March 5, 2004 Once Upon a Time Analyst Report (Baird)

Liquidmetal Technologies (LQMT)

March 5, 2004

4Q Results Delayed, Short-Term Outlook Issued
Price: (03/04/04) $ 3.45
Rating: Underperform
FY: Dec 2002 A 2003E 2004E
52WK H-L: $7 - 2
Q1 (0.13)A (0.14)A
Q2 (0.11)A (0.15)A
Market Cap (mil): 144
Suitability: Speculative Risk Q3 (0.13)A (0.15)A
Shares Out (mil): 41.6 Q4 (0.14)A (0.13)E
Float (mil): 23.9 Total (0.51)A (0.57)E NA
Avg. Daily Vol (mil): 0.34 Previous
Price Target: NA FY P/E NM NM NM
Dividend: 0.00
EPS Cal (0.51)A (0.57)E
Yield: 0.00
P/E NM NM NM

2002 excludes $0.04 per-share (net) income from discontinued
operations. 2003 excludes expected non-recurring downsizing
expenses. Please refer to the end of this document for important
disclosures.

Robert F. McCarthy, CFA
rmccarthy@rwbaird.com
312.609.5434
Peter Lisnic, CFA, CPA
plisnic@rwbaird.com
312.609.5431

Action: Maintain Underperform rating. Existing shareholders'
ownership has been diluted by LQMT's $10 million private
placement, and final 4Q03 results will not become available
until LQMT files its 10K later this month. Given the major
change in the business model and effectively no visibility of
manufacturing profitability, we would continue to avoid the
stock at current levels and would not buy or hold the stock
even at lower levels.

Summary

• LQMT reported 4Q03 revenue of $3.3 million, compared with
our $3.1 estimate. LQMT disclosed no other income statement
details, pending completion of the audit of 2003 results and
(previously disclosed) restatement of operating results for the
4Q02, 1Q03, and 2Q03.

• We are withholding any revision or extension of financial
projections until we see 4Q03 results (our $0.13 per-share
loss estimate excludes material, but unquantifiable
restructuring expenses).

• With $3.1 million of cash at year-end, LQMT used $5.5 million
cash in the 4Q. While in line with the $5.4 million 3Q burn rate,
cash consumption was inflated by aggressive downsizing activities.

• LQMT has closed a $10 million private placement of 6.0% notes
(due in 2007, but holders can call for repayment after two years).
The notes are convertible - at any time - into common at $3.00
per share. The transaction also included warrants for 1.1 million
shares, exercisable at $3.00, and effectively values LQMT in a
range around $135 million. However, the transaction provides
important relief from LQMT's previously deteriorating financial
liquidity.

• LQMT projected 1Q04 revenue in a $3.5-4.0 million range, with
operating expenses below $2.6 million and EBITDA about $1.0 mil
negative. LQMT expects 2Q04revenue to increase sequentially, for
operating expenses to decline to below $2.5 million (as the last
restructuring steps are completed in the 1Q), and for EBITDA to
end the 2Q04 at a breakeven run rate. LQMT expects cash flow
to turn positive in the 2H04. (Three years late in this
forecast, LQMT is trying to be cash flow positive in 2H07).

March 5, 2004 Diversified Industrial & Machinery

Details
Management discussed several potential revenue opportunities
during its conference call:

• LQMT is now manufacturing cellular phone hinge components
with production yields approaching 90%, and has five parts in
production for Samsung. Additional parts are being prototyped.
LQMT hopes to leverage its (arduously achieved and) improved
position on the manufacturing learning curve into similar
applications for other electronics manufacturers. LQMT indicated
that gross margins are above zero in this product line and
expected to improve further.

• LQMT expects initial customers' product introductions of golf
products with Liquidmetal components during the 3Q04. LQMT
expects to manufacture the components internally.

• LQMT has expanded the number of leading medical products
companies with which it is working on potential medical device
and implant applications. LQMT indicated that development of
an initial commercial implant application will likely occur later
than originally anticipated.

• LQMT's work on kinetic energy penetrators (munitions designed
to replace current technology that incorporates depleted uranium)
has progressed to the stage where LQMT can no longer discuss test
results publicly, and LQMT expects the program to be classified as
Secret during 2004. LQMT hopes to be in a position to team with a
bidder (Alliant) for a large US Air Force munitions contract that
could be awarded by 2006. LQMT is also working on securing
funded development orders for other space and defense applications
that could contribute to revenue in 2004.
• LQMT is working on an alliance with an existing supplier (Alstom)
to the electrical power generation industry as a means to expand
use of its coatings products. While management appears appropriately
focused on achievable goals for the business, we would not be surprised
to see conversion of any or all of the above opportunities be delayed
beyond the projected timeframe.

Investment Thesis

Liquidmetal's bulk amorphous metals offer superior strength-to-
weight characteristics when compared with other non-ferrous metals,
such as stainless steels, titanium, and aluminum, zinc, magnesium.
The ability to produce net-shape parts in reusable metal molds implies
manufacturing costs similar to injection molding and die-casting.
Liquidmetal parts thus appear to have the potential to offer a performance
and cost profile that could eventually find broad commercial application.
However, Liquidmetal has struggled to convert this potential into revenue
and earnings as several applications have proven to not be commercially
viable. To date, sales development in the targeted market for high-
volume electronic casing components has been much slower than originally
expected and LQMT has faced a variety of manufacturing issues that
have negatively impacted financial results. Management's decision to
re-focus the business model on (likely) lower-volume, (potentially)
higher-return applications and on a relatively greater reliance on
license and royalty income implies significant incremental risks and slower
revenue development with uncertain prospects for success.

March 5, 2004 Liquidmetal Technologies

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Risk & Caveats

LQMT is an early-stage company having a relatively short operating
history with extremely limited experience in executing the company's
current business model.
The ability and timing of achieving a greater reliance on the future
development of license and royalty revenue is highly uncertain.
LQMT has yet to establish a track record of converting sufficient
high-volume sales opportunities into customer orders to be able to
drive the rapid growth originally targeted in the electronic casings
market.
LQMT has yet to reach large production scales of its key bulk
amorphous alloy products thus adding an element of manufacturing
execution risk as production volumes grow.
LQMT has not posted a quarter of profitable results given the early-
stage nature of its operations.
We believe that LQMT could need to develop additional sources of
operating capital (beyond the recent private placement of convertible
notes), subject to future operating results. If required, raising
additional capital could prove dilutive to shareholders.
LQMT's competitive advantage centers around the performance
and perceived processing advantages of its alloys. Potentially
emerging competing technologies, or ineffective protection of the
company's intellectual property, thus pose as risks to potential
growth and/or profitability.
LQMT's short operating track record and limited float could combine
with changes in investor expectations to yield above-average share
price volatility.
LQMT maintains its manufacturing capacity in Korea thus generating
exchange rate exposure (US dollar versus Korean Won).

The company is rated Speculative Risk.
Company Description
Liquidmetal Technologies has developed internal production
capacity to manufacture net-shape products from its proprietary
bulk amorphous metal alloys. Liquidmetal alloys demonstrate a
superior strength-to-weight ratio when compared with stainless
steels, titanium, aluminum, and magnesium. While these
characteristics alone would suggest potential commercial
applications for Liquidmetal alloys, it is the ability to produce
bulk amorphous metal components through a process akin to
die-casting that increases the scope of potentially addressable
commercial applications. In certain applications, Liquidmetal
alloys can offer superior performance characteristics
combined with manufacturing efficiencies similar to plastic
injection molding.

LQMT has headquarters in Lake Forest, (now Rancho Santa
Margarita, CA.

Baird used to maintain a trading market in the securities of
Liquidmetal Technologies .

March 5, 2004 Liquidmetal Technologies

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06/17/02 I:SB: $32
08/07/02 MO: $15
09/05/02 Outperform: $15 [IPO Pure Hype and Balderdash]
02/21/03 Neutral: $8
08/01/03 Neutral: $6
08/25/03 Underperform: $2
10/09/03 Underperform: NA

Rating and Price Target History for: LQMT as of 03-04-2004
Created by BlueMatrix
Robert W. Baird & Co. and/or its affiliates expect to receive or intend
to seek investment banking related compensation from the company or
companies mentioned in this report within the next three months.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED
HEREIN IS AVAILABLE UPON REQUEST

Copyright 2004 Robert W. Baird & Co. Incorporated

Investment Ratings:

Outperform (O) - Expected to outperform on a total return, risk-
adjusted basis the broader U.S. equity market over the next 12 months.
Neutral (N) - Expected to perform in line with the broader U.S.
equity market over the next 12 months.
Underperform (U) - Expected to underperform on a total return,
risk-adjusted basis the broader U.S. equity market over the next
12 months.

Risk Ratings:

L - Lower Risk - Higher-quality companies for investors seeking
capital appreciation or income with an emphasis on safety. Company
characteristics may include: stable earnings, conservative balance
sheets, and an established history of revenue and earnings.

A - Average Risk - Growth situations for investors seeking capital
appreciation with an emphasis on safety. Company characteristics
may include: moderate volatility, modest balance-sheet leverage,
and stable patterns of revenue and earnings.

H - Higher Risk - Higher-growth situations appropriate for
investors seeking capital appreciation with the acceptance of
risk. Company characteristics may include: higher balance-sheet
leverage, dynamic business environments, and higher levels of
earnings and price volatility.

S - Speculative Risk - High-growth situations appropriate
only for investors willing to accept a high degree of volatility
and risk. Company characteristics may include: unpredictable
earnings, small capitalization, aggressive growth strategies,
rapidly changing market dynamics, high leverage, extreme price
volatility and unknown competitive challenges.