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

This management's discussion and analysis, as well as other sections of this report on Form 10-Q, may contain "forward-looking statements" that involve risks and uncertainties, including statements regarding our plans, future events, objectives, expectations, forecasts, or assumptions. Any statement that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as "believe," "estimate," " project," "expect," "intend," "may," "anticipate," "plans," "seeks," and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results, and undue reliance should not be placed on these statements. These risks and uncertainties include, but are not limited to, the matters discussed under the caption "Factors Affecting Future Results" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission (including risks described in subsequent reports on Form 10-Q, Form 10-K, Form 8-K, and other filings). Liquidmetal Technologies disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

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

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

Our revenues are derived from three principal operating segments: Liquidmetal alloy industrial coatings, Liquidmetal coatings application, and bulk Liquidmetal alloy products. 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 in coal-burning power plants. Liquidmetal coatings application is the service provided for applying Liquidmetal products as a protective coating. Bulk Liquidmetal alloy segment revenue includes sales of parts or components of electronic devices, medical products, and sports and leisure goods, tooling and prototype parts (including demonstration parts and test samples) for customers with products in development, product licensing and arrangements, and research and development revenue relating primarily to defense and medical applications. We expect that these sources of revenue will continue to significantly change the character of our revenue mix.

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

Selling, general, and administrative expenses currently consist primarily of salaries and related benefits, stock-based compensation, travel, consulting and professional fees, depreciation and amortization, insurance, office and administrative expenses, and other expenses related to our operations.

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

On July 24, 2007, we transferred substantially all of the assets of our Liquidmetal alloy industrial coatings business to a newly formed, newly capitalized subsidiary named Liquidmetal Coatings, LLC, a Delaware limited liability company ("LMC"), and LMC assumed substantially all of the liabilities of the coatings business. The transfer included the thermal spray coatings assets and liabilities acquired under a purchase agreement with Foster Wheeler Energy Services in June 2007. We hold a 69.25% ownership interest in LMC. The results of operation of LMC are consolidated and comprise our Liquidmetal alloy industrial coatings segment for financial reporting purposes.

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

Critical Accounting Policies and Estimates

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

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

†         Exchange rate fluctuations

†         Warranty accrual

†         Allowance for doubtful accounts

†         Inventories at lower of cost or net realizable value

†         Deferred tax assets

†         Valuation of derivatives of warrants and embedded conversion features

Our Annual Report on Form 10-K for the year ended December 31, 2008, contains further discussions on our critical accounting policies and estimates.

Results of Operations

Comparison of the three months ended June 30, 2009 and 2008

Revenue. Revenue decreased $2.2 million to $3.5 million for the three months ended June 30, 2009 from $5.7 million for the three months ended June 30, 2008. The decrease consisted of $0.9 million decrease in sales and prototyping of parts manufactured from bulk Liquidmetal alloys to consumer electronics customers as a result of decrease in demand in electronic casings applications, a decrease of $1.0 million from the sales of our coating products as a result decrease in demand in oil drilling applications, and a decrease of $0.3 million from our research and development contracts.

Cost of Sales. Cost of sales decreased to $1.9 million, or 54% of revenue, for the three months ended June 30, 2009 from $4.6 million, or 82% of revenue, for the three months ended June 30, 2008. The decrease was a result of a continued change

in revenue mix during the three months ended June 30, 2009. The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product. However, the cost of sales for the products sold by the coatings business segment is generally consistent because the Liquidmetal coatings products are produced by third parties and sold wholesale to various industries.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased to $1.4 million, or 39% of revenue, for the three months ended June 30, 2009 from $1.3 million, or 23% of revenue, for the three months ended June 30, 2008. The increase was primarily a result of an increase in bad debt expense of $0.2 million, offset by a decrease in salaries and related benefits expenses of $0.1 million.

Research and Development Expenses. Research and development expenses were $0.3 million, or 9% of revenue, for the three months ended June 30, 2009 and $0.3 million, or 5% of revenue, for the three months ended June 30, 2008. We continue to perform research and development of new Liquidmetal alloys and related processing capabilities, develop new manufacturing techniques, and contract with consultants to advance the development of Liquidmetal alloys.

Loss from Extinguishment of Debt. Loss from extinguishment of debt increased to $1.5 million, or 42% of revenue, for the three months ended June 30, 2009 from $0 for the three months ended June 30, 2008. The $1.5 million loss was recognized from extinguishment of certain of our convertible and subordinated notes.

Change in Value of Warrants. Change in value of warrants increased to a gain of $6.2 million, or 178% of revenue, for the three months ended June 30, 2009 from a gain of $1.3 million, or 23% of revenue, for the three months ended June 30, 2008. The change in value of warrants consisted of warrants issued from convertible and subordinated notes and convertible preferred stocks issued between 2004 and 2009 primarily as a result of fluctuations in our stock price.

Change in Value of Conversion Feature. Change in the value of conversion feature liability from our convertible notes resulted in a gain of $0.9 million, or 26% of revenue, during the three months ended June 30, 2009 from a gain of $1.2 million, or 22% of revenue, for the three months ended June 30, 2008, primarily as a result of fluctuations in our stock price.

Other Income. Other income was $0.2 million, or 4% of revenue, for the three months ended June 30, 2008 from write off of accounts payables. There was no other income for the three months ended June 30, 2009.

Interest Expense. Interest expense was $1.4 million, or 40% of revenue, for the three months ended June 30, 2009 and was $1.7 million, or 30% of revenue, for the three months ended June 30, 2008. Interest expense consists primarily of debt discount amortization and interest accrued on outstanding convertible and subordinated notes, borrowings under a factoring, loan, and security agreement, a revolving loan agreement, and the Kookmin loan. The decrease was due to certain of our convertible and subordinated notes retired during the three months ended June 30, 2009.

Interest Income. Interest income was $1 thousand for the three months ended June 30, 2008 from interest earned on cash deposits. There was no interest income for the three months ended June 30, 2009.

Comparison of the six months ended June 30, 2009 and 2008

Revenue. Revenue decreased $5.3 million to $7.1 million for the six months ended June 30, 2009 from $12.4 million for the six months ended June 30, 2008. The decrease consisted of $2.7 million decrease in sales and prototyping of parts manufactured from bulk Liquidmetal alloys to consumer electronics customers as a result of decrease in demand in electronic casings applications, a decrease of $2.1 million from the sales of our coating products as a result decrease in demand in oil drilling applications, and a decrease of $0.5 million from our research and development contracts.

Cost of Sales. Cost of sales decreased to $4.0 million, or 57% of revenue, for the six months ended June 30, 2009 from $9.5 million, or 77% of revenue, for the six months ended June 30, 2008. The decrease was a result of a continued change in revenue mix during the six months ended June 30, 2009. The cost to manufacture parts from our bulk Liquidmetal alloys is variable and differs based on the unique design of each product. However, the cost of sales for the products sold by the coatings business segment is generally consistent because the Liquidmetal coatings products are produced by third parties and sold wholesale to various industries.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased to $2.9 million, or 41% of revenue, for the six months ended June 30, 2009 from $3.2 million, or 26% of revenue, for the six months ended June 30, 2008. The decrease was primarily a result of decreases in salaries and related benefits expenses of $0.2 million and travel expenses of $0.1 million.

Research and Development Expenses. Research and development expenses were $0.5 million, or 8% of revenue, for the six months ended June, 2009 and $0.5 million, or 4% of revenue for the six months ended June 30, 2008. We continue to perform research and development of new Liquidmetal alloys and related processing capabilities, develop new manufacturing techniques, and contract with consultants to advance the development of Liquidmetal alloys.

Loss from Extinguishment of Debt. Loss from extinguishment of debt increased to $1.5 million, or 21% of revenue, for the six months ended June 30, 2009 from $0 for the six months ended June 30, 2008. The $1.5 million loss was recognized from extinguishment of certain of our convertible and subordinated notes.

Change in Value of Warrants. Change in value of warrants increased to a gain of $6.1 million, or 86% of revenue, for the six months ended June 30, 2009 from a gain of $1.4 million, or 11% of revenue, for the six months ended June 30, 2008. The change in value of warrants consisted of warrants issued from convertible and subordinated notes and convertible preferred stocks issued between 2004 and 2009 primarily as a result of fluctuations in our stock price.

Change in Value of Conversion Feature. Change in the value of conversion feature liability from our convertible notes resulted in a gain of $1.0 million, or 14% of revenue, during the six months ended June 30, 2009 from a gain of $1.5 million, or 12% of revenue, for the six months ended June 30, 2008, primarily as a result of fluctuations in our stock price.

Other Expense. Other expense was $17 thousand for the six months ended June 30, 2008 from costs of issuing shares of preferred units of our subsidiary. There was no other expense for the six months ended June 30, 2009.

Other Income. Other income was $0.2 million, or 2% of revenue, for the six months ended June 30, 2008 from write off of accounts payables. There was no other income for the six months ended June 30, 2009.

Interest Expense. Interest expense was $3.7 million, or 52% of revenue, for the six months ended June 30, 2009 and was $3.4 million, or 27% of revenue, for the six months ended June 30, 2008. Interest expense consists primarily of debt discount amortization and interest accrued on outstanding convertible and subordinated notes, borrowings under a factoring, loan, and security agreement, a revolving loan agreement, and the Kookmin loan. The increase was due to higher interest rates on convertible notes during the first quarter of 2009.

Interest Income. Interest income was $3 thousand for the six months ended June 30, 2008 from interest earned on cash deposits. There was no interest income for the six months ended June 30, 2009.

Liquidity and Capital Resources

Our cash used in operating activities was $2.2 million for the six months ended June 30, 2009 and our cash provided by operating activities was $0.4 million for the six months ended June 30, 2008. Our working capital deficit decreased from $20.8 million at December 31, 2008 to $14.6 million at June 30, 2009. The working capital deficit decrease of $6.2 million was primarily attributable to an increase of accounts receivables of $0.3 million, decrease of accounts payable and accrued expenses of $0.5 million, decrease of short-term debt of $0.3 million, decrease of long-term debt, current portion, net of discounts of $12.7 million, offset by decrease of prepaid expenses and other current assts of $0.3 million, increase of warrant liabilities of $6.3 million, and increase of conversion feature liabilities of $1.1 million.

Our cash used in investing activities was $0.5 million for the six months ended June 30, 2009 for the acquisition of property and equipment and investments in patents and trademarks.

Our cash provided by financing activities was $2.6 million for the six months ended June 30, 2009. We paid net $12.7 million in borrowings from a factoring agreement executed in April 2005, a revolving loan agreement executed in July 2007, convertible and subordinated notes, which were offset by $15.3 million proceeds from issuance of convertible preferred stocks.

On May 1, 2009, the Company completed a financing transaction (the "Transaction") whereby aggregate cash of $2.5 million and principal and accrued interest of $20.6 million due under the previously issued 8% Convertible Subordinated Notes due

January 2010 (the "Prior Notes") were exchanged for 500,000 shares of convertible Series A-1 Preferred Stock with an original issue price of $5.00 per share, 2,625,002 shares Series A-2 Preferred Stock with an original issue price of $5.00 per share, and $7.5 million of new 8% Senior Secured Convertible Subordinated Notes due January 2011 (the "Exchange Notes"). Of the $2.5 million aggregate cash purchase price, approximately $0.1 million remains outstanding and is included prepaid expenses and other current assets in the condensed consolidated balance sheet as of June 30, 2009. The Transaction was consummated pursuant to a Securities Purchase and Exchange Agreement, dated May 1, 2009 (the "Securities Purchase Agreement"), among the exchanging note holders and investors (collectively, the "Buyers"). The Securities Purchase Agreement gives the Buyers option to subscribe for an additional 1,000,000 shares of Series A-1 Preferred Stock at $5.00 per share at any time prior to six months from the closing date (the "Series A-1 Option").

The Exchange Notes are due January 3, 2011 and bear annual interest rate of 8% with interest payable in October and April in cash or, at the Company's option, in the form of additional notes (in which case the interest rate will be 10%). The preferred stocks accrue cumulative dividends at an annual rate of 8%, which is payable semi-annually. Beginning on the second anniversary of the initial issuance, the dividend will increase to 10%. The dividends are payable in cash or in kind by the issuance of the Company of additional preferred stock, only when and as declared by the Company's Board of Directors.

The Series A-1 Preferred Stock, Series A-2 Preferred Stock, and Exchange Notes are convertible into the Company's common stock at conversion price of $0.10, $0.22, and $0.60 per common share, respectively. The Company issued warrants to purchase 3,125,007 shares and 42,329,407 shares of the Company's common stock at an exercise of $0.60 and $0.50 per share to the buyers of the Exchange Notes and preferred stocks, respectively. The warrants will expire in January 2012. The conversion prices and the number of common stock issuable under the preferred stocks, Exchange Notes and warrants are subject to adjustments for ant-dilution purposes.

We anticipate that we will not have sufficient funds to pursue our current operating plan beyond the third quarter of 2009 and we will therefore require additional funding. There is no assurance that the Series A-1 Option will be exercised to obtain any such funding. Because we cannot be certain that we will be able to obtain adequate funding from debt, equity, or other traditional financing sources, we are also actively exploring several strategic financing options, including the possible sale of our manufacturing plant in South Korea (which would then be replaced with a smaller facility) and additional licensing and outsourcing of our manufacturing operations.

Additionally, we have approximately $0.3 million of principal and accrued interest outstanding as of June 30, 2009, under the 8% unsecured subordinated notes (the "Bridge Notes"), which were due August 17, 2007. We are working to repay the Bridge Notes with our noteholder.

We have $0.4 million of outstanding loan as of June 30, 2009 under a factoring, loan, and security agreement with a financing company. In June 2009, we received a formal notice of default from the financing company for repayment of the outstanding loan balance. We intend to fully repay the amounts due under the loan. However, as of the filing of this report, we did not repay the loan. We are currently working to resolve the matter with the financing company by seeking a forbearance until we are able to restructure or obtain funding to repay this loan.

Approximately $0.2 million of principal and accrued interest became due from our Korean subsidiary under a loan from Kookmin Bank of South Korea in August 2008. However, as of the filing of this report we did not repay the loan and we have received a formal notice of default. Kookmin Bank has initiated foreclosure proceedings on the loan collateral, which consists of our manufacturing plant facility and certain equipment in South Korea. However, we are currently working to resolve this matter with Kookmin Bank by seeking a forbearance until we are able to restructure or obtain funding to repay this loan.

We have outstanding liens and judgments on our assets by various creditors for past-due trade payables totaling $1.2 million, which are held by creditors in South Korea, as of June 30, 2009. We are currently working to resolve the matter with each creditor by seeking forbearance until we are able to obtain funding to repay the amounts due, although there is no assurance that we will be able to obtain any such funding. If we cannot repay the amounts due or obtain forbearance, the creditors may seek to foreclose on the Company's assets. Such a foreclosure would have material adverse effect on our operations, financial condition, and results of operations.

Contractual Obligations



The following table summarizes the Company's obligations and commitments as of
June 30, 2009:



                                                 Payments Due by Period (in thousands)
                                              Less Than
Contractual Cash Obligations      Total         1 Year         1-3 Years        3-5 Years       Thereafter

Long-term debt (2)               $  7,907    $        407    $        7,500    $          -    $          -
Long-term debt of
consolidated subsidiary (2)         9,102           1,029             1,291           6,782               -
Short-term debt (3)                   361             361                 -               -               -
Short-term debt of
consolidated subsidiary               527             527                 -               -               -
Interest payments (4)               4,010           1,749             2,211              50               -
Operating leases and rents            906             292               605               9               -
Consulting services payable            48              48                 -               -               -
Foster Wheeler                        126             126                 -               -               -
Dongyang                                9               9                 -               -               -
Nichimen                              315             315                 -               -               -
Totals (1)                       $ 23,311    $      4,863    $       11,607    $      6,841    $          -

Off Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained a contingent interest in transferred . . .