NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

1.

Description of Business

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

     The Company classifies operations into two reportable segments: Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. Liquidmetal alloy industrial coatings are used primarily as a protective coating for industrial machinery and equipment, such as drill pipe used by the oil drilling industry and boiler tubes used by coal-burning power plants. Bulk Liquidmetal alloys include market opportunities to manufacture and sell components for electronic devices, medical devices, sporting goods, tooling and prototype sampling, and metal processing equipment. In addition, such alloys are used to generate research and development services revenue for developing uses related primarily to defense and medical applications.

     On May 21, 2003, the Company completed a reincorporation by transitioning from a California corporation to a Delaware corporation. The reincorporation was effected though the merger of the former California entity into its newly created wholly owned Delaware subsidiary. In connection with the reincorporation, the number of authorized common shares was reduced from 200,000,000 to 100,000,000. Additionally, the par value of the common stock was changed from no par value common stock to common stock with a par value of $0.001 per share. For purposes of these notes, the term “Company” refers to the former California entity with respect to periods prior to May 21, 2003.

2.

Basis of Presentation and Recent Accounting Pronouncements

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. In addition, certain reclassifications have been made for consistent presentation. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for any future periods or the year ending December 31, 2003. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

      Stock-based compensation. The Company applies Accounting Principles Board (“APB”) Opinion No. 25 for options when the exercise price of options granted to employees is less than the fair value of the underlying stock on the date of grant. The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 123 for options granted to nonemployees who perform services for the Company.

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

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

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

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

     In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure (“SFAS No. 148”) was issued by the FASB. This standard amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

statements for interim periods. The Company has not yet determined whether it will voluntarily change to the fair value based method of accounting for stock-based employee compensation.

     In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation 45”). Interpretation 45 changes the accounting for and the disclosure of guarantees. Interpretation 45 requires that guarantees meeting the characteristics described in the Interpretation be initially recorded at fair value in contrast to FASB No. 5, which requires recording a liability when a loss is probable and reasonably estimable. The disclosure requirements of Interpretation 45 are effective for financial statements and annual periods ending after December 31, 2002. The initial recognition and initial measurement provisions of Interpretation 45 are effective on a prospective basis to guarantees issued or modified after December 30, 2002. The adoption of Interpretation 45 did not have a material impact on the Company’s financial statements.

3.

Trade Receivables

     Trade receivables from continuing operations were comprised of the following:

4.

Inventories

     Inventories from continuing operations were comprised of the following:

5.

Property, Plant and Equipment

     Property, plant and equipment consisted of the following:

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

     Depreciation expense was approximately $884 and $146 for the three months ended June 30, 2003 and 2002, respectively; and $2,232 and $450 for the six months ended June 30, 2003 and 2002, respectively.

6.

Other Intangible Assets

     Other intangible assets consisted of the following:

     Amortization expense was approximately $21 and $29 for the three months ended June 30, 2003 and 2002, respectively; and $41 and $48 for the six months ended June 30, 2003 and 2002, respectively. The estimated aggregate amortization expense for each of the five succeeding years is as follows:

7.

Product Warranty

     Due to the lack of historical information for warranty expense related to bulk alloy products, management estimates product warranties as a percentage of bulk alloy product sales earned during the period. During the three and six months ended June 30, 2003, the Company recorded $124 and $362 of warranty expense, respectively. The product warranty accrual balance is included in accounts payable and accrued expenses and the warranty expense is included in selling, general, and administrative expenses.

8.

Long-term Debt

     On February 4, 2003, our Korean subsidiary received 6,500,000 in South Korean Won, or approximately $5,488, under a loan from Kookmin Bank of South Korea. The principal and interest under this loan is payable in equal monthly installments beginning eighteen months from the origination date until the maturity date on December 20, 2007. During the first eighteen months from the origination date, interest is payable on a monthly basis. The loan bears interest at an annual rate of 7.1%. In the event of delayed repayment, the interest increases to a maximum of 21%, depending on the length of time the repayment is delayed. This loan is collateralized by the plant facilities and certain equipment in South Korea. Since this loan is denominated in South Korea Won, the balance fluctuates with the exchange rate between the U.S. Dollar and the South Korean Won, resulting in the recognition of foreign exchange gains or losses that are included in other comprehensive income (loss). At June 30, 2003,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

the balance was $5,449 resulting in the recognition of a cumulative foreign exchange gain of $39, which is included in the net foreign exchange gain included in other comprehensive income (loss) for the six months ended June 30, 2003.

9.

Discontinued Operations

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

     During the three and six months ended June 30, 2003, there was no change in the estimate of expenses associated with the disposal of the discontinued retail golf operations. During the six months ended June 30, 2002, the Company recorded a net gain change in estimate of $1,038 on the disposal of the discontinued retail golf segment that was primarily due to a change in the estimated value of stock-based compensation. The change in estimated value of the stock-based compensation was a result of a decrease in the fair market value of the common shares underlying the options granted to Paul Azinger of $1,607 in June 2002. This gain was partially offset by other changes in the estimated loss on disposal that included $312 of additional operating expenses, $57 increase in the allowance for doubtful accounts and $200 primarily for the reduction of the estimated disposal value of work-in-process inventory and equipment.

     At June 30, 2003, the net liabilities of the discontinued operations consisted entirely of current liabilities. There were no assets associated with discontinued retail golf operations at June 30, 2003.

10.

Stock Compensation Plan

     On April 4, 2002, the Company’s shareholders and Board of Directors adopted the 2002 Equity Incentive Plan (“2002 Equity Plan”). The 2002 Equity Plan authorizes the grant of stock options to officers, employees, consultants and directors of the Company and its subsidiaries. In addition, the plan permits the granting of stock appreciation rights, with, or independently of, options, as well as stock bonuses and rights to purchase restricted stock. A total of 10,000,000 shares of common stock may be granted under the 2002 Equity Plan. As of June 30, 2003, there are 375,684 options outstanding under the 2002 Equity Plan. The stock options are exercisable over a period determined by the Board of Directors or the Compensation Committee, but no longer than 10 years.

     Prior to the approval of the 2002 Equity Plan, options were primarily granted under the Company’s 1996 Stock Option Plan (“1996 Company Plan”). On April 4, 2002, the Company’s Board of Directors terminated the 1996 Company Plan. The termination will not affect any outstanding options under the 1996 Company Plan and all such options will continue to remain outstanding and be governed by the plan. No additional options may be granted under the 1996 Company Plan. As of June 30, 2003, there were 3,808,829 options outstanding under the 1996 Company Plan.

     On April 4, 2002, the Company’s shareholders and Board of Directors adopted the 2002 Non-employee Director Stock Option Plan (“2002 Director Plan”). Only non-employee directors are eligible for grants under the 2002 Director Plan. A total of 1,000,000 shares of the Company’s common stock may be granted under the 2002 Director Plan. There are 200,000 options outstanding under the 2002 Director Plan as of June 30, 2003.

     Additionally, the Company has 2,221,508 options outstanding at June 30, 2003 which were granted outside the 1996 Company Plan, the 2002 Equity Plan and the 2002 Director Plan.

     The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the six months ended June 30, 2003 and 2002, respectively: expected volatility of 100% for all periods; dividend yield of 0.0% for all periods; expected option life of

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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002
(in thousands, except share data)
(unaudited)

approximately 5 years; and a risk-free interest rate ranging from 2.6% to 3.8%.

     The following table summarizes the Company’s stock option transactions for the six months ended June 30, 2003:

     The following table summarizes the Company’s stock option transactions for the six months ended June 30, 2002:

     The weighted average fair value of options granted during the six months ended June 30, 2003 and 2002, was $6.95 and $11.41, respectively. There were 4,621,476 options with a weighted average exercise price of $5.22 exercisable at June 30, 2003 and 4,212,585 options with a weighted average exercise price of $4.25 exercisable at June 30, 2002.

     Included in the above tables are certain options granted where their exercise prices were below the fair market value of the common stock at the measurement date (“in-the-money”). In-the-money options of 557,765 with a weighted average fair value of $4.54 were outstanding at June 30, 2003 and 1,246,670 options with a weighted average fair value of $4.56 were outstanding at June 30, 2002.

     The following table summarizes the Company’s stock options outstanding and exercisable by ranges of option prices as of June 30, 2003: