due under the Bridge Notes.  However, as of thefiling of this report it does not have sufficient funds to repay the BridgeNotes.  As a result, the Company is currently in default under theBridge Notes.   Such a default may have material adverse effect onour operations, financial condition, and results of operations. TheCompany has not received a formal notice of default and it is currently workingto resolve this matter with investors holding our Bridge Notes.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

The Company wasrequired under its amended Security Purchase Agreement, dated April 23,2007, between the Company and holders of the 8% convertible subordinated notesdue January 2010 (the “January 2010 Notes”), to repay outstandingdebt under previously issued promissory notes, including the Bridge Notes (“DebtSatisfaction Covenant”) by October 1, 2007.  As the Company has notyet fully repaid the Bridge Notes, it is not in compliance with this covenantand is subject to default under the January 2010 Notes.  Such adefault may have material adverse effect on the Company’s operations, financialcondition, and results of operations. As of the filing of this report, the Company hasreceived a formal notice of default under this covenant and is currentlyworking to resolve this matter.

 

The Company wasrequired, beginning July 31, 2008 and at the end of each month thereafter,to redeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of our common stock.  On July 31, 2008, the Company obtainedan agreement with the majority of the January 2010 Note holders to changethe amortization date of the principal to September 30, 2008 and to changethe redemption amount at each amortization date to be 1/32nd of the principalamount.   As a result of this amendment,the Company is required to make an aggregate payment equal to $583 on September 30,2008. However, the Company did not have sufficient funds to make thispayment, and, accordingly, the Company is in default under the January 2010Notes.  The holders of the January 2010Notes are entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, the Company hasreceived a formal notice of default under this covenant and is currentlyworking to resolve this matter (see Note 14). As a result, the outstanding principal due under the January 2010Notes of $18,643 is included in current portion of long-term debt and accruedinterest and fees of $698 is included in accounts payable and accrued expensesas of September 30, 2008.  Sucha default may have material adverse effect on the Company’s operations,financial condition, and results of operations.

 

Approximately $202of principal and accrued interest became due from the Company’s Koreansubsidiary under a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report theCompany does not have sufficient funds to repay the loan and the Companyhas received a formal notice of default. Kookmin Bank has initiated foreclosureproceedings on the loan collateral, which consists of our manufacturing plantfacility and certain equipment in South Korea. The foreclosure of our manufacturing plant facility and equipment inSouth Korea would have material adverse effect on the Company’s operations,financial condition, and results of operations.  The Company is currentlyworking to resolve this matter with Kookmin Bank by seeking a forbearance untilthe Company is able to obtain funding to repay this loan, although there is noassurance that the Company will be able to obtain any such funding.

 

TheCompany has outstanding liens and judgments on its assets by various creditorsfor past-due trade payables totaling approximately $791, of which approximately$545 is held by creditors in South Korea, as of September 30, 2008.  The Company is currently working to resolvethe matter with each creditor****byseeking forbearance until we are able to obtain funding to repay the amountsdue, although there is no assurance that we will be able to obtain any suchfunding.   If the Company cannot repaythe amounts due or obtain forbearance, the creditors may seek to foreclose onthe Company’s assets.  Such a foreclosurewould have material adverse effect on the Company’s operations, financialcondition, and results of operations.

 

**4.Inventories**

 

Inventories are accountedfor using the moving average basis and at standard cost, which approximate coston a first-in, first-out basis and are valued at the lower of cost ormarket.  Inventories were comprised ofthe following:

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **         | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Raw materials      |       | $                      | 563        |                  | $          | 1,216 |   |
| Work in process    |       | 309                    |       | 536                   |       |
| Finished goods     |       | 402                    |       | 546                   |       |
| Total  inventories |       | $                      | 1,274      |                  | $          | 2,298 |   |

 

**5. IdleEquipment**

 

Idle equipment consistsof certain equipment held by the Company for use in expansion of bulk alloyparts manufacturing.  While the equipment may be used internally to meetfuture capacity requirements, considering our current revenue and foreseeableproduction requirements, the Company does not anticipate utilizing thisequipment internally in the near future. Total amount of idle equipment remaining was $141 as of September 30,2008 and $178 as of December 31, 2007.

 

During the three monthsended March 31, 2007, the Company disposed of $7 of its idle equipment aspart of the equipment purchase agreement and transfer agreement regardingWeihai operations with Grace Metal (see Note 13).

 

**6.   Product Warranty**

 

Managementestimates product warranties as a percentage of certain bulk alloy productsales earned during the period.  As of September 30,2008, the Company used 5% of bulk alloy product sales as an estimate ofwarranties to be claimed.  The percentageis based on industry averages and historical information.  Additionally, as of September 30, 2008the Company used 1% of coatings applications sales as estimates of warrantiesto be claimed.

 

During the threeand nine months ended September 30, 2008, the Company recorded $46 and $68of net gain on warranty, respectively. During the three and nine months ended September 30,2007, the Company recorded a net gain of $120 from expired warranty and $141 ofwarranty expense, respectively.  Thewarranty accrual balance is included in accounts payable and accrued expenses.

 

**7.  Notes Payable**

 

Unsecured Subordinated Note

 

On May 17,2006, September 21, 2006, and December 1, 2006, the Company issued 8%unsecured subordinated notes due August 2007 in the aggregate principalamount of $4,584 (the “August 2007 Subordinated Notes”).  The August 2007 Subordinated Notes areunsecured and became due August 2007.

 

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

 

As of September 30, 2008 and December 31,2007, the Company’s gross outstanding loan balance of the August 2007Subordinated Notes totaled $1,009 and $2,659, respectively, and are included incurrent portion of long-term debt.  TheCompany intends to fully repay the amounts due under the August 2007Subordinated Notes.  However, as of the filing of this report, the Companydoes not have sufficient funds to repay the August 2007 SubordinatedNotes.  As a result, the Company is currently in default under the August 2007Notes.  The Company has not received a formal notice ofdefault and is currently working to resolve this matter with investors holdingthe August 2007 Subordinated Notes.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

Interest expense for the amortization ofdiscount on the note was $172 and $630 for the three and nine months September 30,2007, respectively.  As of September 30,2008 and 2007, the effective interest rate for the August 2007Subordinated Notes was 8% and 37.6%, respectively.

 

As part of the issuance of the August 2007Subordinated Notes in 2006, the Company issued warrants to the purchasers ofthe notes and placement agents giving them right to purchase up to an aggregateof 972,964 shares of the Company’s common stock.  The warrants had an original exercise priceof $2.58 per share, which is subject to price adjustment for anti-dilutionpurposes.  In October 2007, theCompany reduced the exercise price of warrants to $1.75 and increased theoutstanding warrants with certain holders of the August 2007Subordinated Notes by 30% for an extension of the maturity of the August 2007Subordinated Notes.   As of September 30,2008, the exercise price of the warrants was reduced to $1.72 and $2.07 pershare, respectively, and total amount of warrants was increased to1,313,380.  The warrants will expire on May 17,2011.

 

Secured Convertible Subordinated Notes

 

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

 

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

 

The January 2010Notes were originally convertible into the Company’s common stock at $1.55 pershare.  As a part of the private placement, the Company issued warrants tothe purchasers of the notes giving them the right to purchase up to anaggregate of 5,257,921 shares of our common stock at an exercise price of $1.93per share. In connection with the private placement, the Company also issued tothe placement agent for the transaction warrants to purchase an aggregate of248,710 shares of our common stock at an exercise price of $1.55 pershare.  The warrants will expire on January 3, 2012 and are subjectto exercise price adjustment for anti-dilution purposes.

 

In April 2007,the Company entered into an amendment to the Securities Purchase Agreement,dated January 3, 2007, between the Company and the purchasers of the January 2010Notes (“April 2007 Amendment”) providing that the Company will have until October 1,2007 to repay approximately $15,461 of the Company’s outstanding debt underpreviously issued promissory notes, including the August 2007 SubordinatedNotes (“Debt Satisfaction Covenant”). The Company has not fully repaid $1,009 principal due under the August 2007Subordinated Notes as of September 30, 2008.  As a result, the Company is not in compliancewith the Debt Satisfaction Covenant.  Asof the filing of this report, the Company has received a formal notice ofdefault under this covenant and is currently working to resolve this matter.

 

The April 2007Amendment also finalized the schedule of investors in the Private Placement toshow a total of $16,300 in principal amount of Notes; decreased the conversionprice of the Notes to $1.10, decreased the warrant exercise price for thewarrants issued to $1.55, increased the number of shares subject to suchwarrants issued to equal 7,657,591, and the purchasers of the Notes consentedto the Company granting a security interest in its South Korean manufacturing plantto purchasers of convertible notes in a subsequent offering, provideda pari passu security interest is granted to the purchasers of theNotes.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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

 

In December 2007,the Company entered into agreements with two holders of the January 2010Notes and Grace Metal, a South Korean company formed by investor groupsincluding our former Founder and director, James Kang, and the two holders,whereby Grace Metal would assume the liabilities due under the January 2010Notes, including principal, interest, and fees due to the two holders totaling$434.  In connection with the assumptionof the liabilities by Grace Metal, warrants to purchase 179,620 shares of ourcommon stock held by the holders were cancelled (see Note 13).

 

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(in which case the interest rate will be 10% per annum). The ability to payinterest with additional January 2010 Notes is subject to specifiedconditions, including the existence of an effective registration statementcovering the resale of the shares issued in payment of interest and certainminimum trading volumes in the stock to be issued. From and after an event ofdefault under the January 2010 Notes and for so long as the event ofdefault is continuing, the January 2010 Notes will bear default interestat a rate of 12% per annum (or 15% per annum if we elect to pay interest withadditional January 2010 Notes). During 2007, the Company issued $971 of additional January 2010Notes for accrued interest and late registration fees.  For the nine months ended September 302008, the Company issued $846 of additional January 2010 Notes for accruedinterest.

 

The Company wasrequired, beginning July 31, 2008 and at the end of each month thereafter,to redeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of our common stock.  On July 31, 2008, the Company obtainedan agreement with the majority of the January 2010 Note holders to changethe amortization date of the principal to September 30, 2008 and to changethe redemption amount at each amortization date to be 1/32nd of the principalamount.   As a result of this amendment,the Company is required to make an aggregate payment equal to $583 on September 30,2008. However, the Company did not have sufficient funds to make thispayment, and, accordingly, the Company is in default under the January 2010Notes.  The holders of the January 2010Notes are entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, the Company hasreceived a formal notice of default under this covenant and is currentlyworking to resolve this matter (see Note 14). As a result, the outstanding principal due under the January 2010Notes of $18,643 is included in current portion of long-term debt as of September 30,2008.

 

In connection withthe January 2007 private placement, the Company entered into aRegistration Rights Agreement with the purchasers of the January 2010 Notesunder which the Company is subject to monetary penalties up to a maximum amountof 18% of the aggregate amount of Notes sold in the Private Placement if theregistration statement is not filed or does not become effective on a timelybasis. The monetary penalties will accrue at the rate of 1% per month of thethen-outstanding principal amount of the January 2010 Notes. As of September 30,2008, an aggregate of $698 in monetary penalties under the Registration RightsAgreement had already been paid to investors in the form of additional notes,while an additional $256 in such penalties was accrued but unpaid.

 

Pursuant toStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities,” EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” EITF 00-27, “Application of Issue No. 98-5 toCertain Convertible Instruments,” and EITF 05-2 “The Meaning of ‘ConventionalConvertible Debt Instrument’ in EITF Issue No. 00-19,” the original fairvalue of the embedded conversion feature of $6,205 have been recorded asconversion feature liability as the debt is considered nonconventionalconvertible debt. The original fair value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.6 to 3years; (2) volatility of 55%; (3) risk free interest of 4.69% to4.76% and dividend rate of 0%.  The original fair value of the additionalembedded conversion feature of $1,005 resulting from reduced conversion priceunder the amended Securities Purchase Agreement, have been recorded asconversion feature liability. The value was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 1.3 to 2.7years; (2) volatility of 55%; (3) risk free interest of 4.6% to 4.9%and dividend rate of 0%.  In addition, the Company is required to report avalue of the conversion liability as a fair value and record the fluctuation tothe fair value of the conversion feature liability to current operations.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

The change in thefair value of the conversion feature liability resulted in a gain of $642 and$2,104 for the three months and nine ended September 30, 2008,respectively.  The change in the fairvalue of the conversion feature liability resulted in a gain of $602 and $4,565for the three and nine months ended September 30, 2007,respectively. The fair value of conversion feature outstanding at September 30,2008 and December 31, 2007 was $29 and $2,083, respectively.   The fair value conversion featureoutstanding at September 30, 2008 was computed using the Black-Scholesmodel under the following assumptions: (1) expected life of 0 to 1.26years; (2) volatility of 74%, (3) risk free interest of 0.92% to1.78% 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) expectedlife of 5 years; (2) volatility of 55%; (3) risk free interest of4.68% and (4) dividend rate of 0%.  The original fair values of thewarrants of $608 from the additional warrants issued under the amendedSecurities Purchase Agreement, have been recorded as additional warrantliability, which was computed using the Black-Scholes pricing model under thefollowing assumptions: (1) expected life of 4.70 years; (2) volatilityof 50%; (3) risk free interest of 4.51% and (4) dividend rate of 0%.

 

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

 

The Company’sgross outstanding loan balance of the January 2010 Notes totaled $18,643and $17,797 as of September 30, 2008 and December 31, 2007,respectively.  As of September 30, 2008 and December 31, 2007,un-amortized discounts for conversion feature, warrants, and cash discounttotaled $8,175 and $10,471, respectively, and other asset debt issuance coststotaled $751 and $967, respectively.  Interest expense for theamortization of debt issuance cost and discount on note was $1,006 and $2,563for the three and nine months ended September 30, 2008, respectively.Interest expense for the amortization of debt issuance cost and discount onnote was $446 and $1,200 for the three and nine months ended September 30,2007, respectively.  As of September 30, 2008, the effective interestrate of the January 2010 Notes was 61%.

 

Factoring Agreement

 

The Company entered into a Factoring, Loan, and SecurityAgreement (the “Agreement”) with a financing company on April 21, 2005,which allows for borrowings of up to $1,500. The Agreement expires on April 21, 2006, and automatically renewsannually thereafter. All borrowings are secured by outstanding receivablesspecifically assigned to the financing company. Assigned receivables are considered “Approved” or “Non-Approved” by thefinancing company.  In January 2007,the Company entered into a second amendment to the Agreement to provide forincreased borrowings against non-approved receivables assigned of 80%.  Borrowings made against non-approvedreceivables assigned are limited to $1,000 and total borrowings made on approvedand non-approved receivables assigned are limited to $5,000.  Further, the amendment provides for interestcharges of 0.5% plus prime rate of interest less 2%.  The agreement will continue until February 1,2008 and will renew annually thereafter. In February 2007, the Company entered into an agreement to depositcash of $2,083 with a rate of prime rate of interest less 2% with the financingcompany.  The agreement is effectiveuntil July 27, 2007 and the cash deposit will be used to pay downprincipal amount of the July 2007 Notes. Additionally, the financing company reserves the right to offsetoutstanding advances against the cash deposit. In July 2007, the Company entered into a third amendment to excludeintellectual property transferred to LMC as collateral and to release securityinterest in receivables previously assigned in consideration of full repaymentof the outstanding advances.  The Companypaid $628 and the financing company applied the $2,083 cash deposit heldagainst the outstanding advance of $2,711 on July 23, 2007.  Additionally, the financing company reducedthe borrowings against non-approved receivables assigned to 50% of thereceivable value.

 

Payments on assigned receivables are received directly bythe 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 “Accountingfor Transfer and Servicing of Financial Assets and Extinguishments ofLiabilities.”

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

For the nine months ended September 30, 2008, theCompany borrowed $5,251 and repaid $5,340 under the Agreement.  The total outstanding advance made under theagreement is $919 and $1,008 as of September 30, 2008 and December 31,2007, respectively, which is presented as short-term debt.   The weighted average rate of interest forborrowings made under the Agreement was 6.95% for the nine months ended September 30,2008.  As of September 30, 2008, theCompany’s availability for future borrowing under the agreement is $4,081,which is contingent on approval of eligible receivables by the financingcompany.

 

Kookmin Note

 

On February 4, 2003, the Company’s Korean subsidiaryreceived 6,500,000 in South Korean Won, or approximately $5,488, under a loanfrom Kookmin Bank of South Korea.  Theloan bears 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 September 30, 2008, the interestrate was increased 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 $873of principal at the request of Kookmin Bank due to the sale of machines thathad been part of the collateral on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that theCompany pay an additional $866 of principal by February 2004 due to theCompany’s current credit rating.  TheCompany made two payments on the requested additional loan pay down in November andDecember 2003 of $320 and $205, respectively.  The remaining payment of $341 wassubsequently made in February 2004.

 

Beginning in September 2004, the Company is requiredto make equal monthly installments of principal and interest to repay theremaining balance through August 2008. The outstanding loan balance totaled $178 and $451, as of September 30,2008 and December 31, 2007, respectively and are included in currentportion of long-term debt.   The Companyintends to fully repay the amounts due under the loan.  However, as of thefiling of this report the Company does not have sufficient funds to repay theloan.  As a result, the Company is currently in default under theloan.  The Company has received a formal notice of default andKookmin Bank has initiated foreclosure proceedings on the loan collateral,which consists of manufacturing plant facility and certain equipment in SouthKorea.  The foreclosure of the Company’smanufacturing plant facility and equipment in South Korea would have materialadverse effect on the Company’s operations, financial condition, and results ofoperations.  The Company is currently working to resolve this matter withKookmin Bank by seeking a forbearance until the Comany is able to obtainfunding to repay this loan, although there is no assurance that the Companywill be able to obtain any such funding.

 

Debt of MajorityOwned Subsidiary

 

On July 24,2007, the Company completed an $11,500 financing transaction (the “Transaction”)that provided funding to repay convertible notes previously issued by us thatwere scheduled to become due in July and August 2007.  In theTransaction, the Company transferred substantially all of the assets of theCompany’s Liquidmetal Coatings division to a newly formed, newly capitalizedsubsidiary named Liquidmetal Coatings, LLC, a Delaware limited liabilitycompany (“LMC”), and LMC assumed substantially all of the liabilities of thedivision.

 

LMC wascapitalized through a $6,500 subordinated debt and equity investment by C3Capital Partners (“C3”) and a $5,000 senior credit facility with Bank Midwest,N.A.  This debt and equity resulted in cash proceeds of $11,102 afterrelated debt issuance costs of $398, which proceeds LMC used to purchase all ofthe assets and liabilities from the Company. The Company incurred an additional $459 in issuance costs directlyrelated to the debt issuance.  As aresult, $857 was recorded as deferred debt issuance costs to be amortized overthe life of the debt.  Interest expensefor the amortization of debt issuance cost was $41 and $142 for the three andnine months ended September 30, 2008, respectively.  Interest expensefor the amortization of debt issuance cost was $35 for the three and ninemonths ended September 30, 2007.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

The Companyretains a 69.25% ownership interest in LMC, C3 holds a 19% ownership interest,Larry Buffington, the Company’s President and CEO, (who also serves as thePresident and CEO of LMC) holds a 10% ownership interest, and CRESO CapitalPartners (“CRESO”), the Company’s financial advisor in the Transaction, holds a1.75% ownership interest.  The equityinterests acquired by C3 and issued to CRESO were not considered a discount todebt, as the unconsolidated net assets of LMC were deemed to have an initialvalue of $0 upon closing of the Transaction for financial accountingpurposes.  Further, LMC is fullyresponsible for the repayment of debt obligations.

 

*MidwestDebt*

 

In connection with the Transaction, LMC entered into a LoanAgreement, dated July 24, 2007 (the “Loan Agreement”), with Bank Midwest,N.A. (“Midwest”).  The Loan Agreement provides for total loan availabilityof $5,500, consisting of a $4,000 term loan with an annual interest rate of8.48% and a revolving loan of up to $1,500 with a variable interest equal toprime rate as published in the Wall Street Journal. Interest payments are duemonthly.  The term loan has a maturitydate of July 20, 2011.  The revolving loan has a maturity date of July 20,2008.  Borrowing availability under the revolving loan is based in apercentage of LMC’s eligible receivables and eligible inventory, and theinitial advance under the revolving loan was $1,000 on July 24, 2007.

 

On September 23, 2008, the Loan Agreement was amendedto extend the revolving loan maturity to September 24, 2009, reduce therevolving loan limit to $1,350, and provided for a minimum rate of interest of6.5%. LMC’s obligations under the Loan Agreement are secured by a blanketsecurity interest in all of LMC’s assets and the Company’s equity interest inLMC, and pursuant to an intercreditor agreement between the C3 andMidwest.  Midwest’s security interest inthe assets is senior to C3’s security interest in the same assets.

 

LMC is required to make monthly principal payments underthe term loan of: $63 during months 1 through 12, $83 during months 13 through36, and $104 during months 37 through 48.  All remaining principal is dueand payable on July 20, 2011.  If the term loan is prepaid within thefirst twenty-four (24) months after July 24, 2007, LMC will pay aprepayment penalty of 1% of the outstanding principal balance, together withaccrued interest.  After the twenty-four month period has lapsed, LMC willhave the right to prepay the term loan without penalty.

 

As of September 30, 2008 and December 31, 2007,the gross outstanding loan balance under the term loan totaled $2,979 and$3,688, respectively, and the gross outstanding loan balance under therevolving loan totaled $607 and $1,130, respectively. The loans are presentedas long term debt and short term debt on the Company’s consolidated balancesheet, respectively.  Interest expenseincurred under the term loan and revolving loan totaled $63 and $243 for thethree and nine months ended September 30, 2008, respectively.  Interest expense incurred under the term loanand revolving loan totaled $79 for the three and nine months ended September 30,2007.

 

Additionally, LMC entered into a Promissory Note, dated August 29,2007 (the “Capital Loan”), with Midwest to provide for $49 with an annualinterest of 8.25% to be used towards the purchase of a company truck.  The Capital Loan has a maturity date of September 1,2012.  LMC is required to make monthlyprincipal and interest payments of $1 per month.  As of September 30, 2008 and December 31,2007, the gross outstanding loan balance under the Capital Loan totaled $37 and$44, respectively, which is presented as short term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the Capital Loan totaled $1 and $2 for the three andnine months ended September 30, 2008, respectively.  Interest expense incurred under the CapitalLoan totaled $0 for the three and nine months ended September 30, 2007.

 

*C3 Debt*

 

In the Transaction, LMC also entered into a SecuritiesPurchase Agreement, dated July 24, 2007 (the “Securities PurchaseAgreement”), with C3 Capital Partners, L.P. (“C3”), C3 CapitalPartners II, L.P. (“C3 II”, and with C3, the “C3 entities”), andLiquidmetal Coatings Solutions, LLC, a wholly owned subsidiary of LMC that willoperate the thermal spray coatings business (“LMCS”).  Pursuant to theSecurities Purchase Agreement, LMC issued to the C3 entities subordinatedpromissory notes in the aggregate principal amount of $6,500 (the “SubordinatedNotes”). Under the Securities Purchase Agreement, the C3 entities have theright, beginning on the July 24, 2012 (or, if earlier, upon a default byLMC under the Subordinated Notes

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

or Securities Purchase Agreement) to require LMC topurchase the C3 entities’ membership interests in LMC for a purchase priceequal to their pro rata portion of the greater of (i) the appraised fairmarket value of LMC or (ii) six times LMC’s trailing 12-month earningsbefore interest taxes, depreciation, and amortization, less funded debt.

 

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

 

The grossoutstanding loan balance including accrued interest payable upon maturity of theSubordinated Note totaled $6,656 and $6,557 as of September 30, 2008 and December 31,2007, respectively.  Interest expense incurred under the SubordinatedNotes totaled $199 and $594 for three and nine months ended September 30,2008, respectively.  Interest expenseincurred under the Subordinated Notes totaled $172 for three and nine monthsended September 30, 2007.

 

**8.     StockCompensation Plan**

 

During the three and ninemonths ended September 30, 2008, under the Company’s 2002 Non-employeeDirector Stock Option Plan which provides for the grant of stock options tonon-employee directors, the Company granted options to purchase 0 and 70,000,respectively, of the Company’s common shares for an average exercise price of$0 and $0.70, respectively.  Further, alloptions granted under this plan had exercise prices that were equal to the fairmarket value on the date of grant.

 

During the three and ninemonths ended September 30, 2008, under the Company’s 2002 Equity IncentivePlan which provides for the grant of stock options to officers, employees,consultants and directors of the Company its subsidiaries, the Company grantedoptions to purchase 0 and 200,000, respectively, of the Company’s common sharesfor an average exercise price of $0 and $0.64, respectively.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

The Company canceled 87,694 and 524,039 options duringthe three and nine months ended September 30, 2008, for terminatedemployees and options expired.

 

**9.     PreferredUnits of Subsidiary**

 

On February 22,2008, LMC completed a transaction under which it issued and sold $2,500 inpreferred membership units to two minority members of LMC (the “Preferred UnitsTransaction”).  Immediately following the sale of the preferred membershipunits, the subscription proceeds (after a 1% transaction fee) were distributedto LMC’s common unit members, and as a result of such distribution, theCompany received approximately $1,714 in the distribution.  The preferredunits issued by LMC have an accruing priority return of 14% per year thatare priority over any distribution made by LMC and may be redeemed at any timewithin four years of issuance through cash payment or distribution in excess ofthe 14% priority return.  If LMCfails to redeem the preferred units on or before the second anniversary of theissue date, the preferred units will receive an additional 200 commonmembership units (equal to 2% of the currently outstanding commonunits) per quarter until the preferred units are redeemed infull.

 

As of September 30,2008, LMC has redeemed $213 of its preferred units and distributed $200 inpriority return to the preferred unit holders. The total preferred units outstanding are $2,287 as of September 30,2008.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**10.     SegmentReporting and Geographic Information**

 

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 marketopportunities to manufacture and sell casing components for electronic devices,medical devices, sporting goods, tooling, prototype sampling, defenseapplications and metal processing equipment. Primarily, the expenses incurred by the bulk Liquidmetal alloy segmentare research and development costs and selling expenses associated withidentifying and developing market opportunities.  Bulk Liquidmetal alloys products can be distinguishedfrom Liquidmetal alloy coatings in that the bulk Liquidmetal alloy can havesignificant thickness, up to approximately one inch, which allows for their usein a wider variety of applications other than a thin protective coating appliedto machinery and equipment.   Revenue andexpenses associated with research and development services and productlicensing arrangements are included in the bulk Liquidmetal alloy segment.  The accounting policies of the reportablesegments are the same as those described in Note 3 to the consolidated financialstatements included in the Company’s Form 10-K filed with the Securitiesand Exchange Commission on April 3, 2008.

 

Summarized financial informationconcerning the Company’s reportable segments is shown in the following tables:

 
| ** **                                                   | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three months  ended September 30, 2008                  |       |         |       |                |       |                    |       |
| Revenue to  external customers                               |       | $            | 2,727      |                | $          | 2,314                   |       | $ | 5,041 |   |
| Gross profit                                                 |       | 1,042        |       | 208                 |       | 1,250                   |       |
| Income before  minority interest and interest expense        |       | 300          |       | 40                  |       | 340                     |       |
| Total identifiable  assets at end of period                  |       | 3,166        |       | 10,636              |       | 13,802                  |       |
|                                                         |       |         |       |                |       |                    |       |
| Three months  ended September 30, 2007                  |       |         |       |                |       |                    |       |
| Revenue to  external customers                               |       | $            | 3,505      |                | $          | 3,601                   |       | $ | 7,106 |   |
| Gross profit  (loss)                                         |       | 1,115        |       | 797                 |       | 1,912                   |       |
| Income (loss)  before minority interest and interest expense |       | 2,229        |       | (1,308              | )          | 921                     |       |
| Total  identifiable assets at end of period                  |       | 2,942        |       | 17,708              |       | 20,650                  |       |
|                                                         |       |         |       |                |       |                    |       |
| Nine months  ended September 30, 2008                   |       |         |       |                |       |                    |       |
| Revenue to  external customers                               |       | $            | 9,025      |                | $          | 8,453                   |       | $ | 17,478 |   |
| Gross profit                                                 |       | 3,124        |       | 1,029               |       | 4,153                   |       |
| Income before  minority interest and interest expense        |       | 1,034        |       | 483                 |       | 1,517                   |       |
| Total  identifiable assets at end of period                  |       | 3,166        |       | 10,636              |       | 13,802                  |       |
|                                                         |       |         |       |                |       |                    |       |
| Nine months  ended September 30, 2007                   |       |         |       |                |       |                    |       |
| Revenue to  external customers                               |       | $            | 9,293      |                | $          | 11,211                  |       | $ | 20,504 |   |
| Gross profit  (loss)                                         |       | 3,667        |       | (2,484              | )          | 1,183                   |       |
| Income (loss)  before minority expense and interest expense  |       | 2,229        |       | (3,594              | )          | (1,365                  | )          |
| Total  identifiable assets at end of period                  |       | 2,942        |       | 17,708              |       | 20,650                  |       |

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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

 
| ** **                                                                                         | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                         | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                                                                         | ** ** | **2008**                                | ** ** | **2007**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Total segment  income (loss) before minority interest and interest expense                         |       | $                                       | 340        |                                   | $          | 921 |   | $ | 1,517 |   | $ | (1,365 | ) |
| General and  administrative expenses, excluded                                                     |       | (786                                    | )          | (1,193                                 | )          | (2,566 | ) | (5,170 | ) |
|                                                                                               |       |                                    |       |                                   |       |   |   |   |   |
| Consolidated  loss before interest, other expense, other income, income taxes, minority  interests |       | (446                                    | )          | (272                                   | )          | (1,049 | ) | (6,535 | ) |
| Loss from  extinguishments of debt                                                                 |       | —                                  |       | —                                 |       | — |   | (648 | ) |
| Change in value  of warrants, gain                                                                 |       | 989                                     |       | 220                                    |       | 2,385 |   | 4,476 |   |
| Change in value  of conversion feature, gain                                                       |       | 642                                     |       | 625                                    |       | 2,104 |   | 6,137 |   |
| Interest expense                                                                                   |       | (1,860                                  | )          | (1,991                                 | )          | (5,280 | ) | (7,454 | ) |
| Interest income                                                                                    |       | —                                  |       | 14                                     |       | 3 |   | 121 |   |
| Minority  interests                                                                                |       | (115                                    | )          | (66                                    | )          | (341 | ) | (66 | ) |
| Consolidated net  loss                                                                             |       | $                                       | (790       | )                                      | $          | (1,470 | ) | $ | (2,178 | ) | $ | (3,969 | ) |

 

Included in bulkalloy segment income for both the nine months ended September 30, 2008 is$247 of other income from accounts payables write-off.   Included in bulk alloy segment income forboth the three and nine months ended September 30, 2007 is $0 and $49,respectively, of other income from gain on disposal of assets in connectionwith the equipment purchase agreement and transfer agreement of the Weihaioperations to Grace Metal (see Note 13).

 

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 tocompanies in the United States were $3,038 and $4,311 during the three monthsended September 30, 2008 and 2007, respectively.  The revenue related to the United States ofAmerica was earned under defense-related research and development contracts,sales of coatings products, and sales of Liquidmetal bulk alloy products.

 

During the three monthsended September 30, 2008, the Company had revenue from sales to companiesoutside of the United States of $2,003 of which $131 represented sales tocompanies located in South Korea.  Duringthe three months ended September 30, 2007, the Company had revenues fromcompanies outside of the United States of $2,795 of which $1,839 representedsales to companies located in South Korea. The revenue related to sales to companies outside of the United Stateswas from bulk alloy products.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $1,865 and $1,613 located in the United States at September 30,2008 and December 31, 2007, respectively. The Company had long-livedassets of $7,018 and $8,935 located in South Korea at September 30, 2008and December 31, 2007, respectively.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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

 
| ** **                                 | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2008**               | ** ** |
|                                       |       |                   |       |
| Total segment  assets                      |       | $                      | 13,802     |   |
| Cash and cash  equivalents                 |       | 17                     |       |
| Prepaid expenses  and other current assets |       | 985                    |       |
| Other property,  plant and equipment       |       | 114                    |       |
| Intangibles, net                           |       | 1,065                  |       |
| Other assets                               |       | 421                    |       |
| Total  consolidated assets                 |       | $                      | 16,404     |   |

 

Assets excluded from segment assets include assets attributable to theCompany’s corporate headquarters.  TheCompany’s largest assets consist of cash and intangible assets, which consistprimarily of the Company’s patents and trademarks.

 

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

 

Basicearnings per share (“EPS”) is computed by dividing earnings (loss) attributableto common shareholders by the weighted average number of common sharesoutstanding for the periods. Diluted EPS reflects the potential dilution ofsecurities that could share in the earnings.

 

Optionsto purchase 6,248,707 shares of common stock at prices ranging from $0.75 to$15.00 per share were outstanding at September 30, 2008, but were notincluded in the computation of diluted EPS for the same period as the inclusionwould have been antidilutive.  Warrantsto purchase 14,443,183 shares of common stock with prices ranging from $1.55 to$2.07 per share outstanding at September 30, 2008, were not included inthe computation of diluted EPS for the same period as the inclusion would havebeen antidilutive.  Additionally, 16,948,502 shares ofcommon stock issuable upon conversion of the Company’s convertible notes withconversion prices of $1.10 per share outstanding at September 30, 2008were not included in the computation of diluted EPS for the same period becausethe inclusion would have been antidilutive.

 

Pursuantto EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, the Company is required toreport a value of the warrant as a fair value and record the fluctuation to thefair value of the warrant liability to current operations.  The change in the fair value of the warrantsresulted in gains of $989 and $2,385 for the three and nine months ended September 30,2008, respectively. The change in the fair value of the warrants resulted ingains of $220 and $4,476 for the three and nine months ended September 30,2007, respectively.  The fair value ofwarrants outstanding at September 30, 2008 of $198 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.46 to 4.24 years; (2) volatility of 74%, (3) risk free interest of1.60% to 2.98%, and dividend rate of 0%. The fair value of warrants outstanding at December 31, 2007 of$2,583 was computed using the Black-Scholes model under the followingassumptions: (1) expected life of 1.21 to 4.99 years; (2) volatilityof 63%, (3) risk free interest of 3.07% to 3.45%, and dividend rate of 0%.

 

**12.     Commitmentsand Contingencies**

 

The Company is from timeto time a party to certain legal proceedings arising in the ordinary course ofbusiness. Although outcomes cannot be predicted with certainty, the Companydoes not believe that any legal proceeding to which it is a party will have amaterial adverse effect on the Company’s financial position, results ofoperations, and cash flows.

 

In August 2006, theUnited States Department of Justice (“DOJ”) instituted an investigation intounderlying facts and circumstances as were alleged in a securities class actionand shareholder derivative actions filed in 2004 against the Company andcertain of its former and current directors and officers, which were settledout of court.  The Company has cooperated with the DOJ in itsinvestigation.  More than one year has lapsed since the last activity onthis matter, the Company is not aware of any information that thisinvestigation is continuing.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

On June 26, 2006,the Company 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”).  The Company alsoentered 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 inLSI and will have two years to purchase the additional interest at a nominalprice. In January 2007 and June 2007, the Company contributedadditional $217 and $86, respectively, into LSI as additional investment. The contribution did not change the Company’s 19.9% interest in LSI.  Under the licensing agreement, at any timefollowing 18 months after the effective date of the agreement, LSI may exerciseits option to sell to the Company certain business assets including manufacturingequipment acquired under the joint venture. During the nine months ended September 30, 2008 and 2007, theCompany recognized revenues of $0 and $103 of Liquidmetal alloys sold to LSIfor use in the joint venture.

 

TheCompany has outstanding liens and judgments on its assets by various creditorsfor past-due trade payables totaling approximately $791, of which approximately$545 is held by creditors in South Korea, as of September 30, 2008.  The Company is currently working to resolvethe matter with each creditor****byseeking forbearance until we are able to obtain funding to repay the amountsdue, although there is no assurance that we will be able to obtain any suchfunding.   If the Company cannot repaythe amounts due or obtain forbearance, the creditors may seek to foreclose onthe Company’s assets.  Such a foreclosurewould have material adverse effect on the Company’s operations, financialcondition, and results of operations.

 

**13.    RelatedParty Transactions**

 

The Company is a party to a consulting agreement with Mr. Johnson ona month-to-month basis starting from 2005. During the three and nine months ended September 30, 2008, theCompany incurred $10 and $40 in consulting fees from Mr. Johnson,respectively.  During the three and ninemonths ended September 30, 2007 the Company incurred $15 and $45 inconsulting fees from Mr. Johnson, respectively.

 

During2005, Soo Buchanan, the sister of John Kang, the Company’s Chairman, beganproviding services to the Company as a consultant.  During the three and nine months ended September 30,2008, the Company incurred $10 and $70, respectively, for her services as aconsultant.  During the three and ninemonths ended September 30, 2007, the Company incurred $20 and $54,respectively, for her services as a consultant. Additionally, Otis Buchanan,the husband of Ms. Buchanan, was employed by the Company and was paidaggregate compensation of approximately $27 and $82 for the three and ninemonths ended September 30, 2008 and 2007, respectively.

 

In November 2004, the Company entered into an agreement with JohnKang, our Chairman of the Board, in which Mr. Kang agreed that certainstock transactions by him in 2002 involving the Company’s common stock shouldhave resulted in a liability under Section 16(b) of the SecuritiesExchange Act of 1934, as amended (“Section 16(b)”).  These transactions include Mr. Kang’sprivate sale of 285,715 shares of his personal Liquidmetal Technologies commonstock to Growell Metal Co., Ltd. in February 2002, prior to our initialpublic offering.  They also include Mr. Kang’ssubsequent indirect purchase and disposition of Liquidmetal Technologies commonstock in order to satisfy a personal agreement Mr. Kang made to GrowellMetal in February 2002 regarding the guaranteed minimum value of the stockpurchased by Growell Metal in February 2002 (the purchases anddispositions incident to this agreement occurred in August and November 2002,respectively).  Lastly, the transactionsinclude open-market purchases of an aggregate of 89,300 shares of the Company’scommon stock made by 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 Section 16(b) inthe amount of $302.  Mr. Kang hasacknowledged this liability, and in an agreement negotiated between Mr. Kangand 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 reportedon a timely basis in August 2002. As of September 30, 2008 and December 31, 2007, theoutstanding amount of the receivable was $178 for both periods.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

As of September 30,2008 and December 31, 2007, CK Cho, a member of our Board of Directors,held $490 and $467 of the convertible subordinated notes, respectively, andheld 305,918 exercisable warrants for both periods.

 

As of September 30,2008 and December 31, 2007, Ricardo Salas, the Company’s former ChiefExecutive Officer, held $372 and $354 of the convertible unsecured subordinatednotes, respectively, and $259 of the unsecured subordinated notes for bothperiods.  He also held a total of 377,691of exercisable warrants as of both September 30, 2008 and December 31,2007.

 

On June 1, 2007, theCompany entered into a transaction with Grace Metal (“GM”), under which (i) GMagreed to purchase various equipments (including die casting machines andvacuum induction melters) used in the Company’s bulk amorphous alloy businesssegment and (ii) the Company granted GM a 10-year exclusive license tomanufacture products made from bulk Liquidmetal alloys for customers whoseprincipal headquarters or whose major operations are located in SouthKorea.  GM was formed by an investorgroup that includes the former Founder and director of the Company, James Kang,who is also the brother of John Kang, Chairman of the Board of ourcompany.  Under an equipment purchaseagreement between the Company and GM, GM agreed to buy the purchased equipmentfor a total purchase price of $2,000, of which $577 were received as of September 30,2008.  The equipment purchase agreementprovides that delivery of the equipment can be delayed to accommodate theCompany’s continuing manufacturing needs, and it also provides that the Companywill retain a security interest in the purchased equipment until full paymentof the purchase price.

 

In consideration of thelicense agreement with GM, the Company will be entitled to royalty of 10% of GM’snet sales of licensed products (unless GM’s margin on the products falls belowspecified levels, in which case a new royalty will be negotiated in goodfaith).  Effective June 1, 2008, theroyalty rate was adjusted to 5%.  Theagreement provides that the Company may convert the license to a non-exclusivein the event that the net sales in the second year of the contract orthereafter are not sufficient to result in royalties of $500 or more peryear.  The agreement also provides thatGM will be required to purchase all alloy feedstock from the Company, and theCompany will have the right to continue to manufacture Liquidmetal alloyproducts for South Korean customers until all purchased equipment has beencommissioned.

 

Additionally, effective June 1,2007, the Company discontinued its post-processing operation in Weihai, Chinaand transferred the manufacturing staff and equipment in Weihai to GM under anamendment to the equipment purchase agreement with GM.  Further, the Company transferred certain ofits manufacturing staff from its South Korean plant to GM.  As a result, GM assumed $370 of accruedseverance liability for the transferred employee.  The equipment purchase agreement and thetransfer agreement regarding our Weihai operations resulted in a total net gainof $226, which is recorded as other income.

 

The Company purchasedproduction supplies and outsourced production of certain bulk alloy productionwith GM, Lead Metal, and SDM, which are controlled by James Kang, a formerdirector and officer of the Company and the brother of our current Chairman.  In June 2008, the Company began sharing theuse of its manufacturing facility and production equipment in Pyongtack, SouthKorea, with GM as the Company began significant outsourcing at its bulk alloyparts production.  The Company purchaseda total of $830 and $1,213 for the three and nine months ended September 30,2008, respectively, of which $1,073 is included in accounts payable and accruedliabilities at September 30, 2008. The Company recognized revenue from sales of raw materials and royaltiesfor a total of $296 and $1,628 for the three and nine months ended September 30,2008, respectively, of which $138 is included in accounts receivable as of September 30,2008.

 

Effective October 20,2006, Mr. Kang began providing services to the Company as a consultant,which would have continued through December 31, 2009.  On December 31, 2007, the terms of theconsulting agreement were accelerated whereby the remaining two years of Mr. Kang’sconsulting fees were settled for $435. The Company incurred $50 and $150 in consulting for the three and ninemonths ended September 30, 2007, respectively.

 

In December 2007,the Company entered into agreements with two holders of our convertiblesubordinated notes (the “January 2010 Notes”) and GM, a South Korean companyformed by investor groups including our former Founder and director, JamesKang, and the two holders, whereby GM would assume the liabilities due underthe January 2010 Notes, including principal, interest, and fees due by ourcompany to the two holders totaling $434 and the Company released obligationsdue from GM for outstanding trade accounts receivables.  In connection with the assumption of theliabilities by Grace Metal, warrants to purchase 179,620 shares of our commonstock held by the holders were cancelled.

 

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### **LIQUIDMETAL TECHNOLOGIES AND SUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Nine Months Ended September 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**14.    Subsequent Event**

 

The Company currently hasoutstanding $18,643 in aggregate principal amount of 8% ConvertibleSubordinated Notes due January 2010 (the “Notes”).  Under the termsof the Notes, as amended, the Company was required to make an aggregate paymentequal to $583 on September 30, 2008, as a result of the commencement ofmonthly amortization payments equal to 1/32 of their original principal amountdue under the Notes.  However, the Company did not have sufficient fundsto make this payment, and, accordingly, an “Event of Default” occurred underthe Notes as of October 4, 2008.  As a result of this Event ofDefault, the holders of the Notes are entitled to accelerate all principal andinterest under the Notes.  The aggregate amount of outstanding principaland accrued but unpaid interest under the Notes as of October 4, 2008, was$19,081.  As of the filing of this report, we have recieved a formalnotice of default and we are currently working to resolve the matter.  TheCompany intends to respond to this situation by a combination of seeking toamend the terms of certain Notes held by persons indicating a willingness to doso and seeking to sell certain assets of the Company in order tofund payments under the Notes.  However, there is no assurance thatthe Company will be able to sell sufficient assets or complete such amendmentsas may be necessary to bring the Company out of default.

 

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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 nota statement of historical fact is a forward-looking statement, and in some cases,words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,”“plans,” “seeks,” and similar expressions identify forward-looking statements.These statements involve risks and uncertainties that could cause 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 on Form 10-Kfor the fiscal year ended December 31, 2007 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 Technologies disclaims anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events, or otherwise.*

 

**Overview**

 

Weare a materials technology company that develops and commercializes productsmade 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.

 

Amorphous alloys are unique materials that aredistinguished by their ability to retain a random atomic structure when theysolidify, in contrast to the crystalline atomic structure that forms inordinary metals and alloys when they solidify. Liquidmetal alloys possess acombination of performance, processing, and cost advantages that we believemakes them preferable to other materials in a variety of applications. Theamorphous atomic structure of our alloys enables them to overcome certainperformance limitations caused by inherent weaknesses in crystalline atomicstructures, thus facilitating performance and processing characteristicssuperior in many ways to those of their crystalline counterparts. For example,our zirconium-titanium Liquidmetal alloys are approximately 250% stronger thancommonly used titanium alloys, such as Ti-6Al-4V, but they have processingcharacteristics similar in many respects to plastics. We believe theseadvantages could result in Liquidmetal alloys supplanting other incumbentmaterials in a wide variety of applications. Moreover, we believe theseadvantages will enable the introduction of entirely new products andapplications that are not possible or commercially viable with other materials.

 

Our revenues are derived from three principaloperating segments: Liquidmetal alloy industrial coatings, Liquidmetal coatingsapplication, and bulk Liquidmetal alloy products.  Liquidmetal alloy industrial coatings areused primarily as a protective coating for industrial machinery and equipment,such as drill pipe used by the oil drilling industry and boiler tubes used incoal-burning power plants. The historical operating information for fiscal year2001 is based substantially on sales of Liquidmetal alloy coatings. In thesecond half of 2002, we began producing bulk Liquidmetal alloy components andproducts for incorporation into our customers’ finished goods. Liquidmetalcoatings application is the service provided for applying Liquidmetal productsas a protective coating.  BulkLiquidmetal alloy segment revenue includes sales of parts or components ofelectronic devices, medical products, and sports and leisure goods, tooling andprototype parts (including demonstration parts and test samples) for customerswith products in development, product licensing and arrangements, and researchand development revenue relating primarily to defense and medicalapplications.  We expect that thesesources of revenue will continue to significantly change the character of ourrevenue mix.

 

Thecost of sales for our Liquidmetal coatings segment consists primarily of thecosts of outsourcing our manufacturing to third parties. Consistent with ourexpectations, our cost of sales has been increasing over historical results aswe further build our bulk Liquidmetal alloy business. Although we plan tocontinue outsourcing the manufacturing of our coatings, we will internallymanufacture many products derived from our bulk Liquidmetal alloys.

 

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Selling,general, and administrative expenses currently consist primarily of salariesand related benefits, stock-based compensation, travel, consulting andprofessional fees, depreciation and amortization, insurance, office andadministrative expenses, stock-based compensation, and other expenses relatedto our operations.

 

Researchand development expenses represent salaries, related benefits expense,depreciation of research equipment, consulting and contract services, expensesincurred for the design and testing of new processing methods, expenses for thedevelopment of sample and prototype products, and other expenses related to theresearch and development of Liquidmetal alloys. Costs associated with researchand development activities are expensed as incurred. We plan to enhance ourcompetitive position by improving our existing technologies and developingadvances in amorphous alloy technologies. We believe that our research anddevelopment efforts will focus on the discovery of new alloy compositions, thedevelopment of improved processing technology, and the identification of newapplications for our alloys.

 

Ina connection to an equipment purchase agreement entered into with Grace Metal (“GM”),a South Korean corporation, effective June 1, 2007, we discontinued ourpost-processing operation in Weihai, China and transferred our manufacturingstaff and equipment in Weihai to GM under an amendment to the equipmentpurchase agreement with GM.  Further, wetransferred certain of our manufacturing staff from our South Korean plant toGM.  GM was formed by an investor groupthat includes the former Founder and director of our company, James Kang, whois also the brother of John Kang, Chairman of the Board of our company.  We have also changed the name of our SouthKorean subsidiary to Liquidmetal Technologies Korea Co., Ltd, which wasformerly Liquidmetal Korea Co., Ltd.  GMwill assume the name of Liquidmetal Korea to conduct business in South Korea.

 

OnJuly 24, 2007, we transferred substantially all of the assets of ourLiquidmetal alloy industrial coatings business to a newly formed, newlycapitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limitedliability company (“LMC”), and LMC assumed substantially all of the liabilitiesof the coatings business.   Thetransfer included the thermal spray coatings assets and liabilities acquiredunder a purchase agreement with Foster Wheeler Energy Services in June 2007.  We hold a 69.25% ownership interest inLMC.  The results of operation of LMC areconsolidated and comprise our Liquidmetal alloy industrial coatings segment forfinancial reporting purposes.

 

Thefollowing discussion and analysis of our financial condition and results ofoperations focuses on the historical results of our continuing operations.

 

**CriticalAccounting Policies and Estimates**

** **

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requires us tomake estimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

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

 
| · | Exchange  rate fluctuations                                            |
|--------|------------------------------------------------------------------------|
| · | Warranty  accrual                                                      |
| · | Allowance  for doubtful accounts                                       |
| · | Inventories  at lower of cost or net realizable value                  |
| · | Deferred  tax assets                                                   |
| · | Valuation  of derivatives of warrants and embedded conversion features |

 

Our Annual Report on Form 10-K for theyear ended December 31, 2007, contains furtherdiscussions on our critical accounting policies and estimates.

 

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Thecompany adopted Statement of Financial Accounting Standards No. 123,Share-Based Payment (“SFAS 123R”), on January 1, 2006. This new standardrequires companies to expense the fair value of employee stock options andsimilar awards. The company adopted SFAS 123R using the modified prospectivetransition method. Therefore, stock based compensation expense measured inaccordance with SFAS 123R was recorded during the first quarter of 2006, butthe prior year consolidated statement of income was not restated. The adoptionof SFAS 123R resulted in incremental expense of $0.1 million and $0.5 millionfor the three and nine months ended September 30, 2008, respectively, and$0.2 million and $0.6 million for the three and nine months ended September 30,2007, respectively.

 

**Resultsof Operations**

 

Comparison of the threemonths ended September 30, 2008 and 2007

 

*Revenue.* Revenue decreased $2.1 million to $5.0million for the three months ended September 30, 2008 from$7.1 million for the three months ended September 30, 2007.  Thedecrease consisted of $1.1 million decrease in sales and prototyping of partsmanufactured from bulk Liquidmetal alloys to consumer electronics customers androyalties on products sold by our licensees as a result of decrease in demandin electronic casings applications, a decrease of $0.8 million from the salesof our coating products as a result decrease in demand in oil drillingapplications, and a decrease of $0.2 million from our research and developmentcontracts.

 

*Cost ofSales.* Cost ofsales decreased to $3.8 million, or 75% of revenue, for the three months ended September 30,2008 from $5.2 million, or 73% of revenue, for the three months ended September 30,2007.  The decrease was a result of a continued change in revenue mixduring the three months ended September 30, 2008. The cost to manufactureparts from our bulk Liquidmetal alloys is variable and differs based on theunique design of each product.  However, the cost of sales for theproducts sold by the coatings business segment is generally consistent becausethe Liquidmetal coatings products are produced by third parties and soldwholesale to various industries.

 

*Selling,General, and Administrative Expenses*. Selling, general, and administrative expensesdecreased to $1.4 million, or 28% of revenue, for the three months ended September 30,2008 from $1.9 million, or 26% of revenue, for the three months ended September 30,2007. The decrease was primarily a result of decreases in professional fees of$0.4 million, a decrease in wages and expenses of $0.2 million, offset by anincrease in bad debt expense of $0.1 million.

 

*Researchand Development Expenses*. Research and development expenses remained at $0.3 million, or6% of revenue, for the three months ended September 30, 2008 versus $0.3million or 5% of revenue for the three months ended September 30,2007.  Company continues to performresearch and development of new Liquidmetal alloys and related processingcapabilities, develop new manufacturing techniques, and contract withconsultants to advance the development of Liquidmetal alloys.

 

*Changein Value of Warrants. *Change invalue of warrants increased to a gain of $1.0 million, or 20% of revenue, forthe three months ended September 30, 2008 from a gain of $0.2 million, or3% of revenue, for the three months ended September 30, 2007.  The change in value of warrants consisted ofwarrants issued from convertible notes and subordinated notes funded between2004 and 2007 primarily as a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in the value of ourconversion feature liability from our convertible notes funded in 2007 resultedin a gain of $0.6 million, or 13% of revenue, during the three months ended September 30,2008 from a gain of $0.6 million, or 9% of revenue, for the three months ended September 30,2007, primarily as a result of fluctuations in our stock price.

 

*InterestExpense*. Interestexpense was $1.9 million, or 37% of revenue, for the three months ended September 30,2008 and was $2.0 million, or 28% of revenue, for the three months ended September 30,2007. Interest expense consists primarily of debt amortization and interestaccrued on outstanding convertible and subordinated notes, borrowings under theApril 2005 factoring, loan, and security agreement, and the Kookminloan.  The decrease was due to decreaseddebt discount amortization during the three months ended September 30,2008.

 

*InterestIncome.* Interest income was $14 thousand for the threemonths ended September 30, 2007 from interest earned on cashdeposits.  There was no interest incomefor the three months ended September 30, 2008.

 

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Comparison of the ninemonths ended September 30, 2008 and 2007

 

*Revenue.* Revenue decreased $3.0 million to $17.5million for the nine months ended September 30, 2008 from$20.5 million for the nine months ended September 30, 2007.  Thedecrease consisted of a decrease of $2.3 million of sales and prototyping ofparts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers and royalties on products sold by our licensees as a result ofincreased reliance on licensees to manufacture and sell bulk Liquidmetal alloyparts, decrease of $0.2 million from the sales of our coating products as aresult of decrease in demand in oil drilling applications, and a decrease of$0.5 from our research and development contracts.

 

*Cost ofSales.* Cost ofsales decreased to $13.3 million, or 76% of revenue, for the nine months ended September 30,2008 from $19.3 million, or 94% of revenue, for the nine months ended September 30,2007.  The decreases were a result of a change in revenue mix during thenine months ended September 30, 2008, primarily from increased royaltyrevenues.  The cost to manufacture parts from our bulk Liquidmetal alloysis variable and differs based on the unique design of each product. However, the cost of sales for the products sold by the coatings businesssegment is generally consistent because the Liquidmetal coatings products areproduced by third parties and sold wholesale to various industries.

 

*Selling,General, and Administrative Expenses*. Selling, general, and administrative expensesdecreased to $4.6 million, or 26% of revenue, for the nine months ended September 30,2008 from $6.9 million, or 34% of revenue, for the nine months ended September 30,2007. This decrease was primarily a result of decreases in wages and expensesof $0.5 million, a decrease in travel related expenses of $0.1 million, adecrease in bad debt expenses of $0.2 million, a decrease in accrued warrantyexpenses of $0.2 million, a decrease in professional fees expense of $1.0million, and a decrease in rents and utilities expenses of $0.2 million.

 

*Researchand Development Expenses*. Research and development expenses decreased to $0.8 million, or5% of revenue, for the nine months ended September 30, 2008 from $0.9 million,or 4% of revenue, for the nine months ended September 30, 2007.  The Company continues to perform research anddevelopment of new Liquidmetal alloys and related processing capabilities,develop new manufacturing techniques, and contract with consultants to advancethe development of Liquidmetal alloys.

 

*Lossfrom Extinguishments of Debts*.  Loss from extinguishments of debts was $0.6million or 3% of revenue for the nine months ended September 30, 2007 dueto the extinguishment of certain of our convertible and subordinated notes in January 2007.

 

*Changein Value of Warrants. *Change invalue of warrants decreased to a gain of $2.4 million, or 14% of revenue, forthe nine months ended September 30, 2008 from a gain of $4.5 million, or22% of revenue, for the nine months ended September 30, 2007.  The change in value of warrants consisted ofwarrants issued from convertible notes and subordinated notes funded between2004 and 2007 primarily as a result of fluctuations in our stock price.

 

*Changein Value of Conversion Feature.*Change in the value of ourconversion feature liability from our convertible notes funded between 2004 and2007 resulted decreased to a gain of $2.1 million, or 12% of revenue, duringthe nine months ended September 30, 2008 from a gain of $6.1 million, or30% of revenue, for the nine months ended September 30, 2007, primarily asa result of fluctuations in our stock price.

 

*OtherExpense. *Other expense increased to$17 thousand during the nine months ended September 30, 2008 for costs ofissuing shares of preferred units of our subsidiary, from $0 during the ninemonths ended September 30, 2007.

 

*OtherIncome. *Other income increased to $0.2 million, or 1% ofrevenue, during the nine months ended September 30, 2008, due to awrite-off of one of the Company’s outstanding payables, from $49 thousandduring the nine months ended September 30, 2007, primarily from gainrecognized from disposal of assets.

 

*InterestExpense*. Interestexpense was $5.3 million, or 30% of revenue, for the nine months ended September 30,2008 and was $7.5 million, or 36% of revenue, for the nine months ended September 30,2007. Interest expense consists primarily of debt amortization and interestaccrued on outstanding convertible and subordinated notes, borrowings under theApril 2005 factoring, loan, and security agreement, and the Kookminloan.  The decrease was due to decreaseddebt discount amortization during the nine months ended September 30,2008.

 

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*InterestIncome.* Interest income was $3 thousand for the ninemonths ended September 30, 2008 and was $0.1 million, or 1% of revenue,for the nine months ended September 30, 2007 from interest earned on cashdeposits.

 

**Liquidityand Capital Resources**

** **

Our cash provided byoperating activities was $0.3 million for the nine months ended September 30,2008 and our cash used for operating activities was $9.6 million for thenine months ended September 30, 2007.  Our working capital deficitincreased from $12.4 million at December 31, 2007 to $17.0 million at September 30,2008.  The working capital deficit increase of $4.6 million was primarilyattributable to decrease of cash and cash equivalents of $1.0 million, decreaseof trade account receivables of $1.1 million, decrease of inventories of $1.0million, and increase of accounts payable and accrued expenses of $0.7 million,increase of long term debt, current portion, net of discounts of $6.6 million,offset by an increase of prepaid expenses and other current assets of $0.3million, decrease of deferred revenue of 0.1 million, decrease of short-termdebt of $0.6 million, decrease of warrant liabilities of $2.4 million, decreaseof conversion feature liabilities of $2.1 million, and decrease of otherliabilities, current portion, of $0.3 million.

 

Our cash used ininvesting activities was $1.1 million for the nine months ended September 30,2008 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash used for financing activities was $1.1 million for the ninemonths ended September 30, 2008.  Wepaid net $0.6 million in borrowings from factoring agreement executed in April 2005and a revolving loan agreement executed in July 2007.  We have $4.1 million available for futureborrowings under the factoring agreement, which is contingent on approval ofeligible receivables by the financing company and we have $0.7 millionavailable for future borrowings under the revolving loan agreement.

 

On February 22,2008, we received $1.7 million distribution from our majority owned subsidiary,Liquidmetal Coatings, LLC (“LMC”) from which it issued and sold $2.5 million inpreferred membership units to two existing holders of LMC common membershipunits.  The preferred units issued by LMChave an accruing priority return of 14% per year that are priority over anydistribution made by LMC and may be redeemed at any time within four years ofissuance.  LMC has redeemed $0.2 millionof the preferred units as of September 30, 2008.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyondthe fourth quarter of 2008 and we will therefore require additionalfunding.  We are actively seeking additional sources of capital andseeking to restructure and/or modify existing indebtedness.  The amount offunding that we seek and the timing of such fundraising efforts will depend onthe extent to which we are able to increase revenues through obtainingadditional purchase orders for our products and/or the extent to which we canrestructure or modify our debt.  Because we cannot be certain that we willbe able to obtain adequate funding from debt, equity, or other traditional financingsources, we are also actively exploring several strategic financing options,including the possible sale of our manufacturing plant in South Korea (whichwould then be replaced with a smaller facility) and additional licensing andoutsourcing of our manufacturing operations.

 

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

 

Additionally, wehave approximately $1.2 million of principal and accrued interest outstandingas of September 30, 2008, under the 8% unsecured subordinated notes (the “BridgeNotes”), which were due August 17, 2007.  We intend to fully repaythe amounts due under the Bridge Notes.  However, as of the filing of thisreport we do not have sufficient funds to repay the Bridge Notes.  As aresult, we are currently in default under the Bridge Notes.  Such a default may have material adverse effect on our operations, financial condition,and results of operations. We have not received a formal notice of defaultand we are currently working to resolve this matter with investors holding ourBridge Notes.

 

We were requiredunder our amended Security Purchase Agreement, dated April 23, 2007,between our company and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previouslyissued promissory notes, including the Bridge Notes (“Debt SatisfactionCovenant”) by October 1, 2007.  As we have not yet fully repaid ourBridge Notes, we are not in compliance with this covenant and are subject todefault under the January 2010 Notes.  Such a default may havematerial adverse effect on our operations, financial condition, and results ofoperations. As of the filing of this report, we have received a formal notice of default under this covenant and arecurrently working to resolve this matter.

 

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We were required,beginning July 31, 2008 and at the end of each month thereafter, to redeem1/36th of the principal amount of the January 2010 Notes in cash or, atour election, with shares of our common stock. On July 31, 2008, we obtained an agreement with the majority of theJanuary 2010 Note holders to change the amortization date of the principalto September 30, 2008 and to change the redemption amount at eachamortization date to be 1/32nd of the principal amount.   As a result of this amendment, we arerequired to make an aggregate payment equal to $0.6 million on September 30,2008. However, we did not have sufficient funds to make this payment, and,accordingly, we are in default under the January 2010 Notes.  The holders of the January 2010 Notesare entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, we have received a formal notice of default under this covenant and we arecurrently working to resolve this matter. As a result, the outstanding principal due under the January 2010Notes of $18.6 million is included in current portion of long-term debt andaccrued interest and fees of $0.7 million is included in accounts payable andaccrued expenses as of September 30, 2008. Such defaultsmay have material adverse effect on our operations, financial condition, andresults of operations.  We are currentlyworking to resolve this matter with investors holding our January 2010Notes.

 

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

 

Wehave outstanding liens and judgments on our assets by various creditors forpast-due trade payables totaling $0.8 million, of which $0.5 million is held bycreditors in South Korea, as of September 30, 2008.  We are currently working to resolve thematter with each creditor****by seeking forbearance until we are ableto obtain funding to repay the amounts due, although there is no assurance thatwe will be able to obtain any such funding.  If we cannot repay the amounts due or obtain forbearance, the creditorsmay seek to foreclose on the Company’s assets. Such a foreclosure would have material adverse effect on our operations,financial condition, and results of operations.

 

**ContractualObligations**

** **

The following table summarizes the Company’sobligations and commitments as of September30, 2008:

 
| ** **                                     | ** ** | ** ** | ** ** | **Payments Due by Period (in thousands)** | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|
| **Contractual Cash Obligations**     | ** ** | **Total**  | ** ** | **Less Than  1 Year**                                    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|                                           |       |       |       |                                                               |       |               |       |   |   |   |   |
| Long-term debt  (2)                            |       | $          | 19,830     |                                                               | $          | 19,830             |       | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt  of consolidated subsidiary (2) |       | 9,635      |       | 1,000                                                              |       | 1,979              |       | 6,656 |   | — |   |
| Short-term debt  (3)                           |       | 919        |       | 919                                                                |       | —             |       | — |   | — |   |
| Short-term debt  of consolidated subsidiary    |       | 644        |       | 644                                                                |       | —             |       | — |   | — |   |
| Interest  payments (4)                         |       | 8,058      |       | 4,286                                                              |       | 2,569              |       | 1,203 |   | — |   |
| Operating leases  and rents                    |       | 933        |       | 282                                                                |       | 498                |       | 153 |   | — |   |
| Consulting  services payable                   |       | 165        |       | 156                                                                |       | 9                  |       | — |   | — |   |
| Foster Wheeler                                 |       | 150        |       | 150                                                                |       | —             |       | — |   | — |   |
| Dongyang                                       |       | 9          |       | 9                                                                  |       | —             |       | — |   | — |   |
| Nichimen                                       |       | 315        |       | 315                                                                |       | —             |       | — |   | — |   |
| Totals (1)                                     |       | $          | 40,658     |                                                               | $          | 27,591             |       | $ | 5,055 |   | $ | 8,012 |   | $ | — |   |

 

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| (1) | Contractual cash  obligations include Long-Term Debt comprised of $1,009 of Unsecured  Subordinated Notes issued in 2006, $18,643 of Convertible Unsecured Notes  originally issued in 2007, $178 of Kookmin Bank Loan, and $2,979 of Bank  Midwest term loan, $6,656 of C3 Capital Partners Subordinated Notes,  Short-Term Debt comprised of $919 outstanding advances received under  factoring, loan, and security agreement, $644 of Bank Midwest revolving loan,  future minimum lease payments under capital and operating leases, purchase  commitments from consultants, payments due from assets purchased from Foster  Wheeler thermal spray coatings business, payments due from our discontinued  equipment manufacturing business, and minimum payments due under a  distribution agreement. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Does not include  accrued and scheduled interest payments of $7,950; and un-amortized cash  discount and discounts for conversion feature and warrants of $8,175 of our  convertible notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3) | Does not include  minimum interest and fee payments of $30.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4) | Interest payments  include accrued and scheduled payments due on long-term debt and long-term  debt of consolidated subsidiary with annual interest rates between 8% to 14%.  Interest payments also include estimated interest on short-term debt and  short-term debt of majority owned subsidiary with annual interest rates  between 6.5% to 8.25% with expected maturity of approximately 1 year.                                                                                                                                                                                                                                                                                                                                                                                                     |

 

**OffBalance Sheet Arrangements**

 

An off-balance sheet arrangement is any transaction,agreement or other contractual arrangement involving an unconsolidated entityunder which a company has (1) made guarantees, (2) a retained acontingent interest in transferred assets, (3) an obligation underderivative instruments classified as equity, or (4) any obligation arisingout of a material variable interest in an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to the company, orthat engages in leasing, hedging, or research and development arrangements withthe 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 buy anownership interest in LSI, initially, of 19.9% to up to 50%.  In December 2006,we purchased 19.9% interest in the joint venture.  Under the licensingagreement, at any time following 18 months after the effective date of theagreement, LSI may exercise its option to sell us certain business assetsincluding manufacturing equipment acquired under the joint venture.  Duringthe year ended December 31, 2007, we recognized revenues of $0.7 millionof Liquidmetal alloys sold to SAGA for use in the joint venture.  Duringthe nine months ended September 30, 2008 and 2007, we recognized revenuesof $0 and $0.1 million of Liquidmetal alloys sold to LSI for use in the jointventure.

 

**Item3 – Quantitative and Qualitative Disclosures about Market Risk**

 

We are exposed to various market risks in conducting the business of theCompany, and we anticipate that this exposure will increase as a result of ourplanned growth.  In an effort to mitigatelosses associated with these risks, we may at times enter into derivativefinancial instruments, although we have not historically done so.  These 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.

 

*InterestRates.*  We are exposed to market risks relating tochanges in interest rates as our borrowings are subject to the volatility ofinterest rate risk.  Although we do notcurrently have any borrowings with variable interest rates, fluctuations ininterest rates may have a negative impact to any future borrowings.

 

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

 

*ForeignExchange 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 margins andcould 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.

 

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**Item4T – Controls and Procedures**

** **

Evaluation of DisclosureControls and Procedures.  In accordance with the final Release No. 33-8934 bythe Security and Exchange Commission, which requires companies that arenon-accelerated filers to include in their annual reports an attestation reportof their independent auditors on internal control over financial reporting forfiscal years ending on or after December 15, 2009, we have elected not toinclude an attestation report of our independent auditor on our internalcontrols for our fiscal year ending December 31, 2008.  However, based on an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)under the Exchange Act) as of September 30, 2008, the end of the periodcovered by this report, our Chief Executive Officer and Chief Financial Officerhave concluded that the disclosure controls and procedures were effective.

 

Changes in InternalControls.  Duringthe quarter ended September 30, 2008, there was no change in our internalcontrols over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

 

**Item1 – Legal Proceedings**

 

Department of JusticeInvestigation

 

In August 2006, theUnited States Department of Justice (“DOJ”) instituted an investigation intounderlying facts and circumstances as were alleged in a securities class actionand shareholder derivative actions filed in 2004 against our company andcertain of its former and current directors and officers, which were settledout of court.  We have cooperated with the DOJ in its investigation. More than one year has lapsed since the last activity on this matter, we arenot aware of any information that this investigation is continuing.

 

**Item 1A – Risk Factors**

 

In addition to the riskfactors included in our Annual Report on Form 10-K for the year ended December 31,2007, the following is an additional risk factor that could adversely affectour business, results of operations or financial condition.

 

**We rely on our suppliers for mold making andmanufacture of our bulk amorphous alloy parts.**

 

We have outsourced much ofour mold making and manufacturing of our bulk amorphous alloy parts. Therefore,our revenue growth is dependent on our ability to obtain sufficientmanufacturing capacity.  Our suppliers mayallocate their limited capacity to fulfill the production requirements of othercustomers.  In the event of a disruptionof the operations of our suppliers, we may not have a secondary manufacturingsource immediately available. Such an event could cause significant delays inshipments and may adversely affect our cost of goods sold and our results ofoperations. 

 

**We arein default under various debt obligations.**

 

We have approximately$1.2 million of principal and accrued interest outstanding as of September 30,2008, under the 8% unsecured subordinated notes (“Bridge Notes”), which weredue August 17, 2007.  We intend to fully repay the amounts due underBridge Notes.  However, as of the filing of this report we do not havesufficient funds to repay the Bridge Notes.  As a result, we arecurrently in default under the Bridge Notes.  Such defaults may havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working toresolve this matter with investors holding our Bridge Notes by seeking aforbearance until we are able to obtain funding to repay the Bridge Notes,although there is no assurance that we will be able to obtain any such funding.

 

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

 

The holders of the January 2010Notes are entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, we have received a formal notice of default and we are currently working toresolve this matter.  The outstandingprincipal due under the January 2010 Notes of $18.6 million is included incurrent portion of long-term debt and accrued interest and fees of $0.7 millionis included in accounts payable and accrued expenses as of September 30,2008.  Such defaults may have material adverse effect on ouroperations, financial condition, and results of operations.  We are currently working to resolve thismatter with investors holding our January 2010 Notes by a combination ofseeking to amend the terms of certain January 2010 Notes held by personsindicating a willingness to do so and seeking to sell certain assets of ourcompany in order to fund payments under the January 2010 Notes. However, there is no assurance that we will be able to sell sufficient assetsor complete such amendments as may be necessary to bring the company out ofdefault.

 

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

 

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**Item 3 -Defaults Upon Senior Securities**

 

We have approximately$1.2 million of principal and accrued interest outstanding as of September 30,2008, under the 8% unsecured subordinated notes (“Bridge Notes”), which weredue August 17, 2007.  We intend to fully repay the amounts due underBridge Notes.  However, as of the filing of this report we do not havesufficient funds to repay the Bridge Notes.  As a result, we arecurrently in default under the Bridge Notes.   Such defaults may havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working toresolve this matter with investors holding our Bridge Notes.

 

We were required underour amended Security Purchase Agreement, dated April 23, 2007, between ourcompany and holders of our 8% convertible subordinated notes due January 2010(the “January 2010 Notes”), to repay outstanding debt under previouslyissued promissory notes, including the Bridge Notes (“Debt Satisfaction Covenant”)by October 1, 2007.  As we have not yet fully repaid our BridgeNotes, we are in default under the January 2010 Notes. Such defaults mayhave material adverse effect on our operations, financial condition, andresults of operations.  We are currently workingto resolve this matter with investors holding our January 2010 Notes.

 

We were required,beginning July 31, 2008 and at the end of each month thereafter, to redeem1/36th of the principal amount of the January 2010 Notes in cash or, atour election, with shares of our common stock. On July 31, 2008, we obtained an agreement with the majority of theJanuary 2010 Note holders to change the amortization date of the principalto September 30, 2008 and to change the redemption amount at eachamortization date to be 1/32nd of the principal amount.   As a result of this amendment, we arerequired to make an aggregate payment equal to $0.6 million on September 30,2008. However, we did not have sufficient funds to make this payment, and,accordingly, we are in default under the January 2010 Notes.  The holders of the January 2010 Notesare entitled to accelerate all principal and interest under the January 2010Notes.  As of the filing of this report, we have received a formal notice of default under this covenant and we arecurrently working to resolve this matter. As a result, the outstanding principal due under the January 2010Notes of $18.6 million is included in current portion of long-term debt andaccrued interest and fees of $0.7 million is included in accounts payable andaccrued expenses as of September 30, 2008. Such defaultsmay have material adverse effect on our operations, financial condition, andresults of operations.  We are currentlyworking to resolve this matter with investors holding our January 2010Notes.

 

Additionally,approximately $0.2 million of principal and accrued interest became due fromour Korean subsidiary under a loan from Kookmin Bank of South Korea in August 2008.  However, as of the filing of this report we did not have sufficient fundsto repay the loan and wehave received a formal notice of default. Kookmin Bank has initiated foreclosure proceedings on the loancollateral, which consists of our manufacturing plant facility and certainequipment in South Korea.  The foreclosureof our manufacturing plant facility and equipment in South Korea would havematerial adverse effect on our operations, financial condition, and results ofoperations.  We are currently working to resolve this matter with KookminBank by seeking a forbearance until we are able to obtain funding to repay thisloan, although there is no assurance that we will be able to obtain any suchfunding.

 

**Item 5 – Other Information**

 

None.

 

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**Item 6 – Exhibits**

 

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                        |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                             |
| 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, Gerald Morrow, 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, Gerald Morrow, 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, INC.               |
|-------------------------------|--------|-----------------------------------------------|
|                          |   | (Registrant)                                  |
|                          |   |                                          |
| Date:  November 19, 2008 |   | /s/ Larry Buffington                          |
|                          |   | Larry Buffington                              |
|                          |   | President and Chief  Executive Officer        |
|                          |   | (Principal Executive  Officer)                |
|                          |   |                                          |
|                          |   |                                          |
| Date:  November 19, 2008 |   | /s/ Gerald Morrow                             |
|                          |   | Gerald Morrow                                 |
|                          |   | Chief Financial Officer                       |
|                          |   | (Principal Financial  and Accounting Officer) |

 

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