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  June 30, 2008**                                                                                  |
|                                                                                                                                    |       |                                                                                                     |
| **OR**                                                                                                                                  |
|                                                                                                                                    |       |                                                                                                     |
| **o**                                                                                                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                    |       |                                                                                                     |
| **For the transition period from           to        ** |

 

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

 

----

 

# **LIQUIDMETALTECHNOLOGIES, 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**

 

----

 

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 July 31,2008, there were 44,726,295 shares of the registrant’s common stock, $0.001 parvalue, outstanding.**

 

 

 

----

Tableof Contents

 

**LIQUIDMETAL TECHNOLOGIES, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED****JUNE 30, 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, operationsand infrastructure, ability to provide superior customer service, dependenceupon key personnel and the like. The Company’s most recent filings with theSecurities 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.

 

2

----

Tableof Contents

 

**TABLE OF CONTENTS**

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

 

3

----

Tableof Contents

 

### **PART I**

### **FINANCIAL INFORMATION**

### ** **

**Item 1 –Financial Statements**

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                   | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                   |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Current assets:                                                                                                                              |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                   |       | $                 | 214        |                  | $          | 1,180 |   |
| Trade accounts  receivables, net of allowance for doubtful accounts of $88 and $89                                                           |       | 4,201             |       | 5,165                 |       |
| Inventories                                                                                                                                  |       | 1,344             |       | 2,298                 |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 474               |       | 708                   |       |
| Total current  assets                                                                                                                        |       | 6,233             |       | 9,351                 |       |
| Property, plant  and equipment, net                                                                                                          |       | 8,751             |       | 9,730                 |       |
| Idle equipment                                                                                                                               |       | 160               |       | 178                   |       |
| Other  intangibles, net                                                                                                                      |       | 1,116             |       | 1,142                 |       |
| Investment in  joint venture                                                                                                                 |       | 306               |       | 306                   |       |
| Other assets                                                                                                                                 |       | 1,582             |       | 1,806                 |       |
| Total assets                                                                                                                                 |       | 18,148            |       | 22,513                |       |
|                                                                                                                                         |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIENCY**                                                                                           |       |              |       |                  |       |
|                                                                                                                                         |       |              |       |                  |       |
| Current  liabilities:                                                                                                                        |       |              |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                       |       | 8,138             |       | 8,056                 |       |
| Deferred revenue                                                                                                                             |       | 287               |       | 316                   |       |
| Short-term debt                                                                                                                              |       | 1,766             |       | 2,182                 |       |
| Long-term debt,  current portion, net of debt discounts of $2,978 and $838                                                                   |       | 5,315             |       | 6,092                 |       |
| Warrant  liabilities                                                                                                                         |       | 1,187             |       | 2,583                 |       |
| Conversion  feature liabilities                                                                                                              |       | 652               |       | 2,083                 |       |
| Other  liabilities, current portion                                                                                                          |       | 54                |       | 398                   |       |
| Total current  liabilities                                                                                                                   |       | 18,137            |       | 21,710                |       |
|                                                                                                                                         |       |              |       |                  |       |
| Long-term debt,  net of current portion and debt discounts of $6,046 and $9,634                                                              |       | 14,999            |       | 14,588                |       |
| Other long-term  liabilities, net of current portion                                                                                         |       | 290               |       | 411                   |       |
| Total  liabilities                                                                                                                           |       | 32,688            |       | 36,709                |       |
|                                                                                                                                         |       |              |       |                  |       |
| Minority  interests                                                                                                                          |       | 609               |       | 384                   |       |
|                                                                                                                                         |       |              |       |                  |       |
| Shareholders’  deficiency:                                                                                                              |       |              |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized and 44,726,295 issued and outstanding  at June 30, 2008 and December 31, 2007 |       | 45                |       | 45                    |       |
| Additional  paid-in capital                                                                                                                  |       | 139,942           |       | 137,293               |       |
| Accumulated  deficit                                                                                                                         |       | (157,115          | )          | (154,710              | )          |
| Accumulated  other comprehensive income                                                                                                      |       | 1,979             |       | 2,792                 |       |
| Total  shareholders’ deficiency                                                                                                         |       | (15,149           | )          | (14,580               | )          |
|                                                                                                                                         |       |              |       |                  |       |
| Total  liabilities and shareholders’ deficiency                                                                                         |       | $                 | 18,148     |                  | $          | 22,513 |   |

 

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

 

4

----

Tableof Contents

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

 

### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

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

**(unaudited)**

 
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                                  | 5,669      |                                             | $          | 8,331 |   | $ | 12,437 |   | $ | 13,398 |   |
| Cost of sales                                          |       | 4,633                                              |       | 7,686                                            |       | 9,534 |   | 14,127 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Gross profit  (loss)                                   |       | 1,036                                              |       | 645                                              |       | 2,903 |   | (729 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Operating  expenses                                    |       |                                               |       |                                             |       |   |   |   |   |
| Selling,  general, and administrative                  |       | 1,326                                              |       | 2,495                                            |       | 3,200 |   | 5,027 |   |
| Research and  development                              |       | 278                                                |       | 293                                              |       | 536 |   | 556 |   |
| Total operating  expenses                              |       | 1,604                                              |       | 2,788                                            |       | 3,736 |   | 5,583 |   |
| Loss from  operations                                  |       | (568                                               | )          | (2,143                                           | )          | (833 | ) | (6,312 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Loss from  extinguishments of debt                     |       | —                                             |       | —                                           |       | — |   | (648 | ) |
| Change in value  of warrants, gain                     |       | 1,290                                              |       | 564                                              |       | 1,396 |   | 4,256 |   |
| Change in value  of conversion feature, gain           |       | 1,240                                              |       | 1,168                                            |       | 1,462 |   | 5,512 |   |
| Other expense                                          |       | —                                             |       | —                                           |       | (17 | ) | — |   |
| Other Income                                           |       | 247                                                |       | 49                                               |       | 247 |   | 49 |   |
| Interest expense                                       |       | (1,717                                             | )          | (2,700                                           | )          | (3,420 | ) | (5,463 | ) |
| Interest income                                        |       | 1                                                  |       | 46                                               |       | 3 |   | 107 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss)  before minority interest                |       | 493                                                |       | (3,016                                           | )          | (1,162 | ) | (2,499 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Minority  interests                                    |       | (65                                                | )          | —                                           |       | (226 | ) | — |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss)  from continuing operations              |       | 428                                                |       | (3,016                                           | )          | (1,388 | ) | (2,499 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Net income  (loss)                                     |       | 428                                                |       | (3,016                                           | )          | (1,388 | ) | (2,499 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Other  comprehensive income (loss):                    |       |                                               |       |                                             |       |   |   |   |   |
| Foreign exchange  translation (loss) gain              |       | (353                                               | )          | 499                                              |       | (813 | ) | 277 |   |
| Comprehensive  income (loss)                           |       | $                                                  | 75         |                                             | $          | (2,517 | ) | $ | (2,201 | ) | $ | (2,222 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Net income  (loss) per share basic and diluted:        |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss)  per share basic and diluted             |       | $                                                  | 0.01       |                                             | $          | (0.07 | ) | $ | (0.03 | ) | $ | (0.06 | ) |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Number of  weighted average shares - basic and diluted |       | 44,726                                             |       | 44,632                                           |       | 44,726 |   | 44,778 |   |

 

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

 

5

----

Tableof Contents

 

**LIQUIDMETALTECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICIENCY**

###### **For the Three Months Ended June 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                      |       | —             |       | —            |       | 324                              |       | —                   |       | —                                                       |       | 324       |       |
| Foreign exchange  translation gain             |       | —             |       | —            |       | —                           |       | —                   |       | (813                                                         | )          | (813      | )          |
| Distribution to  minority interests            |       | —             |       | —            |       | —                           |       | (1,017                   | )          | —                                                       |       | (1,017    | )          |
| Preferred Units  capital account of subsidiary |       | —             |       | —            |       | 2,325                            |       | —                   |       | —                                                       |       | 2,325     |       |
| Net loss                                       |       | —             |       | —            |       | —                           |       | (1,388                   | )          | —                                                       |       | (1,388    | )          |
| **Balance,  March 31, 2008**                   |       | 44,726,295         |       | $                 | 45         |                             | $          | 139,942                  |       | $                                                            | (157,115   | )         | $          | 1,979 |   | $ | (15,149 | ) |

 

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

 

6

----

Tableof Contents

 

**LIQUIDMETALTECHNOLOGIES, INC.  ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                                        | ** ** | **2007** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| **Operating  activities:**                                                                              | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Net loss                                                                                                |       | $                                                               | (1,388     | ) | $ | (2,499 | ) |
|                                                                                                    |       |                                                            |       |   |   |
| Adjustments to  reconcile loss from operations to net cash provided by (used in) operating  activities: |       |                                                            |       |   |   |
| Gain on disposal  of asset                                                                              |       | (17                                                             | )          | (49 | ) |
| Minority  interests in income of consolidated subsidiary                                                |       | 226                                                             |       | — |   |
| Depreciation and  amortization                                                                          |       | 709                                                             |       | 1,734 |   |
| Loss on  extinguishment of debt                                                                         |       | —                                                          |       | 648 |   |
| Amortization of  debt discount                                                                          |       | 1,657                                                           |       | 3,371 |   |
| Stock-based  compensation                                                                               |       | 324                                                             |       | 403 |   |
| Bad debt  (recovery) expense                                                                            |       | (139                                                            | )          | 131 |   |
| Warranty  (recovery) expense                                                                            |       | (22                                                             | )          | 261 |   |
| Gain from change  in value of warrants                                                                  |       | (1,396                                                          | )          | (4,256 | ) |
| Gain from change  in value of conversion feature                                                        |       | (1,463                                                          | )          | (5,512 | ) |
|                                                                                                    |       |                                                            |       |   |   |
| Changes in  operating assets and liabilities:                                                           |       |                                                            |       |   |   |
| Trade accounts  receivable                                                                              |       | 1,103                                                           |       | (1,047 | ) |
| Inventories                                                                                             |       | 954                                                             |       | 1,622 |   |
| Prepaid expenses  and other current assets                                                              |       | 234                                                             |       | (471 | ) |
| Other assets                                                                                            |       | (7                                                              | )          | (1,386 | ) |
| Accounts payable  and accrued expenses                                                                  |       | 105                                                             |       | 61 |   |
| Deferred revenue                                                                                        |       | (29                                                             | )          | 221 |   |
| Other  liabilities                                                                                      |       | (465                                                            | )          | 330 |   |
| Net cash  provided by (used in) operating activities                                                    |       | 386                                                             |       | (6,438 | ) |
|                                                                                                    |       |                                                            |       |   |   |
| **Investing  Activities:**                                                                              |       |                                                            |       |   |   |
| Purchases of  property and equipment                                                                    |       | (886                                                            | )          | (882 | ) |
| Proceeds from  the sale of property and equipment                                                       |       | (17                                                             | )          | 100 |   |
| Investment in  patents and trademarks                                                                   |       | (36                                                             | )          | (34 | ) |
| Investment in  joint venture                                                                            |       | —                                                          |       | (303 | ) |
| Net cash used in  investing activities                                                                  |       | (939                                                            | )          | (1,119 | ) |
|                                                                                                    |       |                                                            |       |   |   |
| **Financing  Activities:**                                                                              |       |                                                            |       |   |   |
| Proceeds from  borrowings                                                                               |       | 9,603                                                           |       | 24,789 |   |
| Repayment of  borrowings                                                                                |       | (11,803                                                         | )          | (12,779 | ) |
| Proceeds from  issuance of preferred units of subsidiary, net of issuance costs                         |       | 2,325                                                           |       | — |   |
| Restricted cash                                                                                         |       | —                                                          |       | (2,083 | ) |
| Cash  distributions                                                                                     |       | (1,017                                                          | )          | — |   |
| Net cash (used  in) provided by financing activities                                                    |       | (892                                                            | )          | 9,927 |   |
| Effect of  foreign exchange translation                                                                 |       | 479                                                             |       | (226 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                   |       | (966                                                            | )          | 2,144 |   |
|                                                                                                    |       |                                                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                                       |       | 1,180                                                           |       | 144 |   |
| Cash and cash  equivalents at end of period                                                             |       | $                                                               | 214        |   | $ | 2,288 |   |
|                                                                                                    |       |                                                            |       |   |   |
| Supplemental  cash flow information                                                                     |       |                                                            |       |   |   |
| Interest paid                                                                                           |       | $                                                               | 1,269      |   | $ | 1,017 |   |
| Taxes paid                                                                                              |       | $                                                               | —     |   | $ | — |   |

 

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

 

7

----

Tableof Contents

 

**LIQUIDMETALTECHNOLOGIES, INC.  ANDSUBSIDIARIES**

 

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

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

**(unaudited)**

 

During the six months ended June, 2007, $400 of theCompany’s 7% senior convertible notes due July 2007 was converted into320,000 shares of the Company’s common stock at a conversion price of $1.25 pershare.

 

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

 

8

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

** **

**1.         Basisof 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 six months ended June 30, 2008 are not necessarily indicative ofthe results that may be expected for any future periods or the year ending December 31,2008.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe Company’s Form 10-K filed with the Securities and Exchange Commissionon 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 commercializeLiquidmetal alloy 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.  In addition, such alloys are used to generateresearch and development services revenue for developing uses related primarilyto defense and medical applications as well as potential license fees,royalties, and other compensation from strategic partnering transactions.

 

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

 

**2.         Basisof Presentation and Recent 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.

 

9

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

RecentAccounting Pronouncements

 

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities including an amendment of FASB Statement No. 115”(“SFAS 159”), which permits entities to 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 141R, “Business Combinations” (“SFAS 141R”). SFAS 141Ramends the requirements for accounting for business combinations.  SFAS141R will be effective after the beginning of the first annual reporting periodbeginning on or after December 15, 2008.  The Company is currentlyevaluating the potential impact of the adoption of SFAS 141R on the Company’sconsolidated 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. The Company is currently evaluating the potentialimpact of the adoption of SFAS 160 on the Company’s consolidated financialstatements.

 

In March 2008, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 161, “Disclosures about DerivativeInstruments and Hedging Activities – An Amendment of SFAS No. 133” (“SFAS161”). SFAS 161 seeks to improve financial reporting for derivative instrumentsand hedging activities by requiring enhanced disclosures regarding the impacton financial position, financial performance, and cash flows. SFAS 161 will beeffective for the financial statements issued for fiscal years beginning afterNovember 15, 2008. The Company is currently evaluating the potential impact ofthe adoption of SFAS 161 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 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS 162”). SFAS 162 is intended to improve financialreporting by identifying a consistent framework, or hierarchy, for selectingaccounting principles to be used in preparing financial statements that arepresented in conformity with U.S. generally accepted accounting principles fornongovernmental entities. SFAS 162 will become effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight BoardAuditing amendments to AU Section 411, “The Meaning of Present Fairly inConformity with Generally Accepted Accounting Principles.” The Company iscurrently evaluating the impact of SFAS 162.

 

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.

 

10

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**3.         Liquidity**

** **

The Company hasexperienced losses from continuing operations during the last three fiscalyears and has an accumulated deficit of $157,115 as of June 30,2008.  Cash provided by operations for the six months ended June 30,2008 was $386, however, cash flow from operations will likely be negativethroughout fiscal year 2008.  As of June 30, 2008, the Company’sprincipal sources of liquidity are $214 of cash and $4,201 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 $9,144, which was offset by repayments of $9,560,under 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 six months ended June 30, 2008. TheCompany has $4,068 available for future borrowings under the factoringagreement, which is contingent on approval of eligible receivables by thefinancing company and it has $706 available for future borrowings under therevolving 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 June 30, 2008, LMChas redeemed $175 of the preferred units and distributed $118 in priorityreturn to the preferred units holders.

 

The Companyanticipates that it will not have sufficient funds to pursue its currentoperating plan beyond the third 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 $1,172 of principal and accrued interest outstandingas of June 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.

 

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. The Company has not received a formalnotice of default under this covenant and is currently working to resolve thismatter.

 

On July 31,2008, and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of the Company’s common stock. The ability to pay the redemption amounts with shares of common stock will besubject to specified conditions.  As of the filing of this report, theCompany has obtained an agreement from a majority of the January 2010 Noteholders to change the 

 

11

----

Table ofContents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

amortization dateof the principal to September 30, 2008 and to change the redemption amountat each amortization date to be 1/32nd of the principal amount.  Under the current conditions, the Companydoes not have the capital resources to redeem the January 2010 Notes withcash nor will the Company meet the specified condition that will enable theCompany to redeem the January 2010 Notes with shares of its commonstock.  If the Company cannot commence the scheduled principal payment in September,it will be 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.

 

**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:

 
| ** **         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **         | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| ** **         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Raw materials      |       | $                 | 678        |                  | $          | 1,216 |   |
| Work in process    |       | 249               |       | 536                   |       |
| Finished goods     |       | 417               |       | 546                   |       |
| Total  inventories |       | $                 | 1,344      |                  | $          | 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 this equipmentinternally in the near future.  Totalamount of idle equipment remaining was $160 as of June 30, 2008 and $178as 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 June 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 June 30, 2008 theCompany used 1% of coatings applications sales as estimates of warranties to beclaimed.

 

During the threeand six months ended June 30, 2008, the Company recorded $12 and $22 ofnet gain on warranty, respectively. During the three and six months ended June 30,2007, the Company recorded $54 and $261 of warranty expense, respectively.  The warranty accrual balance is included inaccounts payable and accrued expenses.

 

12

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**7.  Notes Payable**

** **

Secured Senior Convertible Note

 

On August 19, 2004, the Company issued$2,855 of 6% Senior Secured Notes Due 2007 (the “July 2007 Notes”) and $2,855of 10% Senior Secured Notes Due 2005 (the “July 2005 Notes”) in exchangefor previously issued 6% Senior Convertible Notes due 2007 includingplacement agent costs.  The July 2005and July 2007 Notes are convertible into Common Stock at $2.00 and $1.00,respectively.

 

In August 2005,the July 2005 Notes were retired and exchanged for 7% Convertible SecuredPromissory Notes Due August 2007. Additionally, the July 2007 Notes were retired in July 2007.

 

The Company’sgross outstanding loan balance of the July 2007 Notes totaled $0 as of June 30,2008 and December 31, 2007.  As of June 30,2008 and December 31, 2007, un-amortized discounts for conversion featureand warrants and other asset debt issuance costs totaled $0.  Interest expense for the amortization of debtissuance cost and discount on note was $0 for the three and six months ended June 30,2008 and $173 and $347 for the three and six months ended June 30, 2007,respectively.

 

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

 

In July 2007,the August 2007 Notes were retired.

 

As of June 30, 2008 and December 31,2007, our gross outstanding loan balance of the August 2007 Notes totaled$0.  As of June 30, 2008 and December 31,2007, un-amortized discounts for beneficial conversion feature and warrants,other asset debt issuance costs, and contra liability debt issuance costtotaled $0.  Interest expense for theamortization of debt issuance cost and discount on note was $0 for the threeand six months ended June 30, 2008 and $850 and $1,812 for the three andsix months ended June 30, 2007, respectively.

 

Pursuant to Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities,” the Company isrequired to report a value of the conversion liability as a fair value andrecord the fluctuation to the fair value of the conversion feature liability tocurrent operations.  The change in thefair value of the conversion feature liability for both the July 2007 and August 2007Notes resulted in a gain of $0 for the three and six months ended June 30,2008 and gains of $1,176 and $1,549 for the three and six months ended June 30,2007, respectively.  The fair value ofconversion feature outstanding at June 30, 2007 of $24 was computed usingthe Black-Scholes model under the following assumptions: (1) 0.08 year; (2) volatilityof 55%, (3) risk free interest of 4.28% and dividend rate of 0%.

 

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.

 

In January 2007, $900 of August Subordinated2007 Notes and $46 of accrued interest was retired as of December 31,2007.

 

Further, as part of a private placement offerin January 2007, $925 of August Subordinated 2007 Notes and $45 ofaccrued interest was exchanged for 8% Convertible Subordinated Notes due January 2010(see Secured Convertible Subordinated Notes below).

 

As of June 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.  The Company intends to fully repay theamounts due under Notes.  However, as of the filing of this report theCompany does not have sufficient funds to repay the Notes.  As a result,the Company is currently in default under the notes.  TheCompany has not received a formal notice of default and is currently working toresolve this matter with investors holding the August 2007 SubordinatedNotes.

 

13

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

As of June 30, 2008 and December 31,2007, un-amortized discounts for warrants totaled $0.  Interest expense for the amortization ofdiscount on the note was $0 for the three and six months ended June 30,2008 and $240 for the three and six months June 30, 2007,respectively.  As of June 30, 2008and 2007, the effective interest rate for the August 2007 SubordinatedNotes 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 June 30,2008, the exercise price of the warrants was reduced to $1.72 and $2.07 pershare and total amount of warrants was increased to 1,313,380.  The warrants will expire on May 17,2011.

 

Secured Convertible Subordinated Notes

 

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

 

The 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 placement resultedin a $648 loss from extinguishment of debt, which consisted of write down of$64 of deferred issue costs, $733 of debt discount, and decrease of $149 inconversion feature liability as a result of the change in carrying value ofexchanged 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 June 30, 2008. As a result, the Company is not in compliance with the Debt SatisfactionCovenant and is subject to default under the January 2010Notes.  The Company has not 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 manufacturingplant to purchasers of convertible notes in a subsequent offering, provided apari passu security interest is granted to the purchasers of the Notes.

 

14

----

Table ofContents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 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 six months ended June 30 2008,the Company issued $444 of additional January 2010 Notes for accruedinterest.

 

Beginning July 31,2008 and at the end of each month thereafter, the Company will be required toredeem 1/36th of the principal amount of the January 2010 Notes in cashor, at the Company’s election, with shares of our common stock.  The January 2010 Notes are subordinateto certain secured financing from commercial lenders incurred by the Company inthe future. On July 31, 2008, the Company obtained an agreement with themajority of the January 2010 Note holders to change the amortization dateof the principal to September 30, 2008 and to change the redemption amountat each amortization date to be 1/32nd of the principal amount.

 

In connection withthe January 2007 private placement, the Company entered into aRegistration Rights Agreement with the purchasers of the January 2010Notes under which the Company is subject to monetary penalties up to a maximumamount of 18% of the aggregate amount of Notes sold in the Private Placement ifthe registration statement is not filed or does not become effective on atimely basis. The monetary penalties will accrue at the rate of 1% per month ofthe then-outstanding principal amount of the January 2010 Notes. As of June 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.

 

The change in thefair value of the conversion feature liability resulted in a gain of $1,240 and$1,463 for the three months and six ended June 30, 2008,respectively.  The change in the fairvalue of the conversion feature liability resulted in a loss of $8 and a gainof $3,963 for the three and six months ended June 30, 2007,respectively. The fair value of conversion feature outstanding at June 30,2008 and December 31, 2007 was $652 and $2,083, respectively.   The fair value conversion featureoutstanding at June 30, 2008 was computed using the Black-Scholes modelunder the following assumptions: (1) expected life of 0.1 to 1.5 years; (2) volatilityof 60%, (3) risk free interest of 1.55% to 2.63% and dividend rate of 0%.

 

15

----

Table ofContents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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’s grossoutstanding loan balance of the January 2010 Notes totaled $18,190 and$17,797 as of June 30, 2008 and December 31, 2007,respectively.  As of June 30, 2008 and December 31, 2007,un-amortized discounts for conversion feature, warrants, and cash discounttotaled $9,078 and $10,471, respectively, and other asset debt issuance coststotaled $836 and $967, respectively.  Interest expense for theamortization of debt issuance cost and discount on note was $846 and $1,557 forthe three and six months ended June 30, 2008, respectively. Interestexpense for the amortization of debt issuance cost and discount on note was$373 and $754 for the three and six months ended June 30, 2007,respectively.  As of June 30, 2008, the effective interest rate ofthe January 2010 Notes was 65%.

 

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 onapproved and 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 down principalamount 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.”

 

For the six months ended June 30, 2008, the Companyborrowed $3,662 and repaid $3,737 under the Agreement.  The total outstanding advance made under theagreement is $932 and $1,008 as of June 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 7.20% for the sic months ended June 30,2008.  As of June 30, 2008, theCompany’s availability for future borrowing under the agreement is $4,068 whichis contingent on approval of eligible receivables by the financing company.

 

16

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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 June 30, 2008, the interest ratewas 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 required to make equalmonthly installments of principal and interest to repay the remaining balancethrough August 2008.  Principalpayments made to Kookmin Bank totaled $218 for the six months ended June 30,2008, which includes $30 of foreign exchange translation loss.  The outstanding loan balance totaled $203 and$451, as of June 30, 2008 and December 31, 2007, respectively and areincluded in current portion of long-term debt, as of June 30, 2008 and December 31,2007, respectively.

 

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 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 $51 and $101 for the three andsix months ended June 30, 2008, respectively.

 

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

 

*MidwestDebt*

* *

In connection with the Transaction, LMC 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 allows for borrowings upto $1,500 and has a maturity date of July 20, 2008.  Borrowingavailability under the revolving loan is based in a percentage of LMC’seligible receivables and eligible inventory, and the initial advance under therevolving loan was $1,000 on July 24, 2007.  LMC’s obligations underthe Loan Agreement are secured by a blanket security interest in all of LMC’sassets and the Company’s equity interest in LMC, and pursuant to an intercreditoragreement between the C3 and Midwest. Midwest’s security interest in the assets is senior to C3’s securityinterest in the same assets.

 

17

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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 June 30, 2008 and December 31, 2007, thegross outstanding loan balance under the term loan totaled $3,313 and $3,688,respectively, and the gross outstanding loan balance under the revolving loantotaled $794 and $1,130, respectively. The loans are presented as long termdebt and short term debt on the Company’s consolidated balance sheet,respectively.  Interest expense incurredunder the term loan and revolving loan totaled $85 and $179 for the three andsix months ended June 30, 2008, respectively.

 

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 June 30, 2008 and December 31,2007, the gross outstanding loan balance under the Capital Loan totaled $39 and$44, respectively, which is presented as short term debt on the Company’sconsolidated balance sheet.  Interestexpense incurred under the term loan and revolving loan totaled $1 and $2 forthe three and six months ended June 30, 2008, respectively.

 

*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 or Securities Purchase Agreement) to requireLMC to purchase the C3 entities’ membership interests in LMC for a purchaseprice equal to their pro rata portion of the greater of (i) the appraisedfair market value of LMC or (ii) six times LMC’s trailing 12-monthearnings before interest taxes, depreciation, and amortization, less fundeddebt.

 

The Subordinated Notes have a maturity date of July 20,2012 with no required principal payments before maturity other than uponspecified triggering events, such as a change in control of LMC.  Interestaccrues under at an annual rate of 14%, with 12% interest being payable monthlybeginning September 2007 and the remaining 2% interest being payable 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 $6,623 and $6,557 as of June 30, 2008 and December 31,2007, respectively.  Interest expense incurred under the SubordinatedNotes totaled $198 and $395 for three and six months ended June 30, 2008,respectively.

 

18

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**8.     StockCompensation Plan**

 

During the three and sixmonths ended June 30, 2008, under the Company’s 2002 Non-employee DirectorStock Option Plan which provides for the grant of stock options to non-employeedirectors, the Company granted options to purchase 70,000 of the Company’scommon shares for an average exercise price of $0.70.  Further, all options granted under this planhad exercise prices that were equal to the fair market value on the date ofgrant.

 

During the three and sixmonths ended June 30, 2008, under the Company’s 2002 Equity Incentive Planwhich provides for the grant of stock options to officers, employees,consultants and directors of the Company its subsidiaries, the Company grantedoptions to purchase 200,000 of the Company’s common shares for an averageexercise price of $0.64.  Further, alloptions granted under this plan had exercise prices that were equal to the fairmarket value on the date of grant.

 

The Company canceled 40,000 and 436,345 options duringthe three and six months ended June 30, 2008, for terminated employees andoptions 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 June 30,2008, LMC has redeemed $175 of its preferred units and distributed $118 inpriority return to the preferred unit holders. The total preferred unitsoutstanding are $2,325 as of June 30, 2008.

 

**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 market opportunities to manufacture andsell casing components for electronic devices, medical devices, sporting goods,tooling, prototype sampling, defense applications and metal processingequipment.  Primarily, the expensesincurred by the bulk Liquidmetal alloy segment are research and developmentcosts and selling expenses associated with identifying and developing marketopportunities.  Bulk Liquidmetal alloysproducts can be distinguished from Liquidmetal alloy coatings in that the bulkLiquidmetal alloy can have significant thickness, up to approximately one inch,which allows for their use in a wider variety of applications other than a thinprotective coating applied to machinery and equipment.   Revenue and expenses associated with researchand development services and product licensing arrangements are included in thebulk Liquidmetal alloy segment.  Theaccounting policies of the reportable segments are the same as those describedin Note 3 to the consolidated financial statements included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on April 3, 2008.

 

19

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

Summarized financial information concerning the Company’s reportablesegments is shown in the following tables:

 
| ** **                                                         | ** ** | **Coatings** | ** ** | **Bulk Alloy** | ** ** | **Segment Totals** | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Three months  ended June 30, 2008                                  |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 2,683      |                | $          | 2,986                   |       | $ | 5,669 |   |
| Gross profit                                                       |       | 938          |       | 98                  |       | 1,036                   |       |
| Income before  minority interest and interest expense              |       | 104          |       | 182                 |       | 286                     |       |
| Total  identifiable assets at end of period                        |       | 3,114        |       | 12,155              |       | 15,269                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Three months  ended June 30, 2007                                  |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 3,065      |                | $          | 5,266                   |       | $ | 8,331 |   |
| Gross profit  (loss)                                               |       | 1,304        |       | (659                | )          | 645                     |       |
| Income (loss)  before minority interest and interest expense       |       | 1,091        |       | (1,533              | )          | (442                    | )          |
| Total  identifiable assets at end of period                        |       | 1,931        |       | 19,049              |       | 20,980                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Six months ended  June 30, 2008                                    |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 6,298      |                | $          | 6,139                   |       | $ | 12,437 |   |
| Gross profit                                                       |       | 2,171        |       | 732                 |       | 2,903                   |       |
| Income (loss)  before interest expense and discontinued operations |       | 588          |       | 589                 |       | 1,160                   |       |
| Total  identifiable assets at end of period                        |       | 3,114        |       | 12,155              |       | 15,269                  |       |
|                                                               |       |         |       |                |       |                    |       |
| Six months ended  June 30, 2007                                    |       |         |       |                |       |                    |       |
| Revenue to  external customers                                     |       | $            | 5,789      |                | $          | 7,609                   |       | $ | 13,398 |   |
| Gross profit  (loss)                                               |       | 2,563        |       | (3,292              | )          | (729                    | )          |
| Income (loss)  before interest expense and discontinued operations |       | 1,886        |       | (4,266              | )          | (2,380                  | )          |
| Total  identifiable assets at end of period                        |       | 1,931        |       | 19,049              |       | 20,980                  |       |

 

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

 
| ** **                                                                         | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                         | ** ** | **2008**                                | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                               |       |                                    |       |                                  |       |   |   |   |   |
| Total segment  income (loss) before minority interest and interest expense         |       | $                                       | 286        |                                  | $          | (431 | ) | $ | 1,160 |   | $ | (2,380 | ) |
| General and  administrative expenses, excluded                                     |       | (607                                    | )          | (1,663                                | )          | (1,763 | ) | (3,883 | ) |
|                                                                               |       |                                    |       |                                  |       |   |   |   |   |
| Consolidated  loss before interest, other income, income taxes, minority interests |       | (321                                    | )          | (2,094                                | )          | (603 | ) | (6,263 | ) |
| Loss from  extinguishments of debt                                                 |       | —                                  |       | —                                |       | — |   | (648 | ) |
| Change in value  of warrants, gain                                                 |       | 1,290                                   |       | 564                                   |       | 1,396 |   | 4,256 |   |
| Change in value  of conversion feature, gain                                       |       | 1,240                                   |       | 1,168                                 |       | 1,462 |   | 5,512 |   |
| Interest expense                                                                   |       | (1,717                                  | )          | (2,700                                | )          | (3,420 | ) | (5,463 | ) |
| Interest income                                                                    |       | 1                                       |       | 46                                    |       | 3 |   | 107 |   |
| Minority  interests                                                                |       | (65                                     | )          | —                                |       | (226 | ) | — |   |
| Consolidated net  loss                                                             |       | $                                       | 428        |                                  | $          | (3,016 | ) | $ | (1,388 | ) | $ | (2,499 | ) |

 

Included in bulkalloy segment income for both the three and six months ended June 30, 2008is $247 of other income from accounts payables write-off.

 

Included in bulkalloy segment income for both the three and six months ended June 30, 2007is $49 of other income from gain on disposal of assets in connection with theequipment purchase agreement and transfer agreement of the Weihai operations toGrace Metal (see Note 13).

 

20

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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 $2,913 and $3,055 during the three monthsended June 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 June 30, 2008, the Company had revenue from sales to companiesoutside of the United States of $2,756 of which $55 represented sales tocompanies located in South Korea.  Duringthe three months ended June 30, 2007, the Company had revenues fromcompanies outside of the United States of $5,276 of which $4,241 represented salesto companies located in South Korea.  Therevenue related to sales to companies outside of the United States was frombulk alloy products.

 

Long-lived assets includenet property, plant, and equipment, and net intangible assets. The Company hadlong-lived assets of $1,810 and $1,613 located in the United States at June 30,2008 and December 31, 2007, respectively. The Company had long-livedassets of $8,243 and $8,935 located in South Korea at June 30, 2008 and December 31,2007, respectively.

 

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

 

| ** **                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2008**          | ** ** |
|                                       |       |              |       |
| Total segment  assets                      |       | $                 | 15,269     |   |
| Cash and cash  equivalents                 |       | 77                |       |
| Prepaid expenses  and other current assets |       | 343               |       |
| Other property,  plant and equipment       |       | 84                |       |
| Intangibles, net                           |       | 1,095             |       |
| Other assets                               |       | 1,280             |       |
| Total  consolidated assets                 |       | $                 | 18,148     |   |

 

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 8,070,801 shares of common stock at prices ranging from $0.64 to$15.00 per share were outstanding at June 30, 2008, but were not includedin the computation of diluted EPS for the same period as the inclusion wouldhave been antidilutive.  Warrants topurchase 14,418,183 shares of common stock with prices ranging from $1.55 to$2.07 per share outstanding at June 30, 2008, were not included in thecomputation of diluted EPS for the same period as the inclusion would have beenantidilutive.  Additionally, 16,536,214 shares ofcommon stock issuable upon conversion of the Company’s convertible notes withconversion prices of $1.10 per share outstanding at June 30, 2008 were notincluded in the computation of diluted EPS for the same period because theinclusion would have been antidilutive.

 

21

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

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 $1,290 and $1,396 for the three and six months ended June 30,2008, respectively. The change in the fair value of the warrants resulted ingains of $564 and $4,256 for the three and six months ended June 30, 2007,respectively.  The fair value of warrantsoutstanding at June 30, 2008 of $1,187 was computed using theBlack-Scholes model under the following assumptions: (1) expected life of0.71 to 4.50 years; (2) volatility of 60%, (3) risk free interest of2.36% to 3.34%, 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.      Commitments and 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 a grand jury proceedingin the Middle District of Florida to investigate, among other things, allegedaccounting improprieties in relation to certain of the Company’s businesstransactions and a personal stock transaction by the Company’s former chiefexecutive officer (now Chairman).  Thegrand jury proceeding is based primarily upon the same underlying facts andcircumstances as were alleged in a consolidated securities class action and twoshareholder derivative actions filed in 2004 against the Company and certain ofits former and current directors and officers, which were settled.  As previously disclosed, the Company was informed in October 2006that three individuals, including the Company’s current Chairman, are targetsin the ongoing investigation.  Todate, subpoenas for the production of documents and/or grand jury testimonyhave been issued to the Company and several present and former officers anddirectors.  The Company is cooperatingwith the DOJ in its investigation.

 

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 includingmanufacturing equipment acquired under the joint venture.  There were no revenues recognized from thejoint venture for the six-months ended June 30, 2008 and 2007.

 

**13.    Related Party Transactions**

** **

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

 

In December 2006,the Company entered into an amended license agreement with LLPG, which extendsthe license agreement to fifteen years at reduced royalty rates. Additionally, the amended license agreement includes a $400 terminationfee.  The Company recognized $0 of revenueas minimum royalty fees under the licensing agreement during the three and sixmonths ended June 30, 2008 and 2007, respectively.

 

22

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

As of June 30,2008 and December 31, 2007, Mr. Chitayat held interests in $2,574 and$2,500 of 8% Convertible Subordinated Notes due January 2010,respectively, and held a total of 1,236,364 and 906,819 exercisable warrants,respectively, through entities related to Mr. Chitayat**.**

** **

TheCompany has a license agreement with California Institute of Technology (“Caltech”)under which we exclusively license from Caltech certain inventions andtechnology relating to amorphous alloys.  Professor William Johnson, amember of the Company’s board of directors, is a professor at Caltech, andsubstantially all of the amorphous alloy technology licensed to us under theCaltech license agreement was developed in Professor Johnson’s Caltech laboratory.  Additionally, the Company reimburses Caltech for laboratory expenses incurredby Professor Johnson’s Caltech laboratory, which during the three and sixmonths ended June 30, 2008 amounted to $78 and $159, respectively.  The laboratory expenses incurred by ProfessorJohnson’s Caltech laboratory for both the three and six month ended June 30,2007, amounted to $121.

 

Additionally, the Company is a party to a consulting agreement with Mr. Johnsonon a month-to-month basis starting from 2005. During the three and six months ended June 30, 2008, the Companyincurred $15 and $30 in consulting fees from Mr. Johnson,respectively.  During the three and sixmonths ended June 30, 2007 the Company incurred $15 and $31 in consultingfees 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 six months ended June 30,2008, the Company incurred $30 and $60, respectively, for her services as aconsultant.  During the three and sixmonths ended June 30, 2007, the Company incurred $20 and $34,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 $28 and $56 for the three and sixmonths ended June 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 June 30, 2008 and December 31, 2007, the outstandingamount of the receivable was $178 for both periods.

 

As of June 30,2008 and December 31, 2007, CK Cho, a member of our Board of Directors,held $478 and $467 of the convertible subordinated notes, respectively, andheld 305,918 exercisable warrants for both periods.

 

As of June 30,2008 and December 31, 2007, Ricardo Salas, the Company’s former ChiefExecutive Officer, held $363 and $354 of the convertible unsecured subordinatednotes, respectively, and $259 of the unsecured subordinated notes for bothperiods.  He also held a total of 377,891of exercisable warrants as of both June 30, 2008 and December 31, 2007.

 

23

----

Table of Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

On June 1, 2007, theCompany entered into a transaction with Grace Metal (“GM”), under which (i) GMagreed to purchase various equipment (including die casting machines and vacuuminduction melters) used in the Company’s bulk amorphous alloy business segmentand (ii) the Company granted GM a 10-year exclusive license to manufactureproducts made from bulk Liquidmetal alloys for customers whose principalheadquarters or whose major operations are located in South Korea.  GM was formed by an investor group thatincludes the former Founder and director of the Company, James Kang, who isalso the brother of John Kang, Chairman of the Board of our company.  Under an equipment purchase agreement betweenthe Company and GM, GM agreed to buy the purchased equipment for a totalpurchase price of $2,000, of which $577 were received as of June 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).  The agreement provides that theCompany may convert the license to a non-exclusive in the event that the netsales in the second year of the contract or thereafter are not sufficient toresult in royalties of $500 or more per year. The agreement also provides that GM will be required to purchase allalloy feedstock from the Company, and the Company will have the right tocontinue to manufacture Liquidmetal alloy products for South Korean customersuntil all purchased equipment has been commissioned.

 

Additionally, effective June 1,2007, 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 has alsochanged the name of its South Korean subsidiary to Liquidmetal TechnologiesKorea Co., Ltd, which was formerly Liquidmetal Korea Co., Ltd.  GM assumed the name Liquidmetal Korea to conductbusiness in South Korea.

 

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 currentChairman.  The Company purchased a totalof $308 and $383 for the three and six months ended June 30, 2008,respectively, of which $373 is included in accounts payable and accruedliabilities at June 30, 2008.  TheCompany recognized revenue from sales of raw materials and royalties for atotal of $703 and $1,332 for the three and six months ended June 30, 2008,respectively, of which $679 is included in accounts receivable as of June 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 $0 in consulting fees for both the three and sixmonths ended June 30, 2008 and $50 and $100 in consulting for the threemonths ended June 30, 2007, respectively, of which $0 is included inaccounts receivable at June 30, 2008.

 

In December 2007,the Company entered into agreements with two holders of our convertiblesubordinated notes (the “January 2010 Notes”) and GM, a South Koreancompany formed by investor groups including our former Founder and director,James Kang, and the two holders, whereby GM would assume the liabilities dueunder the January 2010 Notes, including principal, interest, and fees dueby our company to the two holders totaling $434 and the Company releasedobligations due from GM for outstanding trade accounts receivables.  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.

 

24

----

Tableof Contents

 

### **LIQUIDMETALTECHNOLOGIES AND SUBSIDIARIES**

### ** **

### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Six Months Ended June 30,2008 and 2007**

**(inthousands, except share data)**

**(unaudited)**

 

**14.****    Subsequent Event**

** **

On July 1,2008, the Company issued $454 of new 8% Convertible SubordinatedNotes Due January 2010 (the “New Notes”).  The New Notes wereissued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through April 1,2008 (the “Interest Notes”).   The Original Notes, InterestNotes, and New Notes all become due in January 2010, withmonthly payments of 1/36th of the principal amount beginning on July 31,2008.  The New Notes and the Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5,000 (excluding sales of inventory in theordinary course).  In addition, the New Notes and the Interest Notes (butnot the Original Notes), may be redeemed by the holder if the Company receivesfinancing involving an amount of $25,000 or more in net proceeds at anytime.  The New Notes bear interest at 8% per annum with interestpayable quarterly in arrears in cash and are subordinate to certain securedfinancing from commercial lenders incurred by us in the future.

 

25

----

Tableof Contents

 

**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 somecases, words such as “believe,” “estimate,” “ project,” “expect,” “intend,” “may,”“anticipate,” “plans,” “seeks,” and similar expressions identifyforward-looking statements. These statements involve risks and uncertaintiesthat could cause actual outcomes and results to differ materially from theanticipated outcomes or results, and undue reliance should not be placed onthese statements. These risks and uncertainties include, but are not limitedto, the matters discussed under the caption “Factors Affecting Future Results”in our Annual Report on Form 10-K for the fiscal year ended December 31,2007 and other risks and uncertainties discussed in filings made with theSecurities and Exchange Commission (including risks described in subsequentreports on Form 10-Q, Form 10-K, Form 8-K, and other filings).Liquidmetal Technologies disclaims any intention or obligation to update orrevise 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 incorporated intothe 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 we believeare 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 these advantagescould result in Liquidmetal alloys supplanting other incumbent materials in awide variety of applications. Moreover, we believe these advantages will enablethe introduction of entirely new products and applications that are notpossible 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 these sourcesof revenue will continue to significantly change the character of our revenuemix.

 

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.

 

26

----

Tableof Contents

 

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:

 

·**                 **Exchangerate fluctuations

·**                 **Warrantyaccrual

·**                 **Allowancefor doubtful accounts

·**                 **Inventoriesat lower of cost or net realizable value

·**                 **Deferred taxassets

·**                 **Valuation ofderivatives of warrants and embedded conversion features

** **

OurAnnual Report on Form 10-K for the year ended December 31, 2007, contains further discussions on our criticalaccounting policies and estimates.

 

27

----

Table of Contents

 

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 and $0.3 million for thethree and six months ended June 30, 2008, respectively, and $0.2 and $0.4million for the three and six months ended June 30, 2007, respectively.

 

**Resultsof Operations**

** **

Comparison of the threemonths ended June 30, 2008 and 2007

 

*Revenue.*Revenue decreased $2.6 million to $5.7 million for the three months ended June 30,2008 from $8.3 million for the three months ended June 30,2007.  The decrease consisted of a decrease of $2.4 million in sales andprototyping of parts manufactured from bulk Liquidmetal alloys to consumerelectronics customers and royalties on products sold by our licensees, and adecrease of $0.4 million from the sales of our coating products as a result ofa change in our customer concentration, offset by a increase of $0.2 from ourroyalties revenues on products sold by our licensees.

 

*Cost ofSales.* Cost of sales decreased to $4.6 million, or 82% ofrevenue, for the three months ended June 30, 2008 from $7.7 million,or 92% of revenue, for the three months ended June 30, 2007.  Thedecreases were a result of a continued change in revenue mix during the threemonths ended June 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, andadministrative expenses decreased to $1.3 million, or 23% of revenue, forthe three months ended June 30, 2008 from $2.5 million, or 30% ofrevenue, for the three months ended June 30, 2007. This decrease wasprimarily a result of decreases in professional fees of $0.7 million, adecrease in bad debt expense of $0.3 million and a decrease in rents andutilities expense of $0.3 million.

 

*Researchand Development Expenses*. Research and development expensesremained at $0.3 million, or 5% of revenue, for the three months ended June 30,2008 versus $0.3 million or 4% of revenue for the three months ended June 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 in value of warrants increased to again of $1.3 million, or 23% of revenue, for the three months ended June 30,2008 from a gain of $0.6 million, or 7% of revenue, for the three months ended June 30,2007.  The change in value of warrantsconsisted of warrants issued from convertible notes and subordinated notesfunded between 2004 and 2007 primarily as a result of fluctuations in our stockprice.

* *

*Changein Value of Conversion Feature.*Change in the value of our conversion feature liability from ourconvertible notes funded between 2004 and 2007 resulted in a gain of $1.2million, or 22% of revenue, during the three months ended June 30, 2008from a gain of $1.2 million, or 14% of revenue, for the three months ended June 30,2007, primarily as a result of fluctuations in our stock price.

* *

*Other Income.*  Other income increased to $0.2 million duringthe three months ended June 30, 2008, due to a write-off of one of theCompany’s outstanding payables, from $49 thousand during the three months endedJune 30, 2007, primarily from gain recognized from disposal of assets.

 

*InterestExpense*. Interest expense was $1.8 million, or 32% ofrevenue, for the three months ended June 30, 2008 and was $2.7 million, or32% of revenue, for the three months ended June 30, 2007. Interest expenseconsists primarily of debt amortization and interest accrued on outstandingconvertible and subordinated notes, borrowings under the April 2005factoring, loan, and security agreement, and the Kookmin loan.  The decrease was due to decreased debtdiscount amortization during the three months ended June 30, 2008.

 

28

----

Tableof Contents

 

*InterestIncome.* Interestincome was $1 thousand for the three months ended June 30, 2008 and was$46 thousand for the three months ended June 30, 2007 from interest earnedon cash deposits.

 

Comparison of the sixmonths ended June 30, 2008 and 2007

 

*Revenue.*Revenue decreased $1.0 million to $12.4 million for the six months ended June 30,2008 from $13.4 million for the six months ended June 30, 2007. The decrease consisted of a decrease of $1.5 million of sales and prototypingof parts manufactured from bulk Liquidmetal alloys to consumer electronicscustomers and royalties on products sold by our licensees, offset by anincrease of $1.2 million from the sales of our coating solutions and anincrease of $0.3 from our royalties revenues on products sold by our licensees.

 

*Cost ofSales.* Cost of sales decreased to $9.5 million, or 77% ofrevenue, for the six months ended June 30, 2008 from $14.1 million,or 105% of revenue, for the six months ended June 30, 2007.  Thedecreases were a result of a change in revenue mix during the three monthsended June 30, 2008, primarily from increased royalty revenues.  Thecost to manufacture parts from our bulk Liquidmetal alloys is variable anddiffers based on the unique design of each product.  However, the cost ofsales for the products sold by the coatings business segment is generallyconsistent because the Liquidmetal coatings products are produced by thirdparties and sold wholesale to various industries.

 

*Selling,General, and Administrative Expenses*. Selling, general, andadministrative expenses decreased to $3.2 million, or 26% of revenue, forthe six months ended June 30, 2008 from $5.0 million, or 38% ofrevenue, for the six months ended June 30, 2007. This decrease wasprimarily a result of decreases in wages and expenses of $0.3 million, adecrease in bad debt expenses of $0.6 million and a decrease in professionalfees expense of $0.8 million and a decrease in rents and utilities expenses of$0.1 million.

 

*Researchand Development Expenses*. Research and development expensesslightly decreased to $0.5 million, or 4% of revenue, for the six monthsended June 30, 2008 versus $0.6 million or 4% of revenue for the sixmonths ended June, 2007.  The Companycontinues to perform research and development of new Liquidmetal alloys andrelated processing capabilities, develop new manufacturing techniques, andcontract with consultants to advance the development of Liquidmetal alloys.

 

*Lossfrom Extinguishments of Debts*.  Loss from extinguishments ofdebts was $0.6 million or 5% of revenue for the six months ended June 30,2007 due to the extinguishment of certain of our convertible and subordinatednotes in January 2007.

 

*Changein Value of Warrants. *Change in value of warrants decreased to again of $1.4 million, or 11% of revenue, for the six months ended June 30,2008 from a gain of $4.3 million, or 32% of revenue, for the six months ended June 30,2007.  The change in value of warrantsconsisted of warrants issued from convertible notes and subordinated notes fundedbetween 2004 and 2007 primarily as a result of fluctuations in our stock price.

* *

*Changein Value of Conversion Feature.*Change in the value of our conversion feature liability from ourconvertible notes funded between 2004 and 2007 resulted decreased to a gain of$1.5 million, or 12% of revenue, during the six months ended June 30, 2008from a gain of $5.5 million, or 41% of revenue, for the six months ended June 30,2007, primarily as a result of fluctuations in our stock price.

* *

*OtherExpense. *Other expense increased to $17 thousandduring the six months ended June 30, 2008 for costs of issuing shares ofpreferred units of our subsidiary.

 

*OtherIncome. *Other incomeincreased to $0.2 million during the six months ended June 30, 2008, dueto a write-off of one of the Company’s outstanding payables, from $49 thousandduring the six months ended June 30, 2007, primarily from gain recognizedfrom disposal of assets.

 

*InterestExpense*. Interest expense was $3.4 million, or 27% ofrevenue, for the six months ended June 30, 2008 and was $5.5 million, or41% of revenue, for the six months ended June 30, 2007. Interest expenseconsists primarily of debt amortization and interest accrued on outstandingconvertible and subordinated notes, borrowings under the April 2005factoring, loan, and security agreement, and the Kookmin loan.  The decrease was due to decreased debtdiscount amortization during the three months ended June 30, 2008.

 

29

----

Tableof Contents

 

*InterestIncome.* Interestincome was $3 thousand for the six months ended June 30, 2008 and was $0.1million for the six months ended June 30, 2007 from interest earned oncash deposits.

 

**Liquidityand Capital Resources**

** **

Our cash provided byoperating activities was $0.4 million for the six months ended June 30,2008 and our cash used for operating activities was $6.4 million for thesix months ended June 30, 2007.  Our working capital deficitdecreased from $12.4 million at December 31, 2007 to $11.2 million at June 30,2008.  The Company’s working capital deficit decrease of $1.2 million wasprimarily attributable to decrease in cash and cash equivalents of $1.0million, decrease in trade account receivables of $1.0 million, offset by adecrease in warrant liabilities of $1.4 million, a decrease in conversionfeature liabilities of $1.4 million, and other liabilities, current portion, of$0.3 million.

 

Our cash used ininvesting activities was $0.9 million for the six months ended June 30,2008 for the acquisition of property and equipment and investments in patentsand trademarks.

 

Our cash used forfinancing activities was $0.9 million for the six months ended June 30,2008.  We paid net $0.4 million inborrowings from factoring agreement executed in April 2005 and a revolvingloan agreement executed in July 2007.  Wehave $4.1 million available for future borrowings under the factoringagreement, which is contingent on approval of eligible receivables by thefinancing company and we have $0.7 million available for future borrowingsunder 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 June 30, 2008.

 

We anticipate thatwe will not have sufficient funds to pursue our current operating plan beyond thethird quarter of 2008 and we will therefore require additional funding. We are actively seeking additional sources of capital and seeking torestructure and/or modify existing indebtedness.  The amount of fundingthat we seek and the timing of such fundraising efforts will depend on theextent to which we are able to increase revenues through obtaining additionalpurchase orders for our products and/or the extent to which we can restructureor modify our debt.  Because we cannot be certain that we will be able toobtain 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 June 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, financialcondition, and results of operations. We have not received a formal noticeof default and we are currently working to resolve this matter with investorsholding our Bridge Notes.

 

We were 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. We have not received a formal notice of default under this covenantand we are currently working to resolve this matter.

 

30

----

Tableof Contents

 

On July 31,2008, and at the end of each month thereafter, we will be required to redeem1/36th of the principal amount of the January 2010 Notes in cash or, atour election, with shares of our common stock.  The ability to pay theredemption amounts with shares of common stock will be subject to specifiedconditions.  As of the filing of this report, we have obtained anagreement from a majority of the January 2010 Note holders to change theamortization date of the principal to September 30, 2008 and to change theredemption amount a teach amortization date to be 1/32nd of the principalamount.  Under the current conditions, wedo not have the capital resources to redeem the January 2010 Notes withcash nor will we meet the specified condition that will enable us to redeem theJanuary 2010 Notes with shares of our common stock.  If we cannotcommence the scheduled principal payment in July, we will be subject to defaultunder the January 2010 Notes.  Such a default may have materialadverse effect on our operations, financial condition, and results ofoperations.

 

**ContractualObligations**

 

The following table summarizes the Company’sobligations and commitments as of June 30, 2008:

 
| ** **                                          | ** ** | ** ** | ** ** | **Payments Due by Period (in thousands)** | ** ** | ** **         | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|
| **Contractual Cash Obligations (1)** | ** ** | **Total**  | ** ** | **Less Than  1 Year**                                    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|                                                |       |       |       |                                                               |       |               |       |   |   |   |   |
| Long-term debt  (2)                                 |       | $          | 19,402     |                                                               | $          | 7,275              |       | $ | 12,127 |   | $ | — |   | $ | — |   |
| Long-term debt  of consolidated subsidiary (2)      |       | 9,936      |       | 979                                                                |       | 2,334              |       | 6,623 |   | — |   |
| Short-term debt  (3)                                |       | 932        |       | 932                                                                |       | —             |       | — |   | — |   |
| Short-term debt  of consolidated subisidiary        |       | 834        |       | 834                                                                |       | —             |       | — |   | — |   |
| Operating leases  and rents                         |       | 993        |       | 275                                                                |       | 709                |       | 9 |   | — |   |
| Consulting  services payable                        |       | 227        |       | 179                                                                |       | 48                 |       | — |   | — |   |
| Foster Wheeler                                      |       | 150        |       | 150                                                                |       | —             |       |   |   |   |   |
| Dongyang                                            |       | 11         |       | 11                                                                 |       | —             |       | — |   | — |   |
| Nichimen                                            |       | 315        |       | 315                                                                |       | —             |       | — |   | — |   |
|                                                |       | $          | 32,800     |                                                               | $          | 10,950             |       | $ | 15,218 |   | $ | 6,632 |   | $ | — |   |

 

----

  (1) Contractual cash obligations includeLong-Term Debt comprised of $1,009 of Unsecured Subordinated Notes issued in2006, $18,190 of Convertible Unsecured Notes issued in 2007, $203 of KookminBank Loan, and $3,313 of Bank Midwest term loan, $6,623 of C3 Capital PartnersSubordinated Notes, Short-Term Debt comprised of $932 outstanding advancesreceived under factoring, loan, and security agreement, $833 of Bank Midwestrevolving loan, and future minimum lease payments under capital and operatingleases, and purchase commitments from consultants, payments due from assetspurchased from Foster Wheeler thermal spray coatings business, payments duefrom our discontinued equipment manufacturing business, and minimum paymentsdue under a distribution agreement.

(2) Doesnot include interest payments of $6,144; and un-amortized cash discount anddiscounts for conversion feature and warrants of $9,078 of our convertiblenotes.

(3) Doesnot include minimum interest and fee payments of $30.

 

**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 

 

31

----

Tableof Contents

 

venture. Under the licensing agreement, at any time following 18 months after theeffective date of the agreement, LSI may exercise its option to sell us certainbusiness assets including manufacturing equipment acquired under the jointventure.  During the year ended December 31, 2007, we recognizedrevenues of $0.7 million of Liquidmetal alloys sold to SAGA for use in thejoint venture.  There were no revenues recognized from the joint ventureduring the six months ended June 30, 2008 and 2007.

 

**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 exposedto market risks relating to changes in interest rates as our borrowings aresubject to the volatility of interest rate risk.  Although we do not currently have anyborrowings with variable interest rates, fluctuations in interest rates mayhave a negative impact to any future borrowings.

 

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

 

*ForeignExchange Rates.*  As aresult of our operation of a manufacturing facility in South Korea, asubstantial portion of our costs will be denominated in the South Koreanwon.  Consequently, fluctuations in theexchange rates of the South Korean won to the U.S. dollar will affect our costsof goods sold and operating margins and could result in exchange losses.  Although we do not currently enter intoforeign exchange hedge transactions, we may do so in the future as our businessgrows.

 

**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 June 30, 2008, the end of the period coveredby this report, our Chief Executive Officer and Chief Financial Officer haveconcluded that the disclosure controls and procedures were effective.

 

Changes in InternalControls.  Duringthe quarter ended June 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 tomaterially affect, our internal control over financial reporting.

 

32

----

Tableof Contents

 

**PART II**

**OTHERINFORMATION**

 

**Item1 – Legal Proceedings**

** **

Department of JusticeInvestigation

 

In August 2006, theUnited States Department of Justice (“DOJ”) instituted a grand jury proceedingin the Middle District of Florida to investigate, among other things, allegedaccounting improprieties in relation to certain of our business transactionsand a personal stock transaction by our former chief executive officer (nowChairman).  The grand jury proceeding isbased primarily upon the same underlying facts and circumstances as werealleged in a consolidated securities class action and two shareholderderivative actions filed in 2004 against us and certain of our former andcurrent directors and officers, which were settled.  As previously disclosed, we were informed in October 2006that three individuals, including our current Chairman, are targets in theongoing investigation.  To date,subpoenas for the production of documents and/or grand jury testimony have beenissued to us and several present and former officers and directors.  We are cooperating with the DOJ in itsinvestigation.

 

**Item 1A – Risk Factors**

** **

There have been nomaterial changes to the risk factors that are included in our Annual Report on Form 10-Kfor the year ended December 31, 2007 that could affect our business,results of operations, or financial condition.

 

**Item 3 -Defaults Upon Senior Securities**

** **

We have approximately$1.2 million of principal and accrued interest outstanding as of June 30,2008, under the 8% unsecured subordinated notes (“Notes”), which were due August 17,2007.  We intend to fully repay the amounts due under Notes. However, as of the filing of this report we do not have sufficient funds torepay the Notes.  As a result, we are currently in default under theNotes.   Such a default may have material adverse effect on ouroperations, financial condition, and results of operations.  We have not received a formal notice ofdefault and we are currently working to resolve this matter with investorsholding our Notes.

 

**Item 5 – Other Information**

** **

On July 1,2008, the Company issued $0.4 million of new 8% ConvertibleSubordinated Notes Due January 2010 (the “New Notes”).  The NewNotes were issued in satisfaction of accrued interest due under (i) the original 8%Convertible Subordinated Notes issued by the Company in January 2007(the “Original Notes”) and (ii) 8% Convertible SubordinatedNotes that were subsequently issued by the Company insatisfaction of interest due under the Original Notes through April 1,2008 (the “Interest Notes”).   The Original Notes, InterestNotes, and New Notes all become due in January 2010, withmonthly payments of 1/36th of the principal amount beginning on July 31,2008.  The New Notes and the Interest Notes (but not the OriginalNotes) are subject to accelerated repayment in the event of anysale of company assets exceeding $5.0 million (excluding sales of inventory inthe ordinary course).  In addition, the New Notes and the Interest Notes(but not the Original Notes), may be redeemed by the holder if the Companyreceives financing involving an amount of $25.0 million or more in net proceedsat any time.  The New Notes bear interest at 8% per annum withinterest payable quarterly in arrears in cash and are subordinate to certainsecured financing from commercial lenders incurred by us in the future.

 

On July 31, 2008, the Company obtained an agreement with themajority of the January 2010 Note holders to amend the January 2007Note by changing the amortization date of the principal from July 31, 2008to September 30, 2008 and to change the redemption amount at eachamortization date from 1/36th to be 1/32nd ofthe principal amount.

 

33

----

Tableof Contents

 

**Item 6 – Exhibits**

** **

The following documentsare filed as an exhibit to this Report:

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                             |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                        |
| 10.1                |       | Form of  Convertible Subordinated Note, dated April 1, 2008                                                                                                             |
|                |       |                                                                                                                                                                              |
| 10.2                |       | Form of  Convertible Subordinated Note, dated July 1, 2008                                                                                                              |
|                |       |                                                                                                                                                                              |
| 10.3                |       | Form of letter  dated, July 31, 2008, to extend to change the first redemption date and  amount of the Convertible Subordinated Notes due January 2010.                 |
|                |       |                                                                                                                                                                              |
| 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    |

 

34

----

Tableof Contents

 

**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:  August 19, 2008 |   | /s/ Larry Buffington                          |
|                        |   | Larry Buffington                              |
|                        |   | President and Chief  Executive Officer        |
|                        |   | (Principal Executive  Officer)                |
|                        |   |                                          |
|                        |   |                                          |
| Date:  August 19, 2008 |   | /s/ Gerald Morrow                             |
|                        |   | Gerald Morrow                                 |
|                        |   | Chief Financial Officer                       |
|                        |   | (Principal Financial  and Accounting Officer) |

 

35

----