UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA

TAMPA DIVISIONCase No. 8:04-CV-919-T-23EAJ

PRIMAVERA INVESTORS, individually andon behalf of all others similarly situated,

Plaintiff,

v.

LIQUIDMETAL TECHNOLOGIES, INC., etal.

Defendants.

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

MILBERG WEISS BERSHAD& SCHULMAN LLPMaya SaxenaChristopher S. PolaszekKristi Stahnke McGregor5200 Town Center Circle, Suite 600Boca Raton, FL 33486Tel: (561) 361-5000Fax: (561) 367-8400

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLPJack ReiseDouglas Wilens197 S. Federal Highway, Suite 200Boca Raton, FL 33432Tel: (561) 750-3000Fax: (561) 750-3364

TABLE OF CONTENTS

Page

I. SUMMARY OF THE ACTION ..............................................................................1

II. JURISDICTION AND VENUE ............................................................................ ..7

III. THE PARTIES ....................................................................................................... .. 8

A. LEAD PLAINTIFFS .............................................................................................. .. 8

B. DEFENDANTS ..................................................................................................... .. 8

1. The Individual Defendants ............................................................. ..9

a. John Kang: A "Hands On Executive ................................ ..9

a. James Kang ........................................................................ 10

C. RELATED PARTIES ............................................................................................ 11

1. Growell Metal, Inc ......................................................................... 11

2. Dongyang ....................................................................................... 11

IV. CLAIMS AGAINST DEFENDANTS RELATED TO LQMT'S INITIALPUBLIC OFFERING ............................................................................................. 12

A. BACKGROUND ................................................................................................... 12

B. DEFENDANTS' PROSPECTUS FOR THE IPO WAS MATERIALLYFALSE AND MISLEADING ................................................................................ 13

1. False Statements Contained in the Prospectus ............................... 13

2. Admittedly False FY2001 Financial Statements ........................... 13

3. Material Omissions Concerning The Lock-Up and JohnKang's Holdings ............................................................................ 14

4. Reasons Why the Prospectus Statements Were MateriallyFalse ............................................................................................... 15

5. Improper Accounting for Stock Based Compensation forNon-Employees .............................................................................. 17

6. Improper Accounting for Stock Based Compensation forEmployees ...................................................................................... 18

COUNT I: AGAINST LQMT, JOHN KANG AND JAMES KANG PURSUANT TOSECTION 11 OF THE SECURITIES ACT .............................................................19

COUNT II: AGAINST DEFENDANTS JOHN KANG AND JAMES KANGPURSUANT TO SECTION 15 OF THE SECURITIES ACT INCONNECTION WITH LQMT' S IPO ......................................................................20

V. CLAIMS AGAINST DEFENDANTS UNDER SECTION 10(B) OF THEEXCHANGE ACT................................................................................................. 20

A. DEFENDANTS' INTERLOCKING RELATIONSHIPS AND "UNDERTHE TABLE DEALS WITH GROWELL AND DONGYANG ........................20

1. Growell Metal Inc .......................................................................... 20

2. Dongyang ....................................................................................... 24

B. DEFENDANTS ' FRAUDULENT SCHEME ....................................................... 25

1. Defendants Fail to Disclose that LQMTWas a CompanyIncapable of Producing Viable Products EmployingLiquidmetal Alloys ........................................................................26

2. Defendants Continue to Mislead the Public Regarding theTrue Extent of Their Manufacturing Capabilities ..........................28

3. "A Lot of Smoke and BS : Defendants Could Not ProduceTestable Samples that Actually Included LiquidmetalAlloys ............................................................................................. 30

4. "The Product Claims Are Bullshit : Defendants' "ShamComparisons ...................................................................................31

5. "[W]e own Dongyang : Defendants Insisted on UsingInferior Dongyang Equipment .......................................................33

6. Defendants Were Incapable of Produc ing CommerciallyViable Products at a Profit .............................................................34

7. Defendants Utilize Improper Accounting Methods toRecognize Revenue ........................................................................ 34

8. Defendants Failed To Maintain Adequate Internal Controls.........35

9. Defendants Trickle Out Information Concerning the TrueNature Of the Company While Continuing to MisleadInvestors ......................................................................................... 36

C. FALSE AND MISLEADING STATEMENTS .....................................................37

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1. False Statements During Fiscal Year 2002 ....................................37

2. Reasons For Falsity : FY2002 Statements ...................................... 48

3. False Statements During FY 2003 : Defendants Continue toMislead the Public Regarding LQMT' s ManufacturingCapabilities ..................................................................................... 50

4. Reasons For Falsity: FY 2003 Statements .....................................55

D. THE FRAUD SLOWLY UNRAVELS: RESTRUCTURING ANDRESIGNATIONS ..................................................................................................56

1. Defendants Announce Restructuring Efforts UndertakenWhile Reporting False 2Q2003 Results .........................................56

2. Defendants Announce a Change in Business StrategyWhile Still Issuing Misleading 3Q2003 Estimates ........................59

3. Defendants Reveal A Problem with Growell Deal ButContinue to Issue False and Misleading 3Q2003 FinancialResults ............................................................................................61

4. Defendants Announce Settlement with Growell ............................63

5. LQMT Announced $5-7 Million Private Placement ..................... 64

6. Defendants Reveal Need for Restatement And Admit ToRecognizing Fictitious Revenues ................................................... 65

7. LQMT Completes Private Placement ............................................ 65

8. LQMT' s Misleading Preliminary 4Q2003 Results and1 Q2004 Outlook ............................................................................. 66

9. LQMT' s Form 10-K is Delayed and LQMT BecomesSubject to Delisting ........................................................................66

10. Reasons for Falsity ........................................................................68

E. THE TRUTH EMERGES: Deloitte Resigns , "Unwilling to Rely OnCEO's Representations and Kang's Illegal Stock Sale Is Exposed ....................... 68

VI. POST CLASS PERIOD EVENTS .........................................................................69

VII. THE MAGNITUDE OF THE RESTATEMENT IS REVEALED .......................71

lll

VIII. LQMT'S FINANCIAL STATEMENTS DURING THE CLASS PERIODWERE MATERIALLY FALSE AND MISLEADING AND VIOLATEDGAAP .....................................................................................................................71

A. LQMT' s Improper and Premature Recognition of Revenue .................................73

B. Liquidmetal Failed to Adequately Reserve for Allowance for DoubtfulAccounts .................................................................................................................76

C. Internal Control Deficiencies .................................................................................78

D. Violations of SEC Regulations .............................................................................. 81

E. Additional GAAP Violations .................................................................................82

IX. ADDITIONAL SCIENTER ALLEGATIONS ...................................................... 83

A. Defendants' Knowledge Of The Falsity Of Liquidmetal's Representations .........83

B. The Section 10(b) Defendants' Motive To Commit Fraud ....................................85

1. A Successful IPO Was Necessary For John Kang ToRecoup The Money He Lent The Company .................................. 85

2. John Kang's Private Sale To Growell ............................................86

3. LQMT's Need for Additional Funding ..........................................87

X. NO STATUTORY SAFE HARBOR..................................................................... 88

COUNT III: FOR VIOLATIONS OF SECTION 10(B) OF THE 1934 ACT AND RULEI OB-5 AGAINST LQMT AND JOHN KANG ........................................................89

COUNT IV: FOR VIOLATIONS OF SECTION 20(A) OF THE 1934 ACT AGAINSTJOHN KANG............................................................................................................ 91

XI. CLASS ACTION ALLEGATIONS ...................................................................... 92

XII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ONTHE MARKET DOCTRINE................................................................................. 94

XIII. PRAYER FOR RELIEF ........................................................................................ 96

XIV. JURY DEMAND ................................................................................................... 96

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I. SUMMARY OF THE ACTION

This is a federal securities Class Action brought on behalf of all persons who

purchased or otherwise acquired the publicly traded securities of Liquidmetal Technologies, Inc.

("LQMT or "the Company ), between May 21, 2002 and May 13, 2004, inclusive (the "Class

Period ).

2. LQMT is a materials technology company that claimed (and continues to claim)

to develop and commercialize various products and components made from unique amorphous

alloys.' LQMT purported to focus its commercialization efforts in five product areas: (1)

casings for electronic products such as cellular phone components, (2) sporting goods and leisure

products, (3) medical devices, (4) protective coatings for industrial machinery and equipment,

and (5) defense-related applications such as munitions.

3. LQMT began selling products made from bulk amorphous alloys in 1997. From

1997 to 2001 , LQMT was a company burning through cash, losing over $50.7 million. By

March 31 , 2002 , LQMT had an accumulated deficit of approximately $63.6 million . Of this

accumulated deficit, a staggering $44.8 million was attributable to losses generated by the

Company's now discontinued retail golf business.2

4. In order to fund the Company's continuing operations , corporate officers and

directors (including Defendant John Kang) loaned millions of dollars to the Company. Because

1 Generally speaking, amorphous alloys are metallic materials that are characterized by a non-crystalline (i.e. displaying no discernable pattern) microstructure, which is distinguished from thecrystalline atomic structure typically found in traditional alloys and metals.

2 Historically , LQMT engaged in the retail marketing and sale of golf clubs through a majorityowned subsidiary, Liquidmetal Golf. On September 29, 2001 , LQMT' s board of directors (andthe board of directors of Liquidmetal Golf) voted to discontinue LQMT' s retail golf business.Although the Company's retail golf club business was discontinued, LQMT attempted to remainin the business of manufacturing and selling golf club components to original equipmentmanufacturers , who theoretically would integrate LQMT into their own golf clubs.

the Company's business prior to its initial public offering (`APO ) focused almost exclusively on

the admittedly failed retail golf business, Defendants knew their only chance at recouping this

significant personal investment was through a public offering.

5. That said, LQMT commenced an IPO of 5,000,000 shares of common stock on

May 21, 2002 at a price of $15.00 per share . The IPO was a success , raising cash proceeds of

$78.4 million . Among other things , LQMT used these cash proceeds as follows : (1) $7.8

million to repay outstanding promissory notes and accrued interest to corporate insiders

(including Defendant John Kang); (2) $11.1 million to fund the construction of a 166,000 square

foot manufacturing facility in Pyongtaek, South Korea; (3) $14.3 million to purchase

manufacturing equipment; (4) $0.3 million to purchase a 51% ownership interest in Dongyang

Yudoro ("Dongyang - - a South Korean furnace company that manufactured the casting

equipment that LQMT installed at its South Korea manufacturing facility); and (5) $2.0 million

to acquire 5% (891,100 shares) of the common stock of Growell. As detailed below, the IPO

Prospectus materially distorted the Company's historical financial condition by admittedly

underreporting losses . See IT 41-58.

6. Defendant John Kang is well aware of the need to comply with federal securities

laws. A company he founded, Tampabased Medical Manager, is now the subject of government

probes by the Federal Bureau of Investigation, Securities and Exchange Commission and

Department of Justice. Moreover, John Kang has already admitted to committing an illegal act

in violation offederal securities laws in connection with LQMT's IPO. That is, in February

2002 (prior to the Company's IPO), John Kang entered into a personal stock transaction with

Growell Metal, Inc. ("Growell - - a metals processing company located in South Korea and

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licensee of LQMT' s technology), in which he agreed to sell 285 ,715 shares of his personal

LQMT common stock to Growell.

7. Rather than disclose this transaction to the investing public in the IPO Prospectus,

John Kang remained silent. In fact, the circumstances surrounding this personal stock

transaction did not surface until approximately two years after the IPO, when the Company filed

its Form 8-K on May 13, 2004. This disclosure occurred more than two years after Kang entered

into the personal stock transaction with Growell.3 Subsequently, John Kang admitted that this

transaction violated Section 16(b) of the Exchange Act and also included a previously

undisclosed agreement that the purchase price of the stock purchased by Growell would be at a

thirty percent discount to LQMT's IPO offering price. Timely disclosure of this deeply

discounted stock sale would have alerted investors to the suspicious relationship with Growell,

and would have caused them to question the quality of the revenues later improperly recognized

from the Growell "deal .

8. After the IPO Defendants issued quarter after quarter of improving financial

results, while repeatedly making public statements emphasizing the widespread commercial

application and viability of its products . Along the way, LQMT touted the revolutionary nature

of its products and the efficiency of its manufacturing process and facilities, while announcing

several pending deals to place its alloy products with major customers such as Motorola, Sony,

and Samsung.

9. However, in reality , LQMT was a company without viable products, sufficient

manufacturing capabilities, or realistic prospects for success. For example, a former employee

characterized one such product announcement as "typical Liquidmetal ... a lot of smoke and

3 As discussed more fully below, details surrounding this transaction ultimately led to theresignation of the Company' s independent auditor.

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BS! See 1 105. Ultimately, the Company's purported deals failed to materialize due to the

Company's high manufacturing costs, inability to produce even samples or prototypes capable of

being tested by interested parties or companies (let alone manufacture and produce products in

commercially viable quantities at a price their customers were willing to pay and still generate a

profit to the Company), and insistence on transacting business with South Korean companies in

which LQMT maintained ownership interests.

10. Faced with these material obstacles, Defendants resorted to fraudulent means to

boost revenue and mask LQMT's lack of commercial success . For example, Defendants were

forced to reveal that LQMT would have to restate its past financial results due to improper

revenue recognition practices and a failure to timely write off uncollectible receivables in

violation of Generally Accepted Accounting Principles ("GAAP ) in connection with

transactions involving Growell, Samsung, JS Technologies and AM Corporation. Defendants

have also admitted that the historical financial information contained in the Prospectus was false

due to improper accounting for stock-based compensation - - resulting in a material

understatement of losses.

11. Over time, Defendants' fraud began to surface. For example, on August 6, 2002,

the Company held a conference call with analysts and investors in which Defendant John Kang

partially disclosed that the Company's manufacturing capabilities were not as efficient as

previously touted. The market reacted quickly. By the market's close on August 6, 2002,

LQMT' s shares tumbled down an astonishing 28.6% from the previous day's closing price on

trading of 1.5 million shares (trading volume of a level that had not been seen since the

Company's IPO). Nonetheless, Defendants continued to mislead the public, touting the efficacy

of new manufacturing processes which did not exist.

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12. Then, on December 31, 2003, the Company announced that it would be closing its

Tampa, Florida facility effective December 31, 2003, and that two key senior management

personnel, Thomas N. Trotter (Senior Vice President of Manufacturing), and Scott Wiggins

(Executive Vice President and Chief Strategy Officer), would be leaving the Company. 4

13. On February 20, 2004, LQMT first disclosed that it would be restating revenues

for the third and fourth quarters of 2002 and the first quarter of 2003, due to improper revenue

recognition. The Company announced that it would be restating revenues pertaining to $1.7

million of revenues from alloying equipment sales to Growell originally recorded in the third and

fourth quarters of 2002, and $2.5 million in revenues resulting from sale of die casting machines

to Growell originally recorded in the first quarter of 2003 . Once again, LQMT' s shares

plummeted on the disclosure - - falling approximately 9.2% from the previous day's close on

trading of approximately 595,000 shares . The 595,000 shares traded was more than double the

amount of shares traded the day before.

14. However, notwithstanding LQMT's partial disclosures , Defendants continued to

make false affirmative statements . For example, on March 4, 2004, LQMT reported purportedly

positive earnings results for the fourth quarter of 2004 and commented favorably on the

Company's future prospects . The following day, LQMT' s common stock traded on extremely

high volume (approximately 1.7 million shares traded) and ultimately closed 18.2% higher than

the previous day.

4 Similarly, the Company also announced that R. Brian McDougall, LQMT's Chief Operatingand Financial Officer, would not be relocating to California, but rather would only remain withthe Company during a "transition period.

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15. Then, on March 30, 2004, LQMT revealed that it could not timely file its 2003

Annual Report on Form 10-K due to an ongoing audit and analysis concerning the Company's

previously announced improper revenue recognition and subsequent restatement.

16. The Company's downward spiral continued - - announcing on April 29, 2004 that

the Company received a Nasdaq Staff Determination indicating that the Company' s common

stock was subject to delisting from the Nasdaq National Market due to the Company's failure to

file timely a Form 10-K for the period ended December 31, 2003.

17. On May 13, 2004, the Company shocked the market by revealing that its

independent auditor, Deloitte & Touche LLP ("Deloitte ), had resigned as of May 6, 2004, due

to John Kang's lies. In undertaking such a drastic measure and communicating its resignation,

Deloitte cited "material weaknesses in LQMT' s internal accounting controls relating to the

execution, administration , and accounting for contracts, particularly in connection with the

Company's South Korean operations. Deloitte also advised that it was unwilling to continue to

rely upon the representations ofthe Company's CEO, John Kang, which were necessary in

order to complete the Company's restatement process and audit.

18. Not surprisingly, the market punished LQMT for its May 13, 2004 disclosures.

By the close of trading on May 13 , 2004, LQMT' s stock price fell 14.4% on trading volume of

2.1 million shares.

19. Then on May 24, 2004, then President and CEO John Kang announced his

intention to resign while the Company completed its financial audit for the years 2001-2003, and

the investigation into his personal (and pre-IPO) stock transaction with Growell.

20. On July 15, 2004, the Company announced that its common stock was going to be

delisted from the Nasdaq National Market the following day (i.e. July 16, 2004) as a result of the

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Company's failure and inability to file its Form 10-K for the fiscal year 2003 and Form 10-Q for

the first quarter of 2004 . As a result, on July 16, 2004, LQMT's common stock began trading

(and still currently trades) in the "pink sheets quotation service.

21. However, it was not until November 10, 2004, when the Company filed its Form

10-K for the fiscal year ended 2003 that the Company finally revealed the extent of its fraudulent

revenue recognition scheme , which involved not only restating revenues in connection with the

Growell transactions outlined above, but also involved transactions and improper financial

reporting concerning deals with Samsung, JS Technologies, and AM Corporation. LQMT also

disclosed that there was "substantial doubt that [the] Company will be able to continue as a going

concern for a reasonable period of time without receiving additional funding.

22. LQMT investors who purchased common stock during the Class Period at

artificially inflated prices have lost millions . Indeed, as a result of Defendants' fraudulent

conduct, during the Class Period, LQMT's common stock lost approximately 97% of its value,

falling from its Class Period high of $22.50 to close at $0.75 on May 14, 2004.

II. JURISDICTION AND VENUE

23. This Court has jurisdiction over the subject matter of this action pursuant to §27

of the Securities Exchange Act of 1934 (15 U.S.C. §78aa) and 28 U.S.C. §1331. The claims

asserted in this action arise under Sections 11 and 15 of the Securities Act of 1933 (the

"Securities Act ), 15 U.S.C. §§77k and 77o; Sections 10(b) and 20(a) of the Securities Exchange

Act of 1934 (the "Exchange Act ), 15 U.S.C. §§78j(b) and 78t(a), and the rules and regulations

promulgated thereunder by the SEC, including Rule lOb-5, 17 C.F.R. §240.10b 5.

24. Venue is proper in this District pursuant to Section 22 of the Securities Act,

Section 27 of the Exchange Act, and 28 U.S.C. §1391(b) and (c). Many of the acts and

transactions giving rise to the violations of law complained of herein, including the preparation

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and dissemination to the investing public of false and misleading information, occurred in this

District . In addition, during the majority of the Class Period, LQMT maintained its principal

executive offices in this District at 100 North Tampa Street, Suite 3150, Tampa, Florida, 33602.5

25. In connection with the acts, conduct and other wrongs complained of herein,

Defendants used the means and instrumentalities of interstate commerce, including but not

limited to the mails, interstate telephone communications and the facilities of national securities

exchanges.

III. THE PARTIES

A. LEAD PLAINTIFFS

26. John Ho Lee, Dwight Mamanteo, Mark Rabold, Scott Purcell and Chris Crowley

(collectively "Lead Plaintiffs ) were appointed by the Court on August 23, 2004 to serve as Lead

Plaintiffs in this class action.

27. Lead Plaintiffs purchased LQMT common stock during the Class Period, as set

forth in the certifications accompanying Lead Plaintiffs' motion for appointment as Lead

Plaintiff, and were damaged thereby.

B. DEFENDANTS

28. Defendant LQMT is a materials technology company and at all relevant times,

was based in Tampa.

5 In December 2003, LQMT consolidated all of its corporate functions into its Lake Forest,California facility, which had previously served as LQMT's principal research and developmentoffice.

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1. The Individual Defendants

a. John Kang : A "Hands On" Executive

29. Defendant John Kang graduated from Harvard College in 1985 with a degree in

economics . He has been a LQMT director since 1994 . During the Class Period, he held

positions as LQMT' s President, Chairman of the Board, Principal Executive Officer and Chief

Executive Officer. Kang is no stranger to allegations of accounting fraud. In addition to

admittedly violating federal securities laws in connection with the under the table stock deal to

Growell, Kang's conduct with a previous publicly traded corporation drew a host of government

investigations.

30. From July 1996 to September 2000, John Kang served variously as Chief

Executive Officer, President, and Director of Medical Manager Corporation, a healthcare

software company that commenced an initial public offering in 1997. After founding Medical

Manager and taking the Company public , the Company was forced to restate revenue and net

income. Medical Manager is now under investigation by the FBI, the Department of Justice, and

is the subject of a formal SEC investigation. This investigation includes conduct which took

place when the Company was led by Kang.

31. John Kang, as Liquidmetal's founder and top executive, was intimately familiar

with the Company's operations. According to a former employee at Liquidmetal's golf division

during the Class Period, Kang was a "hands on executive who gets involved in the "nuts and

bolts of decisions.

32. However, this same former employee characterized John Kang as an "extremely

underhanded CEO.6 Indeed, John Kang's lack of credibility has had a devastating impact on

6 Similarly, another former Liquidmetal golf employee during the Class Period indicated thatboth John and James Kang would "flat out lie to investors at shareholder meetings.

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LQMT. After LQMT' s independent auditor, Deloitte , resigned because it was "unwilling to

continue to rely upon the representations of the [Company's] CEO [Defendant John Kang],

Defendant John Kang resigned on May 24, 2004, pending the completion of the Company's

reaudit with its new independent auditor, Stonefield Josephson, Inc., and resolution of an

investigation into John Kang's undisclosed and illegal sale of stock to Growell.

33. LQMT and John Kang are collectively referred to hereafter as the "Section 10(b)

Defendants.

34. Because of his position with LQMT, John Kang was provided with copies of

LQMT' s reports , corporate filings , and press releases alleged herein to be misleading , prior to or

shortly after their dissemination . Therefore, John Kang had both the ability and opportunity to

prevent the issuance of the misleading statements , cause them to be corrected, or commit the

fraudulent acts alleged. Consequently, John Kang is responsible for the accuracy (or inaccuracy)

of the public reports, filings, statements, and releases detailed herein and are primarily liable for

their representations.

b. James Kang

35. Defendant James Kang is the brother of John Kang and has also served as a

LQMT director since 1994. Similarly , at all times relevant hereto , he served as a Director,

Chairman and Founder of LQMT.

36. Defendants John and James Kang are collectively referred to hereafter as the

"Individual Defendants.

37. LQMT, John Kang and James Kang are referred to collectively herein as the

"Section 11 Defendants.

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C. RELATED PARTIES

1. Growell Metal, Inc.

38. Defendants have a longstanding relationship with Growell. In fact, even prior to

becoming a publicly traded corporation, LQMT entered into a technology transfer agreement

with Growell. As revealed in the Company's Form 10-K for the fiscal year ended 2002:

[T]he Company has engaged Growell Metal to produceLiquidmetal alloy ingots ("ingots ) for the Company to purchaseand use as a raw material in the manufacturing of products andcomponents made of Liquidmetal alloys. The agreement is for atwo-year period beginning in February 2002. Under the terms ofthis cost-plus arrangement, Growell Metal is paid a processing feeplus the cost of the raw materials used to produce the ingots.During the year ended December 31, 2002, Growell Metalpurchased [$3,270,000] of raw materials from the Company's ownraw material stock to use in the production of the ingots. TheCompany purchased [$3,669,000] of ingots from Growell Metalduring the year ended December 31, 2002. The net profit on thesale of the raw materials sold to Growell Metal is netted against thecost of the ingots purchased from Growell Metal. At December 31,2002, the Company had a payable to Growell Metal of [$90,000].

39. Prior to LQMT' s IPO, Growell ' s then Chairman and CEO, Jeong Seo Park, was

identified as a significant LQMT shareholder, who was subject to (and executed) a lock up

agreement, which prevented Park from disposing (e.g. offering, pledging, selling, or contracting

to sell) of his LQMT shares for a period of approximately 180 days from LQMT's IPO.

2. Dongyang

40. On June 28,2002, LQMT invested $0.3 million in Chusik Hoesa Dongyang

Yudoro ("Dongyang ), a South Korean company that manufactured furnace equipment.

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IV. CLAIMS AGAINST DEFENDANTS RELATED TO LQMT'S INITIAL PUBLICOFFERING

A. BACKGROUND

41. LQMT commenced an initial public offering (IPO) of 5,000 ,000 shares of

common stock on May 21, 2002 at a price of $15.00 per share, pursuant to a Registration

Statement initially filed with the Securities and Exchange Commission on November 20, 2001,

and declared effective on May 21, 2002. The managing underwriters for the IPO were Merrill

Lynch & Co., UBS Warburg, and Robert W. Baird & Co.

42. Defendants James and John Kang signed the Registration Statement pursuant to

the requirements of the Securities Act.

43. The IPO of 5,000,000 shares was declared effective by the SEC on May 21, 2002

and closed on May 28, 2002. Pursuant to an overallotment option, an additional offering of

229,000 shares was closed on June 10, 2002.

44. The IPO generated cash proceeds of $78.4 million . After deducting underwriting

commissions and other transaction fees , LQMT realized net proceeds from the IPO in the

amount of $70.7 million. Approximately $7.8 million of the net IPO proceeds were used by

LQMT to repay the principal and accrued interest on outstanding loans of $7 . 5 million made by

LQMT officers and directors (including Defendant John Kang) to LQMT prior to the IPO.7

Additional IPO proceeds were used to build a new manufacturing plant in South Korea.

7 Prior to the IPO, John Kang loaned LQMT $2.8 million and also loaned LQMT an additional$ 1.4 million jointly with Ricardo Salas.

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B. DEFENDANTS' PROSPECTUS FOR THE IPO WAS MATERIALLYFALSE AND MISLEADING

1. False Statements Contained in the Prospectus

45. The Prospectus filed in connection with the IPO contained numerous false and

misleading statements and omissions including: (a) false historical financial statements for the

year ended 2001; and (b) a material omission regarding a personal stock sale and discount

guarantee made by John Kang to Growell. Indeed, Defendants have now restated certain loss

figures for LQMT's financial year ending 2001 , thus admitting the falsity of the financial

statements included in the Prospectus, and they have also admitted that Kang violated Rule 16(b)

of the Exchange Act by violating the lock-up provisions detailed in the Prospectus.

2. Admittedly False FY2001 Financial Statements

46. The Prospectus contained historical financial statements of LQMT, purportedly

prepared in compliance with GAAP. The preface to the financial statements included an

assurance that the financial statements had been prepared accurately, stating that "in the opinion

of management the statements ` reflect all adjustments necessary to present fairly, in accordance

with accounting principles generally accepted in the United States, the information for those

periods.

47. Specifically, the Prospectus included LQMT' s financial results for the year ended

December 31, 2001. These results included the following figures, designed to give investors an

accurate portrayal of the Company 's financial condition as of year end 2001:

Selling, general, and administrative expense $4,301,000

Total Operating Expenses $6,027,000

Loss from continuing operations $5,164,000

Net Loss $23,086,000

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Loss per share from continuing operations $(0.15)

(basic and diluted)

48. The Prospectus filed on May 21, 2002 pursuant to Rule 424(b)(1), included the

following disclosure with respect to the Company's policy of accounting for stock-based

compensation:

As permitted under SFAS No. 123, Accounting for StockBasedCompensation, the Company has elected to follow AccountingPrinciples Board ("APB ) Opinion No. 25, Accounting for StockIssued to Employees, which prescribes the intrinsic value methodin accounting for its stock options issued to employees anddirectors. Stock options issued to non-employees of the Companyhave been accounted for in accordance with SFAS No. 123, whichprescribes the fair value accounting method.

3. Material Omissions Concerning The Lock-Up and John Kang'sHoldings

49. As evidenced by LQMT' s revelation in its 2003 10-K, the Prospectus contained a

material omission regarding John Kang's discounted sale of stock to Growell. Given the

improper course of conduct that later transpired involving LQMT and Growell, the existence of

this hidden inducement was clearly material.

50. The Prospectus stated that, as of April 15, 2002, Defendant John Kang

beneficially owned 19,308 ,785 shares of LQMT common stock, or approximately 51.8% of the

outstanding LQMT common stock . The Prospectus added:

All of the executive officers and directors and sDme shareholders

and option holders have signed lock-up agreements in favor of theunderwriters which prohibit them from selling or otherwisedisposing of any shares of our common stock or securitiesconvertible into shares of our common stock for a period of 180days after the date of this prospectus.

***

No Sales of Similar Securities

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We, our executive officers and directors and certain shareholdershave agreed not to sell or transfer any shares of our common stockfor 180 days after the date of this prospectus without first obtainingthe written consent of Merrill Lynch. Specifically , we and theseother individuals have agreed not to directly or indirectly:

• offer, pledge, sell or contract to sell any shares of ourcommon stock;

• sell any option or contract to purchase any shares of ourcommon stock;

• purchase any option or contract to sell any shares of ourcommon stock;

• grant any option, right or warrant for the sale of any sharesof our common stock;

• lend or otherwise dispose of or transfer any shares of oucommon stock;

• request or demand that we file a registration statementrelated to any shares of our common stock; or

• enter into any swap or other agreement that transfers, inwhole or in part, the economic consequences of ownership of anycommon stock whether any such swap or transaction is to besettled by delivery of shares or other securities, in cash orotherwise.

4. Reasons Why the Prospectus Statements Were Materially False

51. The statements alleged in IT 45-50 above were materially false and misleading.

The Prospectus was required to, but did not, disclose the fact that John Kang entered into a secret

deal in which he agreed to sell 285 ,715 shares of his personal LQMT common stock to Growell

at a 30% discount to the IPO price. The Prospectus misrepresented John Kang's own holdings

as it omitted to disclose a material element of his stock ownership. Further, the deep discount

offered to Growell creates doubt concerning the valuation of the IPO selling price.

52. As later revealed in Liquidmetal's 2003 Form 10-K filed with the SEC on

November 11, 2004, LQMT disclosed that an agreement with John Kang had been reached (also

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in November 2004) in which John Kang agreed that the personal stock transactions involving

Growell (the purchases and dispositions incident to the agreement having occurred in August and

November 2002, respectively) should have resulted in a liability under Section 16(b) of the

Exchange Act in the amount of $301,944.73, which John Kang agreed to pay in 24 equal

monthly installments beginning in January 2005.

53. In addition to the admitted violation of securities laws detailed above, the

Prospectus was also false and misleading in that it contained false historical financial data for the

fiscal year ended December 31, 2001, due to Defendants' failure to properly account for stock

option compensation expenses in violation of GAAP. Indeed, as admitted in the Company's

2003 10-K, several key indicator 's of LQMT's financial condition were required to be restated.

For example, Defendants admitted that LQMT's loss per share as reported in the Prospectus

was materially overstated - - by 20%. Specifically, the restatement detailed in the 2004 10-K

revealed that: (a) selling general and administrative expenses were $5,239,000, not $4,301,000 as

originally reported; (b) total operating expenses were $6,965,000 not $6,027,000 as originally

reported: (c) loss before income taxes, minority interest and discounted operations were

$6,102,000 not $5,164,000 as originally reported; (d) net loss was $24,024,000 not $23,086,000

as originally reported, and (e) loss per share from continuing operations was $(0.18), not the

$(0.15) originally reported.

54. Defendants improperly caused LQMT to understate compensation expenses for

compensation to non-employees and employees in 2001 in the amount of $937,000. This

resulted in a material understatement of operating expense and net loss in 2001. LQMT

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subsequently restated its 2001 financial statements as a result of these improprieties as disclosed

in its 2003 Form 10-K filed with the SEC on November 10, 2004.8

5. Improper Accounting for Stock Based Compensation for Non-Employees

55. SFAS 123 requires that transactions in which goods or services are the

consideration received for the issuance of equity instruments shall be accounted for based on the

fair value of the consideration received, or the fair value of the equity instruments issued,

whichever is more readily measurable. ¶8 SFAS 123. The date on which the fair value of the

equity instrument is issued is the measurement date and is the earlier of the date at which a

commitment for performance is reached or the date at which the counterparty's performance is

complete . Emerging Issues Task Force ("EITF ) 96-18 Accountingfor Equity Instrument That

Are Issued to Other Than Employeesfor Acquiring, or in Conjunction with Selling, Goods or

Services Issue 1 . Additionally EITF 96-18 Issue 2 , requires that the fair value of equity

instruments issued should be recognized in the same period and in the same manner as if the

enterprise had paid cash for the goods or services.

56. LQMT violated GAAP and its own disclosed policy by improperly failing to

recognize compensation expense upon cancellation by LQMT of an option agreement dated

July 1, 2001, under which 14,517 options were awarded to a consultant . LQMT also violated

GAAP and its own disclosed policy by inappropriately recognizing compensation expense for

another consultant over three years instead of one year. These violations resulted in a material

understatement of LQMT operating expenses and net loss in the Prospectus financial statements.

8 LQMT also restated its 2002 financial statements as a result of improperly understatingexpenses for compensation by an amount of $533,000.

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6. Improper Accounting for Stock Based Compensation for Employees

57. As stated above, compensation expense is recognized upon issuance of equity

instruments based upon the fair value of the consideration received or the fair value of the equity

instruments issued, whichever is more readily measurable . ¶8 SFAS 123. Additionally, APB 25

outlines situations where a company should recognize compensation expense for stock issued to

employees under compensatory plans. Compensation expense to be recognized is calculated by

reference to the fair value of the stock (i.e., the quoted market price) on the date an option is

granted or stock is awarded to an employee . ¶10 SFAS 123. Compensation expense need not be

recognized for stock issued through non-compensatory plans. ¶7 SFAS 123.

58. LQMT violated GAAP and its own disclosed policy for failing to properly

account for the issuance of 516,130 stock options on May 1, 2000 to a member of the Board of

Directors who was also a full time employee of LQMT. On November 15, 2001 , based on a

separation agreement, the director forfeited 113,548 of these options in exchange for the

accelerated vesting of 15,484 options, which were originally set to vest on May 1, 2003. LQMT

failed to re- measure all of the unvested shares that were permitted to vest after the separation

date under SFAS 123 and record additional stock compensation expense for the portion of the

shares subject to the accelerated vesting. Additionally, LQMT failed to properly calculate

compensation expense for options awarded to a consultant on July 31, 2001, who became an

employee on February 15, 2002. These violations resulted in a material understatement of

LQMT's operating expenses and net loss in the financial statements contained in the Prospectus.

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COUNT I

AGAINST LQMT, JOHN KANG AND JAMES KANG PURSUANT TOSECTION 11 OF THE SECURITIES ACT

59. This Count is brought on behalf of persons who purchased LQMT stock issued

pursuant to or traceable to the May 21, 2002 offering.

60. Lead Plaintiffs, who purchased in the IPO, bring this Count and repeat and

reallege each and every allegation contained in the above paragraphs, as if fully set forth herein.

With respect to this Count, Lead Plaintiffs and the Class specifically exclude any allegations of

knowledge or scienter.

61. The IPO Prospectus contained misrepresentations of material fact and omitted to

state material facts required to be stated in order to make the statements contained therein not

misleading . As such these Defendants are liable to Lead Plaintiffs and the Class.

62. Defendants issued, caused to be issued, and participated in the issuance of

materially false and misleading statements to the investing public that were contained in the IPO

Prospectus. As a direct and proximate result of these Defendants' wrongful conduct, the market

price for LQMT stock sold pursuant to or traceable to the Prospectus was artificially inflated, and

Lead Plaintiffs and the Class suffered substantial damages in connection with their purchase of

LQMT common stock in the IPO.

63. This action was initiated within three years after LQMT stock was sold to the

public under the IPO, and within ten months from the time the truthfulness of the Prospectus was

called into question.

64. Lead Plaintiffs and other class members were damaged by Defendants'

misconduct and by the material misstatements and omissions of the aforementioned Prospectus.

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65. Defendants utilized national securities exchanges, the mails, telephones and other

instruments of interstate commerce in the offering and sale of LQMT stock.

COUNT II

AGAINST DEFENDANTS JOHN KANG AND JAMES KANG PURSUANT TOSECTION 15 OF THE SECURITIES ACT IN CONNECTION WITH LOMT'S IPO

66. Defendants John Kang and James Kang were controlling persons of LQMT

within the meaning of Section 15 of the Securities Act by reason of their respective management

positions in LQMT, and/or their membership on LQMT' s Board of Directors , and/or their stock

ownership, and/or their participation throughout the Class Period in the day-to-day affairs of

LQMT. Because of their positions in the Company and/or their stock ownership, and/or because

of their positions on the LQMT Board of Directors , these Defendants had the requisite power to

directly or indirectly control or influence the specific corporate policy that resulted in the

unlawful acts and conduct alleged pursuant to Count I.

67. By reason of the foregoing, Defendants John Kang and James Kang have violated

Section 15 of the Securities Act.

V. CLAIMS AGAINST DEFENDANTS UNDER SECTION 10(B) OF THEEXCHANGE ACT

A. DEFENDANTS' INTERLOCKING RELATIONSHIPS AND "UNDER THETABLE DEALS" WITH GROWELL AND DONGYANG

1. Growell Metal Inc.

68. Defendants' interlocking relationships with the two South Korean entities,

Growell and Dongyang facilitated their fraudulent scheme . A former LQMT engineer during the

Class Period characterized the Company's suspicious dealings with these entities as "under the

table. For example, John Kang gave an "under the table secret inducement to Growell in the

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form of discounted stock to convince Growell to go along with LQMT's fictitious revenue

scheme . See ¶16-7, 264-266.

69. On July 29, 2002, LQMT further solidified its relationship with Growell by

investing $2 million in Growell. This investment took the form of a purchase of Growell's

common stock directly from Growell, which is a public company whose common stock is traded

on South Korea's KOSDAQ stock market. All told, LQMT acquired 891,100 shares (or an

estimated 5%) of Growell' s outstanding common stock in this transaction.

70. In the Company's second quarter 2002 Form 10-Q, LQMT noted the importance

of its relationship with Growell to boost LQMT's bulk alloy business:9

The specific purpose of this investment was to solidify and bolsterour supply chain in anticipation of an expected significant ramp-upin our manufacturing activities. Prior to our investment inGrowell, we engaged Growell to produce and sell to usLiquidmetal allow ingots that will be used to produce products andcomponents in our South Korean manufacturing facilities. Weexpect that, for the near term, Growell will supply a significantportion of the ingots to be used in our manufacturing operations,and our investment in Growell will enable Growell to develop thecapabilities to meet our expected demand.

71. During the second quarter of 2002, LQMT sold a machine to Growell for

$269,000 to be used in the production of LQMT ingots to be purchased by the Company.

72. Additionally, during the nine months ended September 30, 2002, the Company

sold $872,000 of furnace equipment to Growell to produce Liquidmetal alloy ingots for the

Company. 1 ° The Company stated that the profit on the equipment sales to Growell, $110,000,

was deferred and was to be amortized against the cost of sales over the remaining term of the

9 This information was repeated in substantially similar form in all of the Company's Forms 10-Q and 10-K during the Class Period.

10 By year ended 2002, the amount of the furnace equipment sold by LQMT to Growell totaled$1,569,000.

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technology transfer agreement between Growell and the Company. During this same time

period, the Company purchased approximately $410,000 of LQMT alloy ingots from Growell.

73. Growell became a material part of LQMT' s reported revenue . For example,

during 2002 , Growell accounted for 12% of LQMT' s reported revenue from continuing

operations.

74. On January 6, 2003, Forbes questioned LQMT' s relationship with Growell in an

article stating:

A full 43% of Liquidmetal's $3.7 million in third-quarter salescame from a Korean company, Growell, that it pays to produce itsmetal ingots. Liquidmetal buys [its] ingots from Growell, turnsthem into casings for digital music players and then sells the casesback to Growell, which kindly bought $700,000 in MP3/CD playercovers. Liquidmetal also owns 5% of Growell, which bought$900,000 of Liquidmetal's furnace and production equipment.Bought? Well, Growell still owes Liquidmetal $1.6 million on itspurchases.

75. Undaunted, on May 1, 2003, LQMT issued a press release announcing a 5-year

strategic agreement with Growell and the sale of 5 casting machines to Growell in connection

with that deal, stating:

Revenues from equipment sales during the quarter included $2.5million from the sale of Liquidmetal alloy casting machines toSouth Korea-based Growell Metal, Inc., a KOSDAQ-listedcompany, as part of a five-year strategic agreement finalized inMarch 2003. The agreement provides Growell Metal with theright to manufacture and market an exclusive line of automotiveparts made from Liquidmetal alloys for customers in South Korea.Liquidmetal Technologies will receive royalty payments from thesale of Liquidmetal alloy parts produced and sold by Growell.

***

The agreement with Growell Metal capitalizes on LiquidmetalTechnologies' advanced alloy technology and Growell's 30 yearsof experience die casting products for South Korea-basedcompanies in the automotive, farm machinery and electronicproduct industries. It signals a first step in the expansion of

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Liquidmetal Technologies' business strategy by establishing analliance with a proven partner to introduce the company's alloytechnology into a previously untapped market. It also expands astrategic partnership between the two companies that began in July2002 when Growell contracted to manufacture alloy ingots asfeedstock for Liquidmetal's Pyongtaek, South Korea plant.

"This new agreement is a logical progression of our bulk alloybusiness strategy. Growell has a long history in metal die-casting,extensive experience with ou unique alloy technology, andexisting relationships with our team of engineers and technicalstaff. Moreover, their established presence in South Korea'sautomotive marketplace opens a new market opportunity toLiquidmetal Technologies that might otherwise have taken usyears to develop organically, said Kang.

76. However, it was not until November 14, 2003, when Defendants filed a Form 10-

Q for the third quarter 2003, that they revealed that there was a significant problem with

Growell, stating:

Subsequent to October 31, 2003, the Company received fromGrowell Metal some updated information regarding the status ofGrowell Metal's ingot supply operations, and such informationsuggests that, due to financial challenges associated with theoperations, Growell 1Vbtal may desire to modify its relationshipwith the Company. The Company and Growell Metal are currentlydiscussing these issues. As of November 14, 2003, managementbelieves it is too early to determine the outcome of these matters.

77. On January 15, 2004, the Company filed a Form 8-K in which the Company

reported that effective January 10, 2004, it had entered into an agreement with Growell that

satisfied and settled certain outstanding accounts receivable and potential claims against the

organizations. Then, on February 20, 2004, LQMT disclosed that it would have to restate

revenues for the third and fourth quarters of 2002, and the first quarter of 2003 due to improper

revenue recognition in connection with the sale of alloy melting and casting equipment to

Growell.

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78. The full extent of the Growell restatement was not revealed until LQMT filed its

2003 10-K wherein it finally disclosed:

As a part of the accompanying consolidated financial statementsand the notes thereto, the Company has restated certain previouslyissued financial statements due to the fact that revenues fromequipment sales made to Growell Metal Co., Ltd., a South Koreanmetals processing company ("Growell ), in the third and fourthquarters of 2002 and the first quarter of 2003 should not have beenrecognized in those periods. Revenues of [$873,000] and[$681,000] from the sales of alloying equipment to Growell werepreviously recorded in the quarters ended September 30, 2002 andDecember 31, 2002, respectively, and revenue of [$2,543,000]from the sale of die casting machines to Growell was previouslyrecorded in the quarter ended March3l, 2003. The 2002 Growellsale of [$1,554,000] had an associated cost of sales of [$1,478,000]resulting in a profit of [$78,000] during 2002. The 2003 Growellsale of [$2,543,000] had an associated cost of sales of [$840,000]resulting in profit of [$1,703,000]. The effect of the restatement isto eliminate the recognition of revenue on the alloying equipmentsales in 2002 and to defer the recognition of revenue on the diecasting equipment in 2003 until the quarter ending March 31,2004.

2. Dongyang

79. Subsequent to the Company' s June 28, 2002 investment in Dongyang, LQMT

became the majority interest holder of the South Korean equipment manufacturing company.

80. Commenting on the Dongyang investment, the Company's 3Q2002 Form 10-Q

stated:

The acquisition of a controlling interest in Dongyang allows us tobetter control the manufacturing equipment supply chain relatingto the manufacture of our bulk Liquidmetal alloys.

81. LQMT went on to purchase a significant portion of the manufacturing and

processing equipment used in its South Korean production facilities from Dongyang. The

furnace equipment purchased from Dongyang by LQMT was "critical to the manufacturing of

bulk LQMT alloys.

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82. However, according to a former LQMT project engineer who worked at the

Company during the Class Period, the equipment purchased from Dongyang was inferior and ill-

suited for LQMT' s production needs . In fact, according to this former employee, due in part to

the inferior production equipment purchased from Dongyang, LQMT' s manufacturing facility

could not effectively manufacture products like cellular phone casings in the volumes or at the

pricing required by customers like Samsung or Motorola.

83. Nonetheless, even after the inadequacy and insufficiency of the Dongyang

production equipment initially purchased for LQMT's production facility in South Korea was

well established, Defendants pressured Company project managers to purchase additional

manufacturing and processing equipment from Dongyang.

B. DEFENDANTS' FRAUDULENT SCHEME

84. During the Class Period, Defendants disseminated a series of false and misleading

statements via press releases, corporate filings, and analyst and investor conference calls, which

misled the investing public by concealing the true nature of the Company' s production

capabilities, valuation, and prospects for success. Along the way, Defendants utilized an array of

improper accounting methods in order to improperly recognize revenue and distort the

Company's true financial condition during the Class Period.

85. Despite making grandiose claims , according to a former LQMT project engineer

who worked at the Company during the Class Period, due in part to inferior production

equipment purchased from Dongyang and management's lack of production expertise,

Defendants quickly learned that LQMT's manufacturing facility could not effectively

manufacture products like cellular phone casings in the volumes, or at the quality and pricing,

mandated by customers such as Samsung or Motorola. Defendant John Kang was well aware of

the manufacturing problems in South Korea, as he was regularly on the phone "yelling and

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screaming with personnel at the South Korean manufacturing plant, including South Korean

employee Sonny Hong.

86. Furthermore , LQMT' s manufacturing plant had a lengthy actual production cycle

that was substantially longer than the production cycle time being touted and reported by

Defendants . Additionally, notwithstanding the fact that LQMT lacked the capacity to produce

samples, prototypes, or finished products in meaningful (i.e. commercial) quantities, but the

actual products that were produced by LQMT were often flawed and unsellable . In fact, one

former employee described the products being manufactured by the Company simply as

"garbage.

1. Defendants Fail to Disclose that LQMT Was a Company Incapable ofProducing Viable Products Employing Liquidmetal Alloys

87. On October 4, 2002 LQMT announced that its Liquidmetal alloy would be

featured in a new line of cellular phones by Samsung Electronics Company.

88. However, despite the Company's representations, quality and production

problems were rampant in connection with LQMT's efforts to deliver cellular phone casings and

chassis parts for companies such as Motorola and Samsung, who would not buy products

containing "cosmetic defects . The cellular phone components being produced by LQMT

contained a number of cosmetic defects, including "graphite inclusion and "porosity that made

the products unusable. I l

89. An in depth analysis of the Company's cellular phone component production

problems was undertaken shortly after the IPO, which concluded that the fundamental reason for

11 Graphite inclusion is a potential consequence of the melting process which results in"flecking in the finished product, while the "porosity problems described above refers to thepresence of tiny holes or a "pattern of tiny bubbles. Either way, both conditions contributed toa finished product that was unacceptable to the customer.

-26-

the manufacturing problems was that LQMT' s production facilities and its inferior Dongyang

equipment was fundamentally flawed - - problems that "anyone with tooling experience should

have recognized. For example, the vacuum die-casting machines purchased from Dongyang,

which were integral to LQMT' s production process , were simply too small and operated too

slowly to produce materials in commercially viable quantities.12

90. Put differently, according to a former LQMT Golf and LMG Sports sales manager

who sold golf clubs containing LQMT' s alloy during the Class Period, LQMT's manufacturing

facility in South Korea was "upside down with problems, incapable of producing alloy in viable

quantities, and simply could not produce large quantities of the finished alloy without the

product cracking or breaking to an unsatisfactory degree. According to this former employee,

"nothing they [LQMT] did could resolve this fundamental and incurable production problem.

91. Typifying the misleading nature of Defendants ' representations regarding the true

nature of the Company's manufacturing capabilities, on July 10, 2003 , LQMT further announced

that HEAD Racquet Sports would launch a Liquidmetal® racquet line incorporating

Liquidmetal® technology. However, according to both a former project engineer and a former

Liquidmetal golf employee during the Class Period, the HEAD tennis racquet was simply a

marketing ploy, and not a legitimate application of the LQMT alloy as the HEAD tennis racket

actually contained only LQMT "dust (called "armacor ) and not "viable metal.

12 More directly, according to a former LQMT project manager who worked at the Companyduring the Class Period, the production equipment purchased by LQMT from Dongyang wassimply inadequate. Specifically, due to the "very reactive nature of the Liquidmetal alloy, andthe risk of "oxygen contamination during the melting process, it was necessary for the alloymelting process to occur in a vacuum, which was created by drawing out the atmosphere in avacuum chamber using a vacuum pump. However, the integral vacuum pump purchased byLQMT from Dongyang was "very undersized and incapable of handling the productionvolumes touted and required by the Company.

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2. Defendants Continue to Mislead the Public Regarding the TrueExtent of Their Manufacturing Capabilities

92. Throughout the Class Period, Defendants touted the capabilities of LQMT's

"state-of-the-art manufacturing and production facilities. Along these lines , as Defendant John

Kang stated in an October 31, 2002 press release:

Our expanded manufacturing facilities in Pyongtaek, South Koreacame onstream in September as planned, and capacity there isramping up to meet demand for the current wave of newcommercial products employing Liquidmetal(R) alloys.

93. However, according to a former LQMT project engineer who worked at the

Company during the Class Period, because of the poor choice of the Dongyang equipment

installed at LQMT' s manufacturing facility in South Korea, there was "no way they [LQMT]

could keep up with manufacturing sufficient quantities of cellular phone casings for the

volumes that a customer like Samsung would require.

94. Defendants were well aware of LQMT's production limitations, which rendered

LQMT incapable of producing products in commercial quantities . Nonetheless , during the Class

Period, Defendants repeatedly touted the Company's production cycle time, which they

represented as being "45 seconds.

95. An accurate reporting of the Company' s actual production time was critical. By

reporting a production cycle time, the market (including of course, analysts and investors) was

able to evaluate the extent of LQMT' s production capabilities , calculate the amount of products

that LQMT could theoretically produce (along with the expected revenue from such production

efforts) and form an opinion as to whether LQMT would be able to produce LQMT products in

commercial quantities sufficient to meet the needs and expectations of LQMT's potential

customers.

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96. Thus , the market relied on, and incorporated, LQMT' s representations regarding

its production cycle time in order to (in part) determine an appropriate valuation for the price of

LQMT's publicly traded securities.

97. However, during the Class Period, Defendants repeatedly misrepresented

LQMT' s actual production cycle time. For example, during the Company's February 20, 2003

conference call for analysts and investors, CFO Brian McDougall continued to assert that the

Company was capable of maintaining a production cycle time of 45 seconds.

98. Similarly, on May 1, 2003, the Company held another analyst and investor

conference call in connection with the release of the Company's 1 Q2003 financial results.

During the conference call, CFO McDougall reiterated that production "[c]ycle time typically

remains in an average of 45 seconds.

99. However, according to a former project engineer who worked for the Company

during the Class Period, any claims representing that the Company's production cycle time was

45 seconds (or less) dramatically misrepresented the reality that LQMT' s actual production time

was really sixty minutes.

100. In this regard, the former project engineer stated that any representation regarding

a production cycle time of approximately 35-45 seconds, was inherently misleading and

inevitably referred to a "dry cycle production time, which simply accounted for the time

LQMT's vacuum die-casting machinery could operate without having any material in it. That

being the case , Defendants ' reported "dry cycle production time did not take into account

numerous critical and actual steps in LQMT's production cycle including the need to: (1)

develop a vacuum; (2) melt the materials; and (3) remove the materials from the manufacturing

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machines. That said, the Company's actual production cycle time was approximately one hour -

- nowhere near the touted "45 seconds.

101. According to this former Employee, the inferior Dong Yang machines could

produce 16 finished units an hour in ideal circumstances. However, the number of units per hour

was regularly much less, because of the unusually large amount of flawed units per cycle.

According to the former engineering employee, "these quantities were ridiculously low for a

company purporting to be a modem manufacturing company trying to sell items for high- volume

products such as cell phones.

3. "A Lot of Smoke and BS": Defendants Could Not Produce TestableSamples that Actually Included Liquidmetal Alloys

102. Throughout the Class Period, Defendants continued to announce product

development agreements as evidence of the commercial viability of LQMT's products. For

example , on July 18, 2002, LQMT "announced an agreement with Cleveland Golf to develop

golf club heads using a Liquidmetal® alloy. Similarly, on October 31, 2002 , LQMT issued a

press release announcing deals with "such world-class organizations as LVMH, Ping, Cleveland

Golf, Head Sports, Rawlings, Johnson & Johnson, Surgical Specialties, General Dynamics and

the U.S. Army.

103. According to a former LQMT GM/VP of Sales and Marketing for LQMT's golf

division during the Class Period, LQMT was incapable of even producing "credit-card sized

samples of the Liquidmetal alloy at varying thicknesses that would be required and tested by gLny

potential customer before orders for prototypes or products would be placed with LQMT.

According to this former employee, LQMT could not produce the required samples because the

inferior processing equipment purchased by LQMT from Dongyang produced unusable products

with "a lot of holes or voids.

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104. John Kang and other Company Directors were aware of the Company's inability

to develop testable alloy samples because the issue was repeatedly raised in weekly meetings led

by Defendant Kang. According to this same employee, Defendant John Kang seemingly ignored

the Company's production limitations and would simply instruct him to convince potential

LQMT' s customers that "they did not need [testable alloy] samples in order to place purchase

orders for prototypes or products so that the Company could recognize revenues.

105. Similarly, according to a former LQMT project engineer who worked at the

Company during the Class Period, LQMT' s "deal with Calloway exemplified LQMT's

problems in that it was "typical Liquidmetal ... a lot of smoke and BS!

106. Specifically, LQMT' s production facility had been trying to produce golf club

faceplates intended for the eventual sale to Calloway. However, producing an entire golf club

head out of LQMT's alloy was "way beyond LQMT's technical ability. LQMT personnel ran

"fatigue tests on the faceplates that were being produced by LQMT, which involved shooting a

golf ball at the faceplate in order to simulate the action of a golfer striking a golf ball. However,

LQMT was incapable of producing even "one [faceplate] that passed the fatigue tests . In fact,

the faceplates being produced did not simply crack on impact, but rather "exploded !

4. "The Product Claims Are Bullshit": Defendants ' "Sham"Comparisons

107. Notwithstanding the specific examples referenced above, throughout the Class

Period, Defendants' fraudulent scheme also involved touting the purported performance

attributes of Liquidmetal alloys based upon test results involving nonstandard samples - - a fact

that was not disclosed.

108. Throughout the Class Period, Defendants repeatedly touted the merits and

heightened performance attributes of the Liquidmetal alloy against a variety of other metals and

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materials , including stainless steel , copper and titanium.13 For example, On October 4, 2002

LQMT released a press release which touted (in part) that Liquidmetal alloys had "two-to-three

times the strength of high-performance metals , including stainless steel and titanium.

109. Defendants' representations and comparisons were a sham. According to a

former LQMT project engineer during the Class Period, LQMT' s comparison was a fraud

because LQMT failed to base its comparisons and representations upon standardized testing

samples . This former employee who was familiar with the details of the LQMT manufacturing

processes , reported that Defendants' product claims are "bullshit because [LQMT] doesn't make

anything.

110. More specifically, when testing metals for key performance areas (such as yield

strength and elastic limits), the sample size of the materials must be standardized according to

the American Society for Testing and Materials ("ASTM ) - - standards which are "universally

recognized as the baseline for performing comparison testing between metals and materials.

ASTM standards require that testable samples essentially be cylindrical and of a very specific

size and dimension in order to ensure that comparison between materials are fairly made.

111. However, LQMT based the representations regarding the performance

characteristics of Liquidmetal pursuant to tests run on non- standard cube- sized samples of the

alloy, because LQMT could not even produce a cylindrical sample in the size and shape required

by ASTM. Consequently, LQMT's representations concerning the performance attributes of the

Liquidmetal alloy versus the properties of other materials was skewed, misleading, and in fact

meaningless.

13 Even today, LQMT' s website (at http ://www.liquidmetal .com/technology/) represents thepurported merits and performance characteristics of Liquidmetal alloys versus other materials

and metals.

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5. "[W]e own Dongyang": Defendants Insisted on Using InferiorDongyang Equipment 14

112. Notwithstanding the insurmountable problems associated with the Dongyang

machinery and casting equipment initially purchased by LQMT and utilized in connection with

production efforts associated with cellular phone and watch casings, as well as golf club

faceplates , LQMT officers , and Defendant James Kang in particular , continued to pressure

LQMT project engineers to purchase inferior Dongyang equipment needed for other projects.

113. For example, according to a former LQMT project engineer who worked at the

Company during the Class Period, after LQMT had received funding from a government agency

to fund the research and development of armor-piercing ammunition, LQMT needed to procure a

custom-made machine to produce ammunition samples so that LQMT could demonstrate its

production capabilities. Consequently, LQMT posted a request for proposal from various

manufactures to produce the needed machinery, and ultimately received approximately 7 bids.

114. However, on the same day in September 2002 that LQMT posted the request for

proposal , Defendant James Kang began pressuring LQMT project engineers to immediately

place a purchase order with Dongyang for the needed equipment, even before LQMT completed

its request for proposal process or received a comprehensive proposal from Dongyang.15

115. In fact, in contrast to the "significant proposals typically comprised of 100 pages

or more of technical specifications provided by the other vendors competed for the project,

14 According to a former engineering employee, John Kang pushed Dongyang as the vendorbecause of their ownership interest in Dongyang.

15 This same former employee indicated that Defendant Kang's motivation for pressuring theproject managers to immediately submit a purchase order for the needed manufacturingequipment was that LQMT wanted to issue a purchase order (as a fiscal quarter was near ending)so that they would be able to submit the purchase order to the government as a reimbursable costand recognize revenue.

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Dongyang submitted a proposal that was representative in the quality of the machinery they had

previously provided LQMT - - two pages long and lacking the comprehensive detail and

specifications that should have been submitted. The project managers responsible for reviewing

the competing proposals had a "good laugh at the Dongyang submission and ranked it lowest in

terms of overall value. It was Defendants' insistence on utilizing the flawed Dongyang

equipment which contributed to the initial manufacturing defects at LQMT.

6. Defendants Were Incapable of Producing Commercially ViableProducts at a Profit

116. According to a former LQMT project manager during the Class Period, in those

rare instances where LQMT could or did sell even some finished goods to a customer (e.g. Tag

Heuer), LQMT ended up incurring much greater costs in producing the goods than they were

able to recoup in the sale to the customer . For example , LQMT was able to sell watch casings to

Tag Heuer for approximately $40-$49. However, due to LQMT' s design and manufacturing

problems, LQMT' s manufacturing cost for each watch casing sold to Tag Heuer was

approximately $200 - $300 per casing - - resulting in a lossfor the Company ofas much as

$260per unit sold. This prohibitive cost was due to problems with how LQMT designed the

mold for the watch casings.

7. Defendants Utilize Improper Accounting Methods to RecognizeRevenue

117. During the Class Period, Defendants continued to report ever-improving financial

results . However, as detailed below (and in violation of GAAP and SEC reporting

requirements), Defendants used improper accounting practices to falsely overstate revenue and

income during the Class Period in order to fool the market into believing that the Company was

performing (or even capable of performing) as originally reported . See ¶1225-253.

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118. Defendants' representations concerning revenue and income during the Class

Period were materially false and misleading because LQMT improperly recognized revenue on

the sales of alloying equipment and prematurely recognized revenues from equipment sales of

die casting machines . Additionally, LQMT improperly failed to timely recognize bad debt

expense for receivables, which were clearly uncollectible in 2002. These accounting failures

resulted from a series of deliberate management decisions designed to conceal the truth

regarding LQMT' s poor productions capabilities , slowing customer demand, inability to produce

commercially viable products and ineffective business strategies.

119. For example , Defendants caused LQMT to improperly recognize revenue on sales

of alloying equipment made to Growell in the third and fourth quarters of 2002 of $873,000 and

$681,000 respectively, and prematurely recognize revenue on sales of die casting machines in

the first quarter of 2003 in the amount of $2,543,000. Additionally, LQMT improperly

recognized mold revenue of $315,000 to Samsung and revenue of $250,000 to AM Corporation,

in the fourth quarter of 2002.

120. Finally, Defendants caused LQMT to improperly avoid writing down

uncollectible receivables of $169,000 in 2002 for JS Technologies, despite the fact that the

Company was experiencing a significant deterioration in the quality of its receivables.

8. Defendants Failed To Maintain Adequate Internal Controls

121. Despite repeatedly assuring investors that LQMT's internal controls were

sufficient to safeguard the integrity of LQMT' s financial reports , Defendants later admitted in

LQMT's 2003 Form 10-K that their internal controls were inadequate:

(a) Evaluation of disclosure controls and procedures. During thecourse of the audit of our financial statements for the fiscal yearsended December 31, 2001 , 2002, and 2003 , it was determined thatrevenues from certain equipment sales made by the Company toGrowell Metal Co., Ltd. in the third and fourth quarters of 2002

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and the first quarter of 2003 should not have been recognized inthose periods. It was also determined that certain amounts relatingto sales made to Samsung in December 2002, to JS Technologiesin September 2002, and AM Corporation in December 2002 shouldnot have been recognized. And lastly, it was determined thatcertain stock options granted in 2001 and 2002 were not calculatedin accordance with guidelines under APB Opinion No. 25, SFASNo. 123, and EITF as EAT 00-23. These determinations and theassociated restatement ofpreviously issued financial statements,as described more fully elsewhere in this Form 10-K, suggestthat, at the time of the subject transactions and the preparationof our financial statements for the relevant periods, theCompany's disclosure controls and procedures (as defined inRule 13a-15 under the Securities Exchange Act of 1934) did notensure that all information required to be disclosed by theCompany was adequately accumulated and communicated to theCompany's management. Since that time, the Company has madevarious improvements to enhance the reliability of its disclosurecontrols and procedures.

122. The Company' s lack of adequate internal controls was also a major reason for the

resignation of Deloitte, as revealed in LQMT's 2003 Form 10-K:

Deloitte has communicated to the Registrant that it is unwilling tocontinue to rely on the representations of the Registrant's CEO.Deloitte has also previously communicated to the Registrant that,in light of the facts and circumstances surrounding the expectedrestatement, there were material weaknesses in the Registrant'sinternal accounting controls relating to the execution,administration, and accounting for contracts, particularly in theRegistrant's South Korean operations.

9. Defendants Trickle Out Information Concerning the True Nature Ofthe Company While Continuing to Mislead Investors

123. Ultimately, faced with a mounting deficit , and the realization that their business

model would not succeed, as the Company was incapable of manufacturing products in

commercially viable quantities, Defendants began to trickle out some information concerning the

insurmountable hurdles they had encountered. However, along the way (as alleged more fully

below), Defendants continued to praise the revolutionary nature of their products and their

prospects for success while fictitiously recognizing revenue in order to fool the market.

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124. For example, on August 6, 2002, the Company held a conference call with

investment analysts and investors in which Defendant John Kang partially disclosed that the

Company's manufacturing capabilities were not as efficient as previously touted.

125. Notwithstanding this partial disclosure, Defendants continued to make false

affirmative statements throughout the Class Period. For example, on October 31, 2002, LQMT

issued a press release announcing third quarter 2002 financial results (a time period for which

LQMT was subsequently forced to restate revenues as a result of the Company 's improper

revenue recognition), entitled "Liquidmetal Technologies Reports 2002 Third- Quarter Results;

Revenues Increase 229% over Prior Year, EPS Archive Consensus Estimates.

126. Throughout the Class Period, Defendants continued to disseminate false and

misleading information regarding the purported properties and of LQMT' s products, while

touting LQMT' s production facilities and capabilities , financial condition , and prospects for

success , while intermittently disclosing some adverse information in order to keep LQMT's

common stock price artificially inflated throughout the Class Period.

C. FALSE AND MISLEADING STATEMENTS 16

1. False Statements During Fiscal Year 2002

127. In July and August of 2002, LQMT announced development agreements with

numerous new customers , such as Cleveland Golf, LVMH, the U. S. Army, and Surgical

Specialties.

128. On July 18, 2002, LQMT "announced an agreement with Cleveland Golf to

develop golf club heads using a Liquidmetal® alloy.

16 The Prospectus filed in connection with the IPO detailed above comprises additionalmaterially false statements that are also actionable as false statements under the Exchange Act.The reasons for the falsity of these Prospectus statements are detailed in ¶151-54.

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129. Commenting on the new agreement, Defendant John Kang stated:

With strength that is 2-3 times greater than conventionaltitanium and stainless steel and with less energy absorbed atimpact, Liquidmetal alloy delivers maximum performance forgolf clubs.

130. On August 6, 2002 , LQMT issued a press release announcing its second quarter

2002 financial results for the quarter and first half ended June 30, 2002. The press release

announced improved financial results in line with analysts' estimates and was entitled

"Liquidmetal Technologies Second Quarter Revenue Grows 110% Versus Second Quarter of

2001; Company Beats Consensus Estimates for Revenue and Earnings Per Share. The press

release stated:

For the second quarter, revenue increased 110% to $2.1 millionversus the second quarter of 2001, exceeding consensus revenueestimates of $1.9 million. On a sequential quarterly basis, revenuegrew 47% versus $1.5 million in revenue for the first quarter of2002. For the first six months of 2002, revenue improved 90% to$3.6 million versus $1.9 million for the same period a year ago.

131. Commenting on the results , Defendant John Kang stated:

The IPO has allowed us to invest in the scale-up of ourmanufacturing operations and to strengthen our balance sheet. Inaddition, we have seen customer interest in our technologyincrease dramatically as the revolutionary attributes of theLiquidmetal alloy have gained visibility in the marketplace. 17

132. On August 6, 2002, the Company also held a conference call with analysts in

which Defendant John Kang addressed some of the manufacturing difficulties the Company

faced, specifically in connection with the mold designs for the materials. While partially

revealing some of the manufacturing issues Defendant John Kang affirmatively misled investors

17 Unless otherwise indicated, emphasis added.

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on the call by assuring them there were no problems with the manufacturing for one of LQMT's

most material customers, Samsung. In that regard, Kang specifically excluded Samsung from

those customers subject to manufacturing problems, stating: "So where some designs like the

Samsung design worksjustfine, some design really without some modifications, we could only

get basically two cavities in a mold "

133. During the August 6, 2002 conference call, Defendant John Kang also praised the

companies relationship with golf club manufacturers:

Over the last couple of months, we also announced thedevelopment agreement with Cleveland Golf. This is the secondgolf company signed with us, the first being Ping. As you wouldexpect, we're also working with other golf companies, and lope tohave more development agreements with the other majormanufacturers within the near future. I'm truly excited about whatthis application means for us. Liquidmetal with its strengthproperties and its greater elasticity is ideally suited for golfespecially with the recent ruling by the USGA in allowing agreater core, or coefficient in restitution in their golf clubs, as theycall it. It allows Liquidmetals coefficient of restitution or ourelasticity to be maximized, and really, makes Liquidmetal trulythe material that can help them club manufacturers to do justthat. In addition, these companies will help brand Liquidmetalin a way, I believe, that no other application can.

134. On August 14, 2002, Defendants filed a quarterly report on Form 10-Q for the

second quarter of 2002. The second quarter 2002 Form 10-Q was signed by, among others,

Defendant John Kang. The 10-Q repeated the financial results reported in Liquidmetal's August

6, 2002 press release.

135. The second quarter 2002 Form 10-Q, included a certification from Defendant

John Kang, as required by Section 9.06 of the Sarbanes-Oxley Act of 2002, stating:

Solely for the purposes of complying with 18 U.S.C. 1350, I, theundersigned Chief Executive Officer of Liquidmetal Technologies(the "Company"), hereby certifies, based on my knowledge, thatthe Quarterly Report on Form 10-Q of the Company for the quarterended June 30, 2002 (the "Report") fully complies with the

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requirements of Section 13(a) of the Securities Exchange Act of1934 and that information contained in the Report fairlypresents, in all material respects, the financial condition andresults ofoperations ofthe Company.18

136. The 10-Q also states that "[d]uring the second quarter of 2002, the Company sold

a machine to Growell for [$269,000] to be used in the production of Liquidmetal alloy ingots to

be purchased by the Company.

137. On October 4, 2002 LQMT announced that its Liquidmetal alloy would be

featured in a new line of cell phones by Samsung Electronics Company. In the Company's

announcement of the Samsung deal, Defendant John Kang stated:

We are delighted with the close working partnership we haveachieved with Samsung. With two-to-three times the strength ofhigh-performance metals, including stainless steel and titanium,Liquidmetal® alloys are ideally suited to meet the design andtechnical advancements customers expect and for whichSamsung is being recognized in the global marketplace. This isparticularly true in premium- quality cell phone markets, whereconsumers are demanding smaller thinner and more aestheticallypleasing designs along with increased functionality.

138. On October 31, 2002, LQMT issued a press release announcing third quarter 2002

financial results for the quarter and nine months ended September 30, 2002 entitled "Liquidmetal

Technologies Reports 2002 Third-Quarter Results; Revenues Increase 229% over Prior Year,

EPSArchive Consensus Estimates. The press release stated:

Revenues for the third quarter increased 229% to $3.7 million fromrevenues of $1.1 million in the third quarter of 2001. On asequential quarterly basis, third-quarter revenues were 70% higherthan the $2.1 million reported for the second quarter of 2002.Revenues for the first nine months grew to $7.3 million comparedto $3.0 million in the prior year nine-month period, a 141%increase.

18 This certification regarding the accuracy of the Company' s Reports was also repeated byDefendant John Kang in the Company's 3Q2002 Form 10-Q, 1Q2003 Form 10-Q, 2Q2003 Form10-Q, and 3Q2003 Form 10-Q.

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***

While gross profit for the third quarter more than doubled on thestrength of higher revenues, the gross margin was 30.9% comparedto 50.6% in the third quarter of 2001. For the nine months, thegross margin was 39.5% versus 49.4% a year earlier. The marginreduction during the current year periods was an anticipatedoutgrowth of the shift in the company's revenue mix toward agreater percentage of bulk alloy business, which carries a lowermargin than the higher-margin coatings sales that dominatedrevenues in the prior year.

139. Defendant John Kang touted the Company's first production shipment to Growell

and planned shipments to Samsung and LG Electronics as evidence of its product's viability:

Kang noted that the company shipped its first production partsmade of bulk Liquidmetal(R) alloy-an MP3/CD player casingcomponent-to Growell Telecom, Inc. (formerly Jascom Co.,Ltd) in September. Planned September shipments of cellularphone casing components to Samsung Electronics, LG Electronics

and Chinese wireless manufacturer TCL Mobile were delayed toaccommodate customer-driven product design and launch-schedulechanges. Shipments to Samsung began in October, whileshipments to LG Electronics and TCL are expected to begin laterin the fourth quarter, Kang said.

140. In addition, Defendant John Kang also cited product development agreements

with other customers as evidence of LQMT's product's viability:

Samsung's recent and very visible endorsement of Liquidmetal(R)alloys is, in our view, indicative of the enormous potential for ourtechnology across a broad spectrum of existing and new productapplications. In addition to the products currently in production,our active product development programs with such world-classorganizations as LVMH, Ping, Cleveland Golf, Head Sports,Rawlings, Johnson & Johnson, Surgical Specialties, GeneralDynamics and the U. S. Army underscore the exciting growthopportunities ahead for Liquidmetal Technologies.

141. On October 31, 2002, the Company also held a conference call for analysts and

investors during which Defendant John Kang again praised the Company's manufacturing:

We're not hitting on all cylinders yet but we're proving that thetechnology works in a full-scale manufacturing environment and

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through the events in the third quarter, we're aggressively moving

forward with commercialization of our liquid metal alloys into the

mainstream.

142. Defendant John Kang also used the Company's first shipment to customers to

show the viability ofits product:

More important to the point, and certainly more exciting to me andprobably to the rest of you, we are shipping parts to customers.

***

In September, as expected, we shipped our first production parts.Combination MP3 CD cover made liquid metal alloy to ourcustomer Jazzcom . [ Sic.]19 Third quarter results did not includeanticipated per shipment to Samsung , TCL Mobile or LGElectronics. In all three cases as these , are cell phone components.

143. Analysts reacted positively to the Company's announcement. On November 1,

2002, analysts at Robert W. Baird & Co. maintained the Outperform rating and $15 price target,

based on the Company's initial shipments of bulk alloy parts. The analysts reported:

Perhaps most important for the stock, management reiterated itsexpectations for 4Q revenue to be in a $6.0-8.0 range.

144. On November 14, 2002, Defendants filed a quarterly report on Form 10-Q, which

repeated the financial results in the Company's October 31, 2002 press release . The Form 10-Q

is signed by, among others, Defendant John Kang and contained the same certification by

Defendant John Kang as in the 2Q2002 Form 1OQ (see ¶135 above).

145. The 3Q2002 Form 10-Q also contained the following certification by Defendant

John Kang, as required by section 3.02 of the Sarbanes-Oxley Act of 2002, which includes a

certification regarding the adequacy of the Company's internal controls:

I, John Kang, certify that:

19 According to the Company's 1 Q2002 Form 10-Q, Jascom Co., Ltd. is the former name ofGrowell Telecom, Inc.

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1. I have reviewed this quarterly report on Form 10-Q ofLiquidmetal Technologies;

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made,in light of the circumstances under which such statementswere made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements, andother financial information included in this quarterly report,fairly present in all material respects the financialcondition, results of operations and cash flows of theregistrant as of, and for, the periods presented in thisquarterly report;

4. The registrant's other certifying officers and I areresponsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures toensure that material information relating to theregistrant, including its consolidated subsidiaries, ismade known to us by others within those entities,particularly during the period in which thisquarterly report is being prepared;

b) evaluated the effectiveness of the registrant'sdisclosure controls and procedures as of a datewithin 90 days prior to the filing date of thisquarterly report (the "Evaluation Date ); and

c) presented in this quarterly report our conclusions

about the effectiveness of the disclosure controlsand procedures based on our evaluation as of theEvaluation Date;

5. The registrant's other certifying officers and I havedisclosed, based on our most recent evaluation, to theregistrant's auditors and the audit committee of registrant'sboard of directors (or persons performing the equivalentfunction):

a) all significant deficiencies in the design or operationof internal controls which could adversely affect theregistrant's ability to record, process summarize and

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report financial data and have identified for theregistrant's auditors any material weaknesses ininternal controls; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have asignificant role in the registrant ' s internal controls;and

6. The registrant's other certifying officers and I haveindicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factorsthat could significantly affect internal controls subsequentto the date of our most recent evaluation, including anycorrective actions with regard to significant deficienciesand material weaknesses.

Date: November 14, 2002 /s/ James Kang-------------------------------------President and Chief ExecutiveOfficer(Principal Executive Officer)20

146. The 3Q2002 Form 10-Q stated with regard to Growell:

During the second quarter of 2002, the Company sold a machine toGrowell for [$269,000] to be used in the production of Liquidmetalalloy ingots to be purchased by the Company. Additionally, duringthe three months and nine months ended September 30, 2002, theCompany sold [$872,000] of furnace equipment to Growell toproduce the Liquidmetal alloy ingots for the Company. The profiton these sales, [$111,000] was deferred and will be amortizedagainst cost of sales over the remaining term of the technologytransfer agreement between Growell and the Company. During thethree and nine months ended September 30, 2002, the Companypurchased approximately [$410,000] of Liquidmetal alloy ingotsfrom Growell.

***

As of September 30, 2002 , the total receivables from Growell andentities related to Crowell was approximately $ 1.6 million.

20 A similar affirmance of the adequacy of the Company' s internal controls was contained in theFY2002 Form 10-K and 1Q2003 Form 10-Q.

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147. On February 20, 2003, LQMT issued a press release announcing financial results

for the fourth quarter and year end 2002. The press release touted `Quarterly Revenues of$5.9

Million Exceeded Prior Year by 572% and Grew 61% On a Sequential Quarterly Basis, stating:

Revenues for the fourth quarter achieved a nearly seven- foldincrease to $5.9 million from revenues of $874,000 in the fourthquarter of 2001. On a sequential basis, fourth-quarter revenueswere 61% higher than the $3.7 million in revenues reported for the2002 third quarter ended September 30. Revenues for the yeargrew to $13.1 million compared to $3.9 million in 2001, a 238%increase.

148. Commenting on the results, Defendant John Kang praised the viability ofthe

Company's product:

These results mark an exciting milestone for the company: the startof full production at our new state-of-the-art manufacturingfacility . Perhaps more important, they signal our trajectory ofgrowth as we enter 2003. With each passing week and month, weare gaining momentum and demonstrating the viability of ourrevolutionary material technology in a high-volumemanufacturing environment.

149. The February 20, 2003 press release further stated:

The revenue gains largely resultedfrom a sharp rise in volume ofproducts manufactured from the company 's proprietary bulkLiquidmetal(R) alloys. Construction of the company's first fullmanufacturing plant was completed in September, accelerating theramp-up of manufacturing capacity and providing a platform forthe growth in sales of bulk alloy products and related revenuesachieved in the fourth quarter.

150. The press release summarized LQMT' s seemingly successful 2002 results and

noted the following "significant accomplishments in 2002 :

• Entered new product development agreements with leadingglobal customers, including TAG Heuer (watch casings andcomponents), LVMH (luxury goods), the U.S.Army/General Dynamics Corporation (armor-piercingammunition), Surgical Specialties (ophthalmic blades),DePuy Orthopedics (knee replacement systems) andLockheed Martin (defense armor systems), while

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continuing product development programs with Rawlings,Head Sports , PING, Cleveland Golf, Samsung Electronics,LG Electronics, Motorola and the U. S. Department ofDefense;

• Began mass production of Liquidmetal parts from thenewly dedicated plant during the fourth quarter.

151. Furthermore, Defendant John Kang added in the press release:

While we are gratified by these and other accomplishments, ourfocus now is on taking Liquidmetal Technologies to dramaticallyhigher levels of operating performance and achieving our objectiveof profitability in 2003. As we enter 2003, many ofour customersare poised to launch their first Liquidmetal products. We areexcited by the prospect of multiple Liquidmetal products enteringmultiple markets and the momentum this will build for ourcompany.

152. On the same day, the Company held a conference call for analysts and investors.

During the call, Defendant John Kang praised the Company' s progress in 2002 in proving the

viability of its product:

Q4 was a key transitional quarter and 2002 was clearly afundamental year for Liquidmetal . We entered the year with thetechnology that manypeople believe was too good to be true, andweproved that viability in a mass production environment.

153. Defendant John Kang also stated during the conference call:

We're also making steady progress with Motorola. Actually,multiple divisions of Motorola. As we have discussed in the pastthat perhaps the most rigorous customer we have in terms ofproduct testing, mature validation of process verification. As youwould expect, even their Six Sigma were impatient. They havekept a challenged and better skill . Our current outlook is for firstproduct to break in Q2.

154. The Company continued to assure analysts and investors that it could meet its

revenue targets through its manufacturing efficiencies. During the call, CFO Brian McDougall

stated:

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In the past, I have spoken to certain key metrics to drive ourproductivity and ultimately translates to revenue throughput,specifically, cavities per mold and machine cycle time. These twomeasures drive out our revenue per shot that is the revenue werealized each time our machines open and close to produce a part.

For the fourth quarter, we have modeled our revenue guidancebased on a total of about 1 . 3 million shots , 1.5 cavities per mold, a45 second cycle time, in an average $3 part price . Because of thecancelled product launch by TCL, delayed launch by LG, andcellphone market turbulence , we felt short on the shots total andthat essentially looked -- constrained our revenues from partproduction for the quarter.

In support of our revenue outlook for the first quarter, ourassumption is for an average of two cavities per mold versus 1.5cavities while we are maintaining our assumption on cycle time at45 seconds.

155. On March 31, 2003 , LQMT filed its 10-K for the fiscal year ended December 31,

2002, signed by, among others, Defendants John Kang and James Kang and containing the

certifications as in the 3Q2002 Form 10-K (see ¶1135 & 145 above). The 10-K repeated the

financial results reported in the Company's February 20, 2003 press release.

156. The Company's 2002 Form 10-K claimed the cost advantages of the LQMT

product:

Liquidmetal alloys have the potential to provide significant costadvantages over other metals and alloys in certain applications.Because bulk Liquidmetal alloys have processing characteristicssimilar in many respects to plastics, Liquidmetal alloys can inmany cases be shaped efficiently into intricate, sophisticated,engineered products in a substantially finished form. Thiscapability eliminates or reduces certain finishing steps, such asgrinding, shaping or forming, and therefore has the potential tosignificantly reduce processing costs associated with makinghigh-fidelity parts in high volume.

Additionally, because the processing of Liquidmetal alloys doesnot require capital- intensive heavy industrial equipment such asthat found in foundry and forging operations, Liquidmetal alloyscan be processed with a smaller machinery footprint, which allowsfor efficient development of facilities and reduced permitting and

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regulatory costs. We believe that these processing advantagesand lower capital costs will enable production to scale up fasterand more efficiently than foundry and forging operations. Wealso believe that these advantages may allow our customers anopportunity maintain or improve the performance of theirproducts without a commensurate increase in cost.

157. The 2002 Form 10-K also clearly indicated the materiality of the Growell and

Samsung contracts to LQMT, stating:

During 2002, three customers accounted for 10% or more of ourrevenue from continuing operations. Revenue from Samsungrepresented 15%, Growell Metal, Inc. represented 12% anddefense-related contracts with three departments of the UnitedStates of America represented 10% of revenue from continuingoperations for the year ended December 31, 2002.

***

During the second quarter of 2002, the Company sold a machine toGrowell Metal for [$269,000] to be used in the production ofingots to be purchased by the Company. Additionally, during theyear ended December 31, 2002, the Company sold [$1,569,000] offurnace equipment to Growell Metal to produce ingots for theCompany. The accumulated profit on these sales , [$80,000], wasdeferred and will be amortized against cost of sales over theremaining term of the technology transfer agreement betweenGrowell Metal and the Company. During the year endedDecember 31, 2002, [$24,000] of the deferred profit was amortizedinto cost of sales. At December 31, 2002, the remaining deferredprofit balance was [$56,000] and the related trade receivablebalance due from Growell Metal was [$160,000].

158. The Form 10-K further stated:

[I]n the third quarter of 2002, we shipped production quantities ofLiquidmetal alloy casing components to J.S. Tech, a South Koreanelectronics manufacturer, for inclusion in a combination MP3/CDplayer.

2. Reasons For Falsity: FY2002 Statements

159. The statements detailed above were materially false and misleading because:

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a. Defendants violated GAAP by failing to maintain adequate internal

accounting controls , improperly recognizing revenues and failing to timely write off

uncollectible accounts receivable (see ¶1117-120, 225-253);

b. as Defendants were forced to admit in connection with the restatement,

Defendants lacked the requisite internal and financial controls but nonetheless falsely assured

investors that the Company's internal controls were free of significant deficiencies and

weaknesses (see ¶¶121-122);

c. LQMT' s manufacturing process was rampant with quality and production

problems (see ¶187-91);

d. the equipment LQMT purchased from Dongyang (a company in which

LQMT had an ownership interest) was inferior and could not effectively manufacture products in

the volumes or at the pricing required by customers (see ¶¶112-115);

e. LQMT was unable to produce adequate samples or prototypes for

interested customers (see ¶¶102-111);

f. LQMT was incapable of mass producing bulk alloy products in

commercially viable quantities at a price customers were willing to pay (see ¶116);

g. LQMT could not achieve an actual production cycle time of 45 seconds

(see ¶¶92-101); and

h Motorola and Samsung "pretty quickly determined that LiquidMetal

couldn't deliver. A former project engineer recalled "rumblings to the effect that Motorola

and Samsung were dissatisfied with LQMT' s inability to deliver the cell -phone products.

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3. False Statements During FY 2003: Defendants Continue to Misleadthe Public Regarding LQMT's Manufacturing Capabilities

160. On April 3, 2003, LQMT announced that "TAG Heuer, the fourth brand in luxury

watch making, is featuring high-performance Liquidmetal(R) alloy as the casing of a new special

edition , state-of-the - art digital movement timepiece . Commenting on TAG Heuer' s decision,

Defendant John Kang stated, "[t]his merger ofnew material technology and legendary quality

validates the superior strength, finish andperformance characteristics ofour revolutionary

alloys. "

161. On April 14, 2003 LQMT issued a press release announcing anticipated first

quarter 2003 results. The press release titled "Liquidmetal Technologies Reports Anticipated

First Quarter Revenues; Conference Call!Webcast Detailing Results Scheduledfor May 1

stated:

[B]ased on preliminary estimates, revenues are expected to beapproximately $6.6 million for its first quarter ended March 31,2003.

162. On May 1, 2003, LQMT issued a press release reporting financial results for the

quarter ended March 31, 2003. The press release titled "Liquidmetal Technologies Reports 2003

First Quarter Results stated:

Revenues for the first quarter were $6.6 million, a 348% increaseover revenues of $1.5 million for the first quarter of 2002 and a12% sequential increase over revenues of $5.9 million in the fourthquarter of 2002.

163. John Kang continued to praise LQMT's bulk alloy business:

We are pleased to report solid growth in our bulk alloy segmentversus the prior year and sequentially. These results reflect thepositive impact of an expanded business strategy, increasedrevenues from product development, and the manufacturing offirst components for LG Electronics and new parts for Samsung,demonstrating their continued commitment to incorporatingLiquidmetal alloy across multipleproducts.

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164. The Company also announced a 5-year strategic agreement with Growell and the

sale of 5 casting machines to Growell in connection with that deal, stating:

Revenues from equipment sales during the quarter included $2.5million from the sale of Liquidmetal alloy casting machines toSouth Korea-based Growell Metal, Inc., a KOSDAQ-listedcompany, as part of a five-year strategic agreement finalized inMarch 2003. The agreement provides Growell Metal with theright to manufacture and market an exclusive line of automotiveparts made from Liquidmetal alloys for customers in South Korea.Liquidmetal Technologies will receive royalty payments from thesale of Liquidmetal alloy parts produced and sold by Growell.

***

The agreement with Growell Metal capitalizes on LiquidmetalTechnologies' advanced alloy technology and Growell's 30 yearsof experience die casting products for South Korea-basedcompanies in the automotive, farm machinery and electronicproduct industries. It signals a first step in the expansion ofLiquidmetal Technologies' business strategy by establishing analliance with a proven partner to introduce the company's alloytechnology into a previously untapped market. It also expands astrategic partnership between the two companies that began in July2002 when Growell contracted to manufacture alloy ingots asfeedstock for Liquidmetal's Pyongtaek, South Korea plant.

"This new agreement is a logical progression of our bulk alloybusiness strategy. Growell has a long history in metal die-casting,extensive experience with our unique alloy technology, andexisting relationships with our team of engineers and technicalstaff. Moreover, their established presence in South Korea'sautomotive marketplace opens a new market opportunity toLiquidmetal Technologies that might otherwise have taken usyears to develop organically , said Kang.

165. The Company held a conference call with analysts in connection with the release

of 1 Q2003 financial results, in which Defendant John Kang noted:

From the positive side the number of parts produced during thequarter grew to eight parts for a cell phone model. This was asignificant increase over two parts produced in the fourth quarter,which is really the first full quarter of operations at ourmanufacturing plant. Seven of the eight parts were to our majorcustomer, Samsung, and one was for LG Electronics.

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166. Defendant John Kang also pointed out the significance of the Growell

relationship:

Our expanded partnership with GROWELL Metal signs thebroaden strategic focus that reflects the growing acceptance ofour technology and the maturing of our proprietarymanufacturing process.

167. CFO Brian McDougall commented during the conference call on the Company's

progress with manufacturing:

My practice on these calls is to give a quick update on how we areprogressing with certain key manufacturing measures. Principallycavities per mold and cycle time. We are continuing to see steadyimprovements through our experience building molds. In the firstquarter we achieved our goal of a minimum of two cavities permold. And for the second quarter we expect to be at two to threecavities per mold. Cycle time typically remains in an average of45 seconds.

168. In response to a question from Edward Nudbarn of Third Rich Capital regarding

Motorola and other cell phone manufacturers, Defendant John Kang stated:

[O]bviously there's been product launches by Samsung and LGnow. And we have as we've talked about in a couple of quartersbefore we have, continue to work with Motorola. Right now wehave, and basically in prototyping that I think is really winding upand so forth to the end of the prototyping cycles. You know, we'reworking on three different product lines with them. I can't confirmexactly when the launches would be. We do expect, you know,one of them at least, you know, toward the end of this quarter ifnot in the third quarter. And so that's what we can tell you withconfidence is that there's three models of the prototyping. And ourexpectations is that, you know, that they will be going intoproduction.

169. In response to a question from Peter Lipnick of Robert W. Baird & Co. regarding

the five casting machines sold to Growell during the quarter, CFO Brian McDougall stated:

How the accounting for that was recognized is because we havemade that part of our strategic business that was recognized as asale, including revenue. And so the assets were basicallyreclassified from the balance sheet And as a result of the sale

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were reflected through cost to goods sold. There's a real importantdistinction there, if this was, you know, we've, you know, workedwith our independent auditors and they understand the strategicdirection that we're taking with these kinds of transactions.

170. Analysts reacted positively to the Company's announcement regarding first

quarter 2003 revenues , the Growell deal, and cost-cutting measures . On May 2, 2003, Robert W.

Baird & Co. analysts commented: "Commercial acceptance of LQMT alloys continues to

expand highlighting the favorable performance profile of the alloys....

171. On May 15, 2003, Defendants filed a quarterly report on Form 10-Q for the first

quarter 2003, which repeated the financial results in the Company's May 1, 2003 press release.

The second quarter 2003 Form 10-Q was signed by, among others, Defendant John Kang and

contained the same certifications by Defendant John Kang as in the 3Q2002 Form 10-Q (See ¶¶

135 & 145 above).

172. The Form 10-Q stated with regard to Growell:

During the first quarter of 2003, the Company sold [$2,544,000] ofcasting equipment to Growell Metal for use in the processing ofbulk Liquidmetal alloy products. As part of a five-year strategicagreement finalized in March 2003. Growell Metal has the right tomanufacture and market an exclusive line of automotive partsmade from Liquidmetal alloys for customers in South Korea. TheCompany will receive royalty payments from the sale ofLiquidmetal alloy parts produced and sold by Growell. AtMarch 31, 2003, the Company had a receivable from GrowellMetal of [$2,500,000] related to the sale of this equipment.

During the year ended December 31, 2002, the Company sold[$1,569,000] of furnace equipment to Growell Metal to produceingots for the Company. The accumulated profit on these sales,[$80,000] was deferred and will be amortized against cost of salesover the remaining term of the technology transfer agreementbetween Growell Metal and the Company. The agreement is for atwo-year period beginning in February 2002. At March3l, 2003,the remaining deferred profit was [$44,000]. During the threemonths ended March3l, 2003, the Company sold [$3,000] ofproducts and services to Growell Metal related to the maintenanceof this furnace equipment. At March3l, 2003, the Company had a

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receivable from Growell Metal of [$148,000] related to the sale ofthis equipment to Growell Metal.

173. In preparation for the May 3, 2002 annual meeting of shareholders , LQMT issued

its 2002 Annual Report. In the 2002 Annual Report LQMT stated:

We must stress that Liquidmetal's breakthrough is not just onealloy, but our ability to make amorphous metals in bulkform. Toput it another way, our value is a broad technology platform, whichwill be applicable to many different metals and manufacturingprocesses . By the end of 2003, we expect to have four alloysavailable for commercial use, each designed to address specificperformance parameters.21

***

Our technology platform was significantly bolstered in 2002when we proved our ability to make products on a commercialscale.... We have mass-produced casing components for cellphones.

174. In discussing the Company's electronic product casings business , the 2002

Annual Report emphasized the Samsung relationship , stating:

In September 2002 we shipped our first manufactured parts - acombination MP3/CD player casing - and by year's end we weremass-producing handset components for Samsung. We currentlyare in the validation process with leading U.S. electronicscompanies, including Motorola, and are working with Samsungon Liquidmetal® components for several of its nextgenerationphones. Through these applications, the electronics industry will

be the first to exploit Liquidmetal's capabilities.

175. The 2002 Annual Report also incorporated the financial results reported in the

Form 10-K filed for the year ended December 31, 2002.

176. On May 22, 2003, the Company announced it had entered into an agreement with

Sony Corporation to develop an exterior casing made from Liquidmetal® allows for Sony digital

still cameras.

21 Emphasis in original.

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177. Defendant John Kang commented on the agreement with Sony:

Developing casing components for a world-wide consumerelectronics company in the class of Sony Corporation is obviouslya significant advance in our efforts to establish Liquidmetal alloysas the material of choice for product applications where superiorstrength, durability and aesthetics are driving designconsiderations. With strength two-to-three times greater thantitanium and the ability to be molded to precision net shapes, our

alloys are ideally suited for use as a high-performance cameracasing.

178. On July 10, 2003, LQMT further announced that HEAD Racquet Sports would

launch a Liquidmetal® racquet line incorporating Liquidmetal® technology.

4. Reasons For Falsity: FY 2003 Statements

179. The statements detailed above were materially false and misleading because:

a. Defendants violated GAAP by failing to maintain adequate internal

accounting controls , improperly recognizing revenues and failing to timely write off

uncollectible accounts receivable (see ¶1117-120,225-253);

b. as Defendants were forced to admit in connection with the restatement,

Defendants lacked the requisite internal and financial controls but nonetheless falsely assured

investors that the Company's internal controls were free of significant deficiencies and

weaknesses (see ¶¶121-122);

c. LQMT' s manufacturing process was rampant with quality and production

problems (see ¶187-91);

d. the equipment LQMT purchased from Dongyang (a company in which

LQMT had an ownership interest) was inferior and could not effectively manufacture products in

the volumes or at the pricing required by customers (see ¶¶112-115);

e. LQMT was unable to produce adequate samples or prototypes for

interested customers (see ¶¶102-111);

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f LQMT was incapable of mass producing bulk alloy products in

commercially viable quantities at a price customers were willing to pay (see ¶116); and

g. LQMT could not achieve a production cycle time of 45 seconds (see ¶192-

101).

D. THE FRAUD SLOWLY UNRAVELS: RESTRUCTURING ANDRESIGNATIONS

1. Defendants Announce Restructuring Efforts Undertaken WhileReporting False 2Q2003 Results

180. Between July 31, 2003 and May 13, 2004, negative information concerning the

gravity of LQMT' s manufacturing inefficiencies , the financial difficulties in which the Company

found itself, problems with LQMT' s relationship with Growell, and accounting problems began

to belatedly surface. Nonetheless, Defendants continued to conceal material adverse facts from

the public during this time.

181. On July 31, 2003, LQMT issued a press release entitled "Liquidmetal

Technologies Reports 2003 Second Quarter and Six-Month Results announcing financial results

for the quarter and six months ended June 30, 2003. The release stated:

Revenues for the second quarter increased 199% to $6.4 millionfrom revenues of $2.1 million for the second quarter of 2002. On asequential quarterly basis, revenues were slightly below the $6.6million generated in the first quarter of 2003, while roughly in linewith management's previously announced revenue outlook for thequarter. Revenues for the first six months of 2003 were 260%higher, at $13.0 million versus $3.6 million a year ago.

182. Defendant John Kang again emphasized the restructuring:

As outlined during our last quarterly update, we have engaged inintensive efforts to restructure the company's operations andsharpen our product focus in support of our stated objective ofachieving profitability in the fourth quarter of 2003. This involveda rigorous assessment of both our progress and shortcomings as astill emerging company and resulted in a substantial realignment ofour organizational size, facilities, marketing and manufacturing

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emphasis. With these efforts now largely behind us, we arerealizing benefits that we believe will be reflected in our resultsgoing forward, beginning with our ongoing third quarter.

183. Defendant John Kang recounted, among others, the following major restructuring

steps undertaken during the second quarter of 2003:

• unprofitable parts that disproportionately consume plantresources and impact costs are being eliminated from the

company's manufacturing and R&D pipeline or phased outas obligations are fulfilled;

• manufacturing and administrative facilities have beenconsolidated; and

• new pricing and manufacturing feasibility thresholds havebeen instituted to optimize product development efforts andpersonnel utilization.

184. On the same day, the Company held a conference call for analysts and investors,

during which Defendant John Kang recounted the Company's restructuring efforts and the

"lessons learned in the prior quarters. Kang also stated with regard to Motorola:

The obvious missing link in our outlook for casings is Motorola,our long-term partner in product development. We've taken instride that this will be a long courtship, but that products willeventually reach the market. Probably not this year, however. OneMotorola division working with us for several months has beenforced to halt the project, due to curtailment of the new productexpenditure (indiscernible) the principal wireless customer,delaying indefinitely a launch we had forecasted for this quarter.We've taken ourselves out of the running on another part withanother division, due to price limitation. But we continue to workwith them on other opportunities, where margins wuld be moresuitable.

185. On August 14, 2003, the Company filed its quarterly report on Form 10-Q,

repeating the financial results announced in the July 31, 2003 press release . The Form 10-Q was

signed by, among others, Defendant John Kang and contained the same certification by

Defendant John Kang as in the 2Q2002 Form 10-Q (See ¶135 above).

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186. The Form 10-Q stated with regard to Growell:

During the six months ended June 30, 2003, Growell Metalpurchased [$2,636,000] of raw materials from the Company's ownraw material stock to use in the production of the ingots. TheCompany purchased [$3,149,000] of ingots from Growell Metalduring the six months ended June 30, 2002. The net profit on thesale of the raw materials sold to Growell Metal is netted against thecost of the ingots purchased from Growell Metal. At June 30,2003, the Company had a net payable to Growell Metal of[$186,000] related to these transactions.

During the first quarter of 2003, the Company sold [$2,544,000] ofcasting equipment to Growell Metal for use in the processing ofbulk Liquidmetal alloy products. As part of a five-year strategicagreement finalized in March 2003, Growell Metal has theexclusive right to manufacture and market automotive parts madefrom Liquidmetal alloys for customers in South Korea. TheCompany will receive royalty payments from the sale ofLiquidmetal alloy parts produced and sold by Growell. At June 30,2003, the Company had a receivable from Growell Metal of[$2,057,000] related to the sale of this equipment.

During the year ended December 31, 2002, the Company sold[$1,569,000] of furnace equipment to Growell Metal to produceingots for the Company. The accumulated profit on these sales,[$80,000] was deferred and will be amortized against cost of salesover the remaining term of the technology transfer agreementbetween Growell Metal and the Company. The agreement is for atwo-year period beginning in February 2002. At June 30, 2003, theremaining deferred profit was [$32,000]. During the six monthsended June 30, 2003, the Company sold [$7,000] of products andservices to Growell Metal related to the maintenance of thisfurnace equipment. At June 30, 2003, the Company had areceivable from Growell Metal of [$157,000] related to the sale ofthis equipment to Growell Metal.

187. On August 25, 2003, Robert W. Baird & Co. analysts reduced its rating of LQMT

from Neutral to Underperform, stating:

Our forecasts have historically assumed that growth would beextremely rapid once early adopters became LQMT customers, butwe are no longer comfortable with that assumption.

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The Baird analysts noted that LQMT had been unable to convert Motorola's interest into an

order, in part because it was unable to hit Motorola's required price point for an application

LQMT was developing for Motorola.

188. After Robert W. Baird & Co. dropped its rating of LQMT stock, CBS

MarketWatch and AFX News Limited reported that LQMT shares "plunged almost 22 percent

to $3.83 on heavy volume of 2.5 million in recent trades. Earlier in the session, the stock

plumbed to a 52-week low of $3.44.

2. Defendants Announce a Change in Business Strategy While StillIssuing Misleading 3Q2003 Estimates

189. On October 9, 2003, LQMT issued a press release entitled, "Liquidmetal

Technologies Provides Third Quarter Revenue Estimate, Introduces New Operating Strategy

Focused on Strategic Partnerships. The press release announced lower estimates for the third

quarter 2003:

Full details of third quarter results will be announced on October30; however, based on preliminary results, the company today saidit expects revenues for the third quarter to be in the range of $3.2to $3.5 million. This compares to revenues of $3.7 milliongenerated in the same quarter of 2002 and $6.4 million recorded inthe 2003 second quarter.

190. The Company blamed the lower estimates on the fact that the prior quarter

benefited from the sale of equipment, as well as lower-than-expected shipments of cellular phone

components, largely due to the inability to manufacture at planned costs.

191. In addition, the press release also announced that LQMT was modifying its

business strategy. Key elements of the modified strategy included:

• Manufacturing of casing components for mass-market cellphones has been unprofitable and is being sharply curtailed.Future production of electronic casing components will belimited to select products that require the high-performance

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qualities of Liquidmetal alloys and can be pricedaccordingly.

• In keeping with this emphasis on performance-drivenproduct opportunities, internal manufacturing andmarketing emphasis will be focused on higher-margin,value-added products in the company's targeted sports andmedical markets.

• Strategic partnerships, principally in the form of technologylicensing and product distribution relationships, will beaggressively pursued with industry partners whoseresources, market position and established technologies orprocesses will facilitate more rapid and effectivedevelopment and commercialization of new productsemploying Liquidmetal alloys. This will enable thecompany to operate on a less capital- intensive basis thanunder its previous, internalonly manufacturing strategy.

192. Defendant John Kang explained the strategy change:

We initially targeted the mass-production cell phone casingsmarket because of its potential for high product volumes andbranding opportunities; however, current manufacturing processlimitations, higher-than-expected production costs, unpredictablecustomer adoption cycles, short product shelf life, and intensepricing pressures ha'e made it difficult to compete profitably inthis commodity-driven market at this stage of our company'sevolution.

Our revised strategy addresses the reality that our unprecedentedtechnology is still new in the marketplace, and that while we havemade great progress in developing and improving our proprietaryprocesses over the past year, they are not yet refined to the pointthat we can cost-effectively manufacture price-sensitive,commodity products.

193. For the first time, the Company revealed that it no longer expected to reach

profitability in 2003:

As an outgrowth of this timing shift, the company said it no longerexpects to reach profitability in the fourth quarter of 2003.Profitability will continue to be a primary focus of operations, andwith the deployment of the modified business strategy, thecompany will make further statements about its outlook forreaching profitability when appropriate.

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3. Defendants Reveal A Problem with Growell Deal But Continue toIssue False and Misleading 3Q2003 Financial Results

194. On October 30, 2003 LQMT announced results for the quarter and nine months

ended September 30, 2003 in a press release titled "Liquidmetal Technologies Reports 2003

Third Quarter and Nine-Month Results. The Company stated:

Revenues for the third quarter were $3.5 million compared with

$3.7 million in the third quarter of 2002. Revenues for the firstnine months of 2003 were $16.5 million compared with $7.3million in the prior year period.

195. The Company held a conference call for analysts and investors in connection with

its third quarter 2003 results release , during which CFO Brian McDougall commented on

LQMT's changed business strategy:

Initial targets to this narrow focus are expected to be certainelectronic casing components currently in development forproduction, medical products including surgical instrumentscurrently in prototyping and targetedfor launch in thefirst halfof2004 and sporting goods products, with emphasis on golf clubOEMs with whom we are in various stages of productdevelopment.

196. In response to a question from Peter Lisnick of Robert W. Baird & Co. regarding

the termination of the Sony digital still camera project, CFO Brian McDougall stated "It did have

a negative gross profit impact on its prototyping activities. That part is going away. There were

some things with Sony in regard to design specifications, line requirements and deadlines that

made the project no longer feasible for both sides...."

197. On November 14, 2003, Defendants filed a Form 10-Q for the third quarter 2003,

which repeated the financial results in the October 30, 2003 press release . Defendant John Kang,

among others , signed the Form 10-Q and the Form 10-Q contained the same certification as that

in the 2Q2002 Form 10-Q (See ¶135 above).

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198. The third quarter 2003 Form 10-Q repeated the background of the Company's

relationship with Growell, and stated:

During the nine months ended September 30, 2003, Growell Metalpurchased [$3,126,000] of raw materials from the Company's ownraw material stock to use in the production of the ingots. TheCompany purchased [$3,980,000] of ingots from Growell Metalduring the nine months ended September 30, 2002. The net profiton the sale of the raw materials sold to Growell Metal is nettedagainst the cost of the ingots purchased from Growell Metal. AtSeptember 30, 2003, the Company had a net payable of [$176,000]to Growell Metal related to these transactions.

During the first quarter of 2003, the Company sold [$2,544,000] ofcasting equipment to Growell Metal for use in the processing ofbulk Liquidmetal alloy products. As part of a five-year strategicagreement finalized in March 2003, Growell Metal has theexclusive right to manufacture and market automotive parts madefrom Liquidmetal alloys for customers in South Korea. TheCompany will receive royalty payments from the sale ofLiquidmetal alloy parts produced and sold by Growell Metal. AtSeptember 30, 2003, the Company had a receivable of[$2,134,000] from Growell Metal related to the sale of thisequipment.

During the year ended December 31, 2002, the Company sold[$1,569,000] of furnace equipment to Growell Metal to produceingots for the Company. The accumulated profit on these sales,[$80,000] was deferred and will be amortized against cost of salesover the remaining term of the technology transfer agreementbetween Growell Metal and the Company. The agreement is for atwo-year period beginning in February 2002. At September 30,2003, the remaining deferred profit was [$21,000]. During the ninemonths ended September 30, 2003, the Company sold [$7,000] ofproducts and services to Growell Metal related to the maintenanceof this furnace equipment. At September 30, 2003, the Companyhad a receivable of [$161,000] from Growell Metal related to thesale of this equipment to Growell Metal.

199. The 3Q2003 Form 10-Q revealed for the first time that there were significant

problems with the Growell deal, stating:

Subsequent to October 31, 2003, the Company received fromGrowell Metal some updated information regarding the status ofGrowell Metal's ingot supply operations, and such information

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suggests that, due to financial challenges associated with theoperations, Growell Metal may desire to modify its relationshipwith the Company. The Company and Growell Metal are currentlydiscussing these issues. As of November 14, 2003, managementbelieves it is too early to determine the outcome of these matters.

200. Despite hinting of problems to come with Growell, Defendants still failed to

disclose the full extend of the accounting fraud.

4. Defendants Announce Settlement with Growell

201. On January 15, 2004, the Company filed a Form 8-K signed by Defendant John

Kang reporting that LQMT had entered into a settlement agreement with Growell effective

January 10, 2004. The Form 8-K further stated:

[T]he Company has been engaged in continuing discussions withGrowell Metal regarding the nature and structure of therelationship between the two parties. As a result of thesediscussions, Growell Metal has indicated that it will discontinue itsingot supply operations and has recently threatened to pursue legalclaims against the Company's South Korean subsidiary("Liquidmetal Korea"). These claims were based on an allegedbreach by Liquidmetal Korea of a Product Supply Agreemententered into between Growell Metal and Liquidmetal Korea inJune 2002. Although Liquidmetal Korea has denied liability onthese claims, because the claims involve complex issues of factand contractual interpretation, the Company has been unable topredict with any certainty whether a court of law in South Koreawould have imposed any liability on Liquidmetal Korea in theevent that a legal proceeding would have been commenced, norcould the Company predict the extent of damages that may havebeen awarded.

In addition to the foregoing, in March 2003, Liquidmetal Koreasold Growell Metal five proprietary Liquidmetal alloy castingmachines and granted to Growell Metal a license to use suchcasting machines to manufacture auto parts for South Koreanautomobile manufacturers (the "Diecasting Agreement").Immediately prior to the Settlement Agreement, LiquidmetalKorea had an unpaid account receivable from Growell Metal in theamount of approximately $2.1 million (US) for the purchase ofthese casting machines. In addition to discontinuing its ingotsupply operations, Growell Metal has also recently indicated to theCompany that it may discontinue this Liquidmetal casting

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business. Although Growell Metal had never denied its obligationto pay this outstanding receivable and had not alleged a breach ofthe Diecasting Agreement, the Company had recently come tobelieve that, based on the pendency of the dispute under theProduct Supply Agreement, the discontinuation of Growell Metal'singot supply business, and the potential discontinuation of GrowellMetal's casting business, there is substantial doubt as to whetherthe Company would have been able to collect such accountreceivable.

202. The 8-K further detailed the terms of the settlement agreement to include:

• Pursuant to and upon the execution of the SettlementAgreement, Growell Metal has satisfied in full the $2.1million account receivable to Liquidmetal Korea for thecasting machines bought by Growell Metal in connectionwith the Diecasting Agreement.

• Pursuant to the Settlement Agreement, Liquidmetal Koreahas purchased from Growell Metal approximately $4.9million in equipment and materials inventory that was usedin Growell Metal's ingot supply operations. Approximately$2.1 million of the purchase price for this equipment hasbeen paid through the offsetting of the $2.1 million castingmachine receivable from Growell Metal as describedabove, while the remaining balance of approximately $2.8million must be paid by December 31, 2004 in cash or byCompany common stock (as decided by the Company). Ifthe amount is paid in Company stock, the stock will bevalued for such purpose on the basis of the average closingprice of the Company's common stock during the fivetrading days immediately preceding the date on which thepayment is made. The Company intends to use thisequipment in its manufacturing operations or itslicensing/equipment sales business.

5. LQMT Announced $5-7 Million Private Placement

203. On January 16, 2004 LQMT issued a press release announcing that it had "entered

into a definitive agreement to sell $5.0 and 7.0 million of 6.0% senior convertible notes due 2007

to Michigan Venture Capital Co., Ltd., a South Korea-based institutional investment firm, in a

private placement....

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6. Defendants Reveal Need for Restatement And Admit To RecognizingFictitious Revenues

204. On February 20, 2004, LQMT issued a press release entitled "Liquidmetal

Technologies Expects to Restate Prior Period Revenues From Equipment Sales To Former

Supplier Growell Metal. The press release revealed for the first time that a restatement would

be necessary due to improper revenue recognition methods associated with the sales of alloy

melting and casting equipment to Growell. The press release issued that day stated:

The expected restatement of revenues from the equipment sales isa result of an analysis initiated by the company based upon thedispute settlement and a determination that the original revenuerecognition decision did not include consideration of at least oneagreement identified during a review of the originating transactiondocuments. The review and analysis indicated that the equipmentsales should have been viewed as being contingent upon LMK'scontinued performance under its agreements with Growell, whichwould have precluded revenue recognition until the contingencyended.

The sales to Growell, which were previously disclosed in thecompany's public financial reports, were comprised of $1.7 millionof revenue from alloying equipment sales in the third and fourthquarters of 2002 and $2.5 million of revenue from the sale ofLiquidmetal die casting machines in the first quarter of 2003.However, an ongoing analysis and review by the company willdetermine the full extent of the expected restatement andcorresponding impact on previously reported results of operations.

The company said it will report on the full extent of the financialrestatement upon completion of the analysis.

7. LQMT Completes Private Placement

205. On March 3, 2004, LQMT issued a press release announcing that the Company

had completed its previously announced private placement, expanding the private placement to

$10 million and to include sales to IndiGo Ventures LLC, a New York-based investment firm

that served as a financial advisor to LQMT for the transaction.

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206. On March 5, 2004 Robert W. Baird & Co. analysts noted that `te]xisting

shareholders ' ownership has been diluted by LQMT' s $10 million private placement....

8. LQMT' s Misleading Preliminary 4Q2003 Results and 1Q2004Outlook

207. On March 4, 2004, LQMT issued a press release entitled "Liquidmetal

Technologies Reports Preliminary 2003 Fourth Quarter Financial Highlights and 2004 First

Quarter Outlook announcing that, due to the Company's previously announced restatement,

LQMT would report full results for the fourth quarter and fiscal year 2003 in conjunction with

the filing of its 2003 Annual Report on Form 10-K.

208. Defendant John Kang added in the press release:

We are gratified with this show of confidence in the company'sfuture prospects.... Despite the challenges of 2003, including theformidable learning curve associated with launching a newmanufacturing company based on a new technology, the oneconstant value driver of Liquidmetal Technologies is theunprecedented nature of our family of amorphous alloys andtheir potential to change the paradigm of materialsmanufacturing andproduct development.

209. In response to a question by Keith Hartsdale of Indigo Adventures regarding

LQMT' s cash flow and burn rate , Defendant John Kang stated:

And Keith, we've really made tremendous strides in getting ourcost structure in line. I think air products that we have inproduction right [now] are all profitable, and as we really arestarting to cover the overhead, the infrastructure we have, weare, I think we're rapidly going to cross thatprofitability line.

9. LQMT' s Form 10-K is Delayed and LQMT Becomes Subject toDelisting

210. On March 15, 2004, the Company filed a Form 10-K Notification of Late Filing

with the SEC signed by Defendant John Kang, stating that the Company expected to file its Form

10-K by March 30, 2004.

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211. The Late Filing Notification provided greater detail regarding the anticipated

restatement:

The effect of the restatement will be to eliminate the recognition ofrevenue on the alloying equipment sales made to Growell in thethird and fourth quarters of 2002, and to defer the recognition ofrevenue on the die casting machine sales made in the first quarterof 2003. The Registrant currently expects that the revenue from thedie casting machine sales will be deferred until the first quarter of2004, which is the quarter during which Growell paid for the diecasting machines as a part of the previously announced settlementagreement between the Registrant and Growell. On a preliminaryunaudited basis, the Registrant currently expects that therestatement will result in total revenues of $11.5 million for the2002 fiscal year, a decrease over previously reported revenues forthe year. On a quarterly basis, the restatement will result inrevenue of $2.8 million and $5.2 million for the third quarter of2002 and fourth quarter of 2002, respectively, representing adecrease over previously reported revenues for such periods. Theregistrant does not expect that the restatement will have a materialimpact on the amount of the Registrant's previously reported netloss for fiscal 2002 or for the third and fourth quarters of 2002.

On a preliminary unaudited basis, the Registrant also currentlyexpects that the restatement will result in revenue of $4.0 millionfor the first quarter of 2003, representing a decrease overpreviously reported first quarter 2003 revenues, and a net loss of$(7.6) million for the first quarter of 2003, representing an increasein the previously reported net loss for first quarter 2003.

212. On March 24, 2004 Robert W. Baird & Co. analysts announced they were

discontinuing coverage of LQMT.

213. On March 30, 2004, LQMT revealed in a press release that it would not timely

file its Annual Report on Form 10-K for FY 2003 due to "additional time required to complete a

previously announced review and analysis relating to the company's restatement of results for

certain prior periods .

214. On April 30, 2004, LQMT announced that on April 28, 2004 it had received a

Nasdaq Staff Determination that its common stock was subject to delisting from the Nasdaq

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National Market, because the Company had not timely filed a Form 10-K with the SEC for the

fiscal year 2003, as required by Marketplace Rule 4310(c)(14). The Company' s delisting was

initially stayed pending a hearing, but was ultimately delisted effective with the open of business

on Friday, July 16, 2004.

10. Reasons for Falsity

215. The statements above were materially false and misleading because they failed to

disclose:

a. LQMT' s restructuring efforts would not assist the Company in

overcoming its manufacturing problems;

b. the equipment LQMT purchased from Dongyang (a company in which

LQMT had an ownership interest) was inferior and could not effectively manufacture products in

the volumes or at the pricing required by customers (see ¶¶112-115); and

c. Defendants continued to violate GAAP by failing to maintain adequate

internal accounting controls , improperly recognizing revenues and failing to timely write off

uncollectible accounts receivable (see ¶1117-120, 225-253).

E. THE TRUTH EMERGES: Deloitte Resigns, "Unwilling" to Rely On CEO'sRepresentations and Kang' s Illegal Stock Sale Is Exposed

216. On May 13, 2004 LQMT filed a Form 8-K with the SEC reporting that its

independent auditor, Deloitte & Touche LLP, had resigned effective May 6, 2004. The Form 8-

K further reported the reason for Deloitte's resignation as follows:

In connection with the Audit Committee's inquiry into the Growellequipment sales and dispute settlement, the Audit Committee alsoreviewed the facts and circumstances relating to a personal stocktransaction between the Registrant's CEO and Growell. In thistransaction, as reported by the CEO, the CEO undertook a privatesale of personal shares of Registrant common stock to Growell inFebruary 2002, prior to the Registrant's initial public offering. Aspart of the inquiry, the CEO reported that this sale included a

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previously undisclosed personal agreement to ensure that thepurchase price of the stock purchased by Growell would be at athirty percent discount to the Registrant's initial public offeringprice, and he also provided information regarding his fulfillment ofthis personal agreement.

As of May 6, 2004, certain details of the foregoing transactionshad not been resolved to Deloitte's satisfaction, and the audit forthe 2003 fiscal year has therefore not been completed. As a resultof the expected restatements and these unresolved issues, theRegistrant's previously issued financial statements for the yearended December 31, 2002 and Deloitte's audit report thereon, aswell as the Registrant's quarterly financial statements for the thirdquarter of 2002 and the first, second, and third quarters of 2003(and Deloitte's related review reports thereon), should no longer berelied upon.

Deloitte has communicated to the Registrant that it is unwillingto continue to rely on the representations of the Registrant'sCEO. Deloitte has also previously communicated to the Registrantthat, in light of the facts and circumstances surrounding theexpected restatement, there were material weaknesses in theRegistrant's internal accounting controls relating to the execution,administration, and accounting for contracts, particularly in theRegistrant's South Korean operations. The Registrant has taken andis continuing to take steps to improve these internal controls

217. On May 18, 2004 LQMT filed a Form 8-K/A with the SEC, which included a

letter from Deloitte to the SEC. In that letter, Deloitte stated:

we believe that the internal inquiry conducted by the AuditCommittee did not resolve certain details regarding the CEO'spurported personal agreement with Growell Metal Co., Ltd.

218. The market reacted quickly and severely. By the close of trading on May 13,

2004, LQMT' s stock price fell 14.4% on trading volume of 2 . 1 million shares.

VI. POST CLASS PERIOD EVENTS

219. LQMT announced on May 24, 2004 that Defendant John Kang intended to resign

from the office of President and CEO upon the appointment of an interim successor during the

time required to complete the Company's audit with its new independent auditor and to resolve

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any outstanding issues related to Defendant John Kang's personal stock transaction with

Growell.

220. On July 15, 2004, LQMT announced that it was notified by the Nasdaq Listing

Qualifications Panel in a letter dated July 14, 2001, that the LQMT common stock would be

delisted from the Nasdaq National Market effective with the open of business on July 16, 2004,

as a result of the Company's failure to comply with Marketplace Rule 4310(c)(14) due to the

Company's inability to file its Form 10-K for the fiscal year 2003 and Form 10-Q for the first

quarter of 2004.

221. On July 2, 2004, LQMT filed a Form 8-K with the SEC revealing that the

Company was in default under the convertible notes of the private placement previously closed

March 1, 2004 for failure to timely file all required reports under the Exchange Act, and to file a

registration statement covering the resale of the common stock into which the Notes are

convertible. The Company stated that it was negotiating modifications of the Notes with

investors.

222. On August 19, 2004, LQMT completed a private exchange of the 6% Senior

Convertible Notes originally issued on March 1, 2003. Under the terms of the exchange offer,

the Company voluntarily redeemed $4,464,999 in principal amount of the prior notes (and their

associated warrants). $5,509,002 in aggregate principal amount of the prior Notes were

exchanged for an aggregate of (i) $2,754,501 of 10% Senior Secured Notes Due 2005 with a

conversion price of $2.0022 and (ii) $2,754,501 million of 6% Senior Secured Notes Due 2007

with a conversion price of $1.00 per share.

22 The conversion price of the prior notes was $3.00.

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VII. THE MAGNITUDE OF THE RESTATEMENT IS REVEALED

223. On November 10, 2004, Defendants filed LQMT's Form 10-K for the year ended

December 31, 2002 which restated its results for the above-described manipulations. The

restatement materially changed the Company's previously reported revenue, operating expenses,

net loss and loss per share and highlighted the extent of Defendants fraudulent financial

reporting. Revenues for 2002 were overstated by $1,904,000 or 14.5% and operating expenses

were understated by $705 ,000 or 5.5% and $938,000. This resulted in an understatement of net

loss of $1,104,000 or 6% and an understatement of loss per share of 3 cents. Additionally, in the

same filing LQMT disclosed that it had also overstated revenue recognized in Form 10-Q for the

quarter ended March 31, 2003 filed with the SEC on May 15, 2003 by a staggering $2,543,000

or 39%. Nothing could have been more material to investors.

224. On November 23, 2004, LQMT filed a Form 8-K with the SEC, which stated that

the Company had been notified in a letter dated November 18, 2004 that the Nasdaq Listing and

Hearing Review Council affirmed the Nasdaq Listing Qualifications Panel's decision to delist

the Company's securities from The Nasdaq National Market.

VIII. LOMT'S FINANCIAL STATEMENTS DURING THE CLASS PERIOD WEREMATERIALLY FALSE AND MISLEADING AND VIOLATED GAAP

225. At all relevant times during the Class Period, Defendants represented that

LQMT' s consolidated financial statements when issued, were prepared in accordance with

GAAP. GAAP are those principles recognized by the accounting profession and SEC as the

uniform rules, conventions, and procedures necessary to define accepted accounting practice at a

particular time. However, in violation of GAAP and SEC reporting requirements , Defendants

used improper accounting practices to falsely overstate revenue and income during the Class

Period.

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226. As set forth in Financial Accounting Standards Board ("FASB ), Statement of

Concepts ("Concepts Statement ) No. 1 (November 1978), one of the fundamental objectives of

financial reporting is that it provides accurate and reliable information concerning an entity's

financial performance during the period being presented . Concepts Statement No. 1, ¶ 42, states:

Financial reporting should provide information about anenterprise's financial performance during a period. Investors andcreditors often use information about the past to help in assessingthe prospects of an enterprise. Thus, although investment andcredit decisions reflect investors' and creditors' expectations aboutfuture enterprise performance, those expectations are commonlybased at least partly on evaluations of past enterprise performance.

227. SEC Regulation S-X requires that publicly traded companies present their annual

financial statements in accordance with GAAP. [17 C.F.R. § 210 .4-01(a) ( 1)]. In addition,

Regulation S-X requires that interim financial statements also comply with GAAP. Financial

statements filed with the SEC that are not prepared in compliance with GAAP are presumed to

be misleading and inaccurate. Management is responsible for preparing financial statements that

conform to GAAP. As noted by AICPA professional standards:

financial statements are management's responsibility...M]anagement is responsible for adopting sound accountingpolicies and for establishing and maintaining internal control thatwill, among other things, record, process, summarize and reporttransactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements. Theentity's transactions... are within the direct knowledge and controlof management.... Thus, the fair presentation of financialstatements in conformity with Generally Accepted AccountingPrinciples is an implicit and integral part of management'sresponsibility.

228. Defendants' representations concerning revenue and income during the Class

Period were materially false and misleading because LQMT, in violation of GAAP and SEC

reporting requirements, improperly recognized revenue on the sales of alloying equipment and

prematurely recognized revenues from equipment sales of die casting machines . Additionally,

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LQMT improperly failed to timely recognize bad debt expense for receivables which were

clearly uncollectible in 2002. These accounting failures resulted from a series of deliberate

management decisions designed to conceal the truth regarding LQMT' s poor productions

capabilities, slowing customer demand, inability to produce commercially viable products and

ineffective business strategies . Specifically , Defendants caused the Company to violate GAAP

and SEC requirements and its own accounting policies as follows:

a. Defendants caused LQMT to improperly recognize revenue on sales of

alloying equipment made to Grovell Metal Co., Ltd ("Growell ), a South Korean metals

processing company in the third and fourth quarters of 2002 of $873,000 and $681,000

respectively, and prematurely recognize revenue on sales of die casting machines in the first

quarter of 2003 in the amount of $2,543,000. Additionally, LQMT improperly recognized mold

revenue of $315,000 to Samsung and revenue of $250,000 to AM Corporation, in the fourth

quarter of 2002.

b. Defendants caused LQMT to improperly avoid writing down uncollectible

receivables of $169,000 in 2002 for JS Technologies, despite the fact that the Company was

experiencing a significant deterioration in the quality of its receivables.

A. LQMT' s Improper and Premature Recognition of Revenue

229. Generally GAAP provides that revenue should not be recognized until it is

realized or realizable and earned. FASB Concepts Statement No. 5, Recognition and

Measurement in Financial Statements of Business Enterprises ("CON 5 ) (December 1984),

1183 - 84; Accounting Research Bulletin No. 43, Restatement and Revision of Accounting

Research Bulletins (June 1953) Chapter 1A ¶ 1; Accounting Principles Board Opinion No. 10

Omnibus Opinion, (December 1966), 1 12. The conditions for revenue recognition ordinarily are

met when persuasive evidence of an arrangement exists, delivery has occurred or services have

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been rendered, the seller price to the buyer is fixed or determinable, collectibility is reasonably

assured, and the seller has substantially accomplished what it must do to be entitled to the

benefits represented by the revenues. Staff Accounting Bulletin No. 101 Revenue Recognition in

Financial Statements ("SAB 101 ) (December 1999) and CON 5 ¶ 83. LQMT also had an

affirmative duty to recognize revenue in interim periods in accordance with APB Opinion No.

28, Interim Financial Reporting (December 1973) ¶ 22, "[r]evenue from products sold or

services rendered should be recognized as earned during an interim period on the same basis as

followed for the full year. Further, revenue which arises from circumstances involving

uncertainty as to possible gains should not be recognized since to do so might result in gain

being recognized prior to its realization. FASB Statement of Financial Accounting Standard

("SFAS ) No. 5 Accounting for Contingencies (March 1975), 1 12.

230. LQMT' s fiscal 2002 Form 10-K filed with the SEC on March 31, 2003, included

the following disclosure with respect to the Company's policy of accounting for revenue

recognition:

On December 3, 1999, the staff of the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 101, Revenuerecognition in Financial Statements ("SAB 101 ) that summarizesthe staffs views in applying accounting principles generallyaccepted in the United States of America to revenue recognition infinancial statements. The Company's revenue recognition policycomplies with the requirements of SAB 101. Revenue isrecognized at the time the Company ships its products, as this iswhen title passes to the customer. Revenue is deferred andincluded in liabilities when the Company receives cash in advancefor services not yet performed or goods not yet delivered. Revenuefrom research and development contracts is recognized under thepercentage of completion method.

231. LQMT improperly recognized revenue on transactions with Growell in the fourth

quarter of 2002 and the first quarter of 2003 in violation of GAAP and its own disclosed policies.

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These violations arose from agreements entered into with Growell for the supply of alloys ingots

and die casting equipment.

232. Specifically , Liquidmetal Korea, LQMT's South Korean subsidiary and Growell,

entered into a Product Supply Agreement in June 2002 for the manufacture and supply of LQMT

alloy ingots under which LQMT recognized revenue of $873,000 and $681,000 in the third and

fourth quarters of 2002 respectively. This arrangement was contingent upon certain performance

obligations which Liquidmetal Korea's did NOT meet before the aforementioned revenue was

improperly recognized. In other words , the revenue was not earned as LQMT had not

accomplished what it must do to be entitled to the benefits represented by the revenues. This

agreement alone represented a staggering 12% of LQMT' s revenues for the year ended

December 31, 2002. Additionally, Growell threatened legal action as a result of Liquidmetal

Korea's breach of contract due to non performance of obligations under this agreement, which

the company settled in January 2004. As part of an internal investigation, the Company also

restated its 2002 financial results in November 2004 which included reversal of this revenue. As

a result of this improper revenue recognition, LQMT' s revenue for the year ended December 31,

2002 was materially overstated and net loss materially understated, which Defendants knew or

recklessly disregarded.

233. Additionally, in March 2003, Liquidmetal Korea sold Growell die casting

machines and granted Growell a license to use these machines to manufacture auto parts for

South Korean automobile manufacturers (the "Diecasting Agreement"). Under this agreement,

LQMT prematurely recognized revenue of $2,543,000 in Q1 2003. This represented 39% of the

total revenue recognized for the quarter ended March 31, 2003. As known to LQMT,

collectibility of this revenue was not reasonably assured at the time of sale given its existing

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troublesome relationship with Growell and its likelihood to pay the amounts in question and

therefore revenue was not realized or realizable and earned according to GAAP. However, in

direct contravention of GAAP and its own disclosed policies , LQMT prematurely recognized

this revenue and as a result, materially overstated revenue and understated net loss for the year

ended December 31, 2003.

B. Liquidmetal Failed to Adequately Reserve for Allowance for DoubtfulAccounts

234. LQMT' s 2003 Form 10-K disclosed the following policy for accounts receivable

and allowance for doubtful accounts:

The Company grants credit to its customers generally in the formof short-term trade accounts receivable. The creditworthiness ofcustomers is evaluated prior to the sale of inventory. Twocustomers represent 42%, or $2,703, of total outstanding tradereceivables as of December 31, 2002.

235. Additionally, in its Management Discussion and Analysis, the following was

highlighted as a critical accounting policy and estimate:

We record an allowance for doubtful accounts as a contra-asset toour trade receivables for estimated uncollectible accounts.Management estimates the amount of potentially uncollectibleaccounts by reviewing significantly past due customer balancesrelative to historical information available for those customers. Inthe event, in future periods, actual uncollectible accounts exceedthe estimate for uncollectible accounts, an adjustment would bemade and income would decrease in the period of suchdetermination. Likewise, in the event, in future periods, actualuncollectible accounts are lower than the estimate for uncollectibleaccounts, an adjustment would be made and income wouldincrease in the period of such determination.

236. GAAP provides that an estimated loss from a loss contingency, such as the

collectibility of receivables, "shall be accrued by a charge to income if: (i) information available

prior to issuance of the financial statements indicated that it is probable that an asset had been

impaired or a liability had been incurred at the date of the financial statements ; and (ii) the

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amount of the loss can be reasonably estimated SFAS No. 5 Accounting for Contingencies,

(March 1975) ¶ 8. SFAS No. 5 also requires that financial statements disclose contingencies

when it is at least reasonably possible (e.g., a greater than slight chance) that a loss may have

been incurred. The disclosure shall indicate the nature of the contingency and shall give an

estimate of the possible loss, a range of loss or state that such an estimate cannot be made.

237. The SEC considers the disclosure of loss contingencies to be so important to an

informed investment decision that it promulgated Regulation S-X, which provides that

disclosures in interim period financial statements may be abbreviated and need not duplicate the

disclosure contained in the most recent audited financial statements, except that, "where material

contingencies exist, disclosure of such matters shall be provided even though a significant

change since year end may not have occurred . 17 C.F.R. § 210 . 10-01.

238. In addition, ARB No. 43 Chapter 3, Section 9 provides that the objective of

providing for reserves against receivables is to assure that, "[a]ccounts receivable net of

allowances for uncollectible accounts ... are effectively stated as the amount of cash estimated

as realizable.

239. The Company also violated GAAP by failing to take a provision forbad debt in

its interim financial statements , as indicated by APB No. 28:

The amounts of certain costs and expenses are frequently subjectedto year-end adjustments even though they can be reasonablyapproximated at interim dates. To the extent possible suchadjustments should be estimated and the estimated costs andexpenses assigned to interim periods sD that the interim periodsbear a reasonable portion of the anticipated annual amount.

240. In addition, CONS states , "[a]n expense or loss is recognized if it becomes

evident that previously recognized future economic benefits of an asset have been reduced or

eliminated ....

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241. Moreover, GAAP considers "[t]he conditions under which receivables exist [to]

usually involve some degree of uncertainty about their collectibility, in which case a contingency

exists (contingency is defined as an existing condition, situation, or set of circumstances

involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved

when one or more future events occur or fail to occur). Losses from uncollectible receivables

shall be accrued when both conditions in paragraph 8 are met. Those conditions may be

considered in relation to individual receivables or in relation to groups of similar types of

receivables. If the conditions are met, accrual shall be made even though the particular

receivables that are uncollectible may not be identifiable. SFAS No. 5 ¶ 22.

242. Despite these requirements, the Company's financial statements during the Class

Period failed to reflect the risk of non-collectibility through reserves or charges against income

as required by GAAP and its own disclosed policies. Instead, the Company's reported results

included an allowance for doubtful accounts which was grossly inadequate, as it did not reflect

the true level of uncollectible receivables.

243. Specifically , LQMT failed to appropriately reserve $169 ,000 for the uncollectible

portion of a sale of molds, MP3 players, and compact disc cases to JS Technologies in

September 2002 . LQMT failed to provide for this risk of uncollectibility in its financial

statements as of December 31, 2002, which Defendants knew or recklessly disregarded. As a

result, net income during the Class Period was materially overstated and allowance for doubtful

accounts was materially understated.

C. Internal Control Deficiencies

244. The Company also suffered from a chronic and systematic breakdown of its

internal accounting controls to record revenue in the period when it was earned and establish

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reserves for uncollectible receivables , which rendered LQMT's financial reporting unreliable and

incorrect, resulting in materially false and misleading financial statements. For example:

a. There were insufficient controls relating to the execution, administration

and accounting for contracts;

b. The control environment was such that Defendant Kang's management

philosophy and operating style was at times controlling and dictatorial;

c. Controls to initiate, process and record revenue in compliance with

LQMT' s revenue recognition policies and GAAP were insufficient and overridden; and

d. There was insufficient internal review to ensure that the Company had

accomplished all it must do to be entitled to the benefits represented by revenues.

245. Deloitte notified LQMT of its intent to resign as the Company 's independent

auditors effective May 6, 2004, as revealed in a Form 8-K filed with the SEC on May 13, 2004:

Deloitte has communicated to the Registrant that it is unwilling tocontinue to rely on the representations of the Registrant's CEO.Deloitte has also previously communicated to the registrant that, inlight of the facts and circumstances surrounding the expectedrestatement, there are material weaknesses in the Registrant'sinternal accounting controls relating to the execution,administration, and accounting for contracts, particularly in theRegistrant's South Korean operations.

246. Section 13(b)(2)(B) of the Exchange Act requires every issuer that has securities

registered pursuant to Section 12 of the Exchange Act, such as LQMT to: (a) make and keep

books, records and accounts which, in reasonable detail, accurately and fairly reflect the

transactions and disposition of the assets of the issuer; and (b) devise and maintain a system of

internal accounting controls sufficient to reasonably assure, among other things, that transactions

are recorded as necessary to permit preparation of financial statements in conformity with

GAAP. These provisions require an issuer to employ and supervise reliable personnel, to

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maintain reasonable assurances that transactions are executed as authorized, to properly record

transactions on an issuer's books and, at reasonable intervals, to compare accounting records

with physical assets.

247. LQMT failed to implement and maintain an adequate internal control system, in a

manner that would ensure compliance with GAAP, which Defendants knew or recklessly

disregarded, resulting in materially false and misleading financial statements.

Liquidmetal' s False and Misleading Class Period Financial Statements Were Material

248. The foregoing violations of GAAP were material. Staff Accounting Bulletin No.

99 ("SAB 99), emphasizes the need to assess and take into account the qualitative aspects of

materiality, including, but not limited to:

a. Whether the misstatement arises from an item capable of precise

measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent

in the estimate;

b. Whether the misstatement masks a change in earnings or other trends;

c. Whether the misstatement hides a failure to meet analysts' consensus

expectations for the enterprise;

d. Whether the misstatement changes a loss into income or vice versa;

e. Whether the misstatement concerns a segment or other portion of the

registrant's business that has been identified as playing a significant role in the registrant's

operations or profitability; and

f Whether the misstatement has the effect of increasing management's

compensation - for example, by satisfying requirements for the award of bonuses or other forms

of incentive compensation.

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249. Consequently, the financial statements during the Class Period were materially

false and misleading because the Company violated its own disclosed policies, it failed to

accurately portray its earning trends , and Defendants were engaged in the scheme to manipulate

reported earnings.

D. Violations of SEC Regulations

250. Item 7 of Form 10-K and item 2 of Form 10-Q, Management discussions and

Analysis of Financial Condition and Results of Operations ("MD&A ) requires the issuer to

furnish information required by Item 303 of Regulation S-K [17.C.F.R.229.303]. In discussing

results of operations, Item 303 of Regulation S-K requires the registrant to:

[d]escribe any known trends or uncertainties that have had or thatthe registrant reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income fromcontinuing operations.

251. In addition, the SEC in its May 1989 Interpretive Release No. 34-2683 1, has

indicated that registrants should employ the following two step analysis in determining when a

known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item

303 of Regulation S-K:

A disclosure duty exists where a trend, demand, event oruncertainty is both presently known to management and isreasonably likely to have a material effect on the registrant'sfinancial condition or results of operations.

252. Nonetheless , LQMT' s Class Period Forms 10-K and 10-Q failed to disclose the

uncertainty associated with the Growell transactions in 2002 and 2003 (and LQMT's failing

financial condition), in violation of SEC regulations, which Defendants knew or recklessly

disregarded.

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E. Additional GAAP Violations

253. In addition to the accounting improprieties stated above, LQMT presented its

financial statements during the Class Period in a manner which also violated at least the

following provisions of GAAP:

a. The concept that financial reporting should provide information that is

useful to present and potential investors and creditors and other users in making rational

investment , credit and similar decisions (Concepts Statement No. 1, ¶ 34);

b. The concept that financial reporting should provide information about the

economic resources of an enterprise , the claims to those resources , and the effects of

transactions, events and circumstances that change resources and claims to those resources

(Concepts Statement No. 1, ¶ 40);

c. The concept that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners

(stockholders) for the use of enterprise resources entrusted to it. To the extent that management

offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (Concepts Statement No. 1,

¶ 50);

d. The concept that financial reporting should provide information about an

enterprise's financial performance during a period. Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise. Thus, although investment and

credit decisions reflect investors' expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No. 1, ¶ 42);

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e. The concept that financial reporting should be reliable in that it represents

what it purports to represent. That information should be reliable as well as relevant is a notion

that is central to accounting (Concepts Statement No. 2, 1158-59);

f The concept of completeness , which means that nothing is left out of the

information that may be necessary to ensure that it validly represents underlying events and

conditions (Concepts Statement No. 2, ¶ 79); and

g. The concept that conservatism be used as a prudent reaction to uncertainty

to try to ensure that uncertainties and risks inherent in business situations are adequately

considered. The best way to avoid injury to investors is to try to ensure that what is reported

represents what it purports to represent (Concepts Statement No. 2, 1195, 97).

IX. ADDITIONAL SCIENTER ALLEGATIONS

A. Defendants' Knowledge Of The Falsity Of Liquidmetal's Representations

254. The Section 10(b) Defendants acted with scienter in that they intentionally and/or

recklessly disseminated and/or acquiesced in the issuance of false and misleading financial

statements that disregarded the true financial condition of the Company, as depicted in internal

Company documents and reports. For example , according to former LQMT accounting

department employees during the Class Period, LQMT had weekly cash flow reporting and also

had reports entitled "Aging Report for Accounts Receivable. The Aging Reports were prepared

monthly, and detailed any accounts more than sixty days in arrears. Along these lines, the

Section 10(b) Defendants also had ready access to financial and operational metrics concerning

the Company's performance and ability, as LQMT's operations in South Korea, California, and

Florida were inter-connected via a Wide-Area-Network (WAN), with a server based in the

Company's Lake Forest, California facility.

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255. Although not part ofthe restatements , Defendants ' severely reckless conduct is

also evidenced by the fact that they engaged in a fraudulent course of conduct whereby LQMT

would recognize revenue on costs incurred in connection with government projects, but would

not pay the vendors for different materials and services needed for the project. Specifically,

according to a former LQMT project engineer involved in research and development on

government projects during the Class Period, LQMT received a government contract (i.e.

FYI3KEP) for $3 million for continued research and development of armor-piercing

ammunition.23 According to this former employee, every month as LQMT incurred costs on the

project, the Company would submit its "deliverables to the government, which would reimburse

the Company for the submitted costs . In turn, LQMT would recognize revenue on those incurred

costs.

256. As part of this process, LQMT submitted purchase orders to vendors (i.e. incurred

costs) for materials and services needed for the project. However, according to the former

Company project manager, even though the Company received the goods and/or services from

the vendors, billed and received reimbursement from the government, and recognized revenue on

the transactions , LQMT would not pay its vendors for the goods and services that had been

rendered.

257. Along these lines and in furtherance of this scheme, Company managers would

ensure that purchase orders were placed with outside vendors in order to meet financial goals.

For instance , a former LQMT project manager recalls managers making comments in the last

week of fiscal quarters to the effect of "we need to spend $10,500 to hit budget.

23 LQMT announced this contract via press release dated August 11, 2003.

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258. In short, the ongoing fraudulent scheme described in this complaint could not

have been perpetrated over a substantial period of time, as has occurred, without the knowledge

and complicity of the personnel at the highest level of the Company, including Defendant John

Kang.

259. Indeed, while the Section 10(b) Defendants were misrepresenting the actual

financial status of the Company, LQMT reincorporated from California to Delaware for the

express purpose of limiting the liability of the Company's directors and permitting

indemnification of the Company's officers, directors and employees. According to the May 20,

2003 Proxy, Delaware law permits the Company to include a provision in its charter that

eliminates the liability of Company directors to its stockholders for monetary damages for breach

of fiduciary duty in shareholder class action lawsuits, whereas such provision under California

law would not apply to shareholder class action lawsuits . The officers and directors of LQMT,

according to the May 20, 2003 Proxy, saw this as "significant :

Significantly, the indemnity provision in LiquidmetalTechnologies' [California] charter does not limit the liability of ourdirectors for monetary damages as a result of shareholder classaction lawsuits, where the indemnity provision in LiquidmetalDelaware's charter will, under certain circumstances, limit suchliability.

B. The Section 10(b) Defendants' Motive To Commit Fraud

260. Each of the Section 10(b) Defendants possessed substantial motives for

misrepresenting LQMT' s financial status , operations and prospects throughout the Class Period.

1. A Successful IPO Was Necessary For John Kang To Recoup TheMoney He Lent The Company

261. Prior to the IPO, individual officers and directors, including Defendant John

Kang, loaned the Company approximately $7.5 million. According to the Prospectus, a portion

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of the net proceeds of the IPO were to be used to repay the following loans to Defendant John

Kang:

Approximately $1.5 million to repay Defendant John Kangand Ricardo Salas jointly in full for a $1.4 million loanbearing interest at 8.5% per year with a maturity date ofDecember 31, 2002;

Approximately $2.0 million to repay Defendant John Kangin full for a $2.0 million loan bearing interest at 8.0% peryear with a maturity date of the earlier of May 1, 2003 orthe closing of an initial public offering; and

Approximately $0.8 million to repay Defendant John Kangin full for a $0.8 million loan bearing interest at 8.0% peryear with a maturity date of the earlier of July 1, 2003 orthe closing of an initial public offering.

262. Therefore, assuming Defendant John Kang would receive half of the $1.5 million

repayment to Mr. Salas and him, Defendant John Kang was to be repaid a total of approximately

$3.55 million from the IPO proceeds.

263. The success of the IPO was necessary for John Kang to recoup the approximately

$3.55 million he lent the Company. Defendants were motivated to misrepresent LQMT's

financial status, operations and prospectus because they knew that, without a successful IPO, the

Company would be unable to repay the loans to LQMT officers and directors (including

Defendant John Kang), and Defendant John Kang knew he would probably never see the

approximately $3.55 million owed to him by the Company again.

2. John Kang's Private Sale To Growell

264. In February 2002, Defendant John Kang sold 285,715 shares of his personal

LQMT stock to Growell. According to press releases and the Company's Form 10-K filed with

the SEC on November 10, 2004, in connection with John Kang's private sale to Growell, John

Kang entered into a personal agreement with Growell to ensure that the purchase price of the

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stock purchased by Growell would be at a thirty percent discount to the Company' s IPO price.

In order to satisfy his obligations regarding the guaranteed minimum value of the shares sold to

Growell, Defendant John Kang indirectly purchased and disposed of LQMT stock in August and

November 2002 respectively. In this regard, John Kang made open market purchases of an

aggregate of 89,300 shares of LQMT stock in August 2002.

265. Defendant John Kang failed to disclose his personal agreement regarding the

guaranteed minimum value of the stock sold to Growell. Rather, the personal agreement only

came to light after the Company's Audit Committee reviewed Defendant John Kang's personal

transaction with Growell in connection with an internal inquiry into the Company's transactions

with Growell conducted at the request of the Company' s independent auditor , Deloitte.

Defendant John Kang failed to disclose the details of his indirect transactions in Company stock

to the public until he finally (and belatedly) filed a From 4 with the SEC on November 15, 2004.

266. As stated in the Company's May 13, 2004 press release and Form 10-K filed with

the SEC on November 10, 2004, Defendant John Kang's lack of candor in connection with his

transaction with Growell caused Deloitte to communicate to the Company that it was unwilling

to continue to rely on the representations of Defendant John Kang, which were necessary in

order to complete the restatement process and 2003 audit. Deloitte resigned as LQMT's

independent auditor effective May 6, 2004.

267. Defendant John Kang was motivated to inflate the financial performance of the

Company in order to prop up the stock price of LQMT stock and satisfy his undisclosed personal

agreement with Growell.

3. LQMT's Need for Additional Funding

268. An additional motive was the Company's need for additional funding, which was

necessary due to the extraordinary cash burn rate of the Company. Defendants knew that unless

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they painted a positive image of the viability of the LQMT product, the Company would not be

able to obtain additional funding.

269. Indeed, on January 16, 2004, the Company announced a $5-7 million private

placement of senior convertible notes . That placement was expanded to $10 million and

completed on March 2, 2004. The Company defaulted on those notes due to its failure to timely

file all required reports under the Exchange Act, and to file a registration statement covering the

resale of the common stock into which the notes were convertible.

X. NO STATUTORY SAFE HARBOR

270. The federal statutory safe harbor provided for forward- looking statements under

certain circumstances does not apply to any of the allegedly false statements pleaded in this

complaint. Further, many of the specific statements pleaded herein were not identified as

"forward- looking statements when made. Nor was it stated that actual results "could differ

materially from those projected. Nor were the forward-looking statements pleaded

accompanied by meaningful cautionary statements identifying important factors that could cause

actual results to differ materially from the statements made therein.

271. Alternatively, to the extent that the statutory safe harbor would (or could) apply to

any of the forward-looking statements pleaded herein, Defendants are liable for the forward-

looking statements pleaded because, at the time each of those forward-looking statements was

made, the particular speaker knew the forward- looking statement was false, and/or the forward-

looking statement was authorized and/or approved by an executive officer of LQMT who knew

that those statements were false when made. Moreover, pursuant to 15 U.S.C. § 77z-2(b)(i)(B),

the Safe Harbor does not apply to statements made in connection with a public offering such as

the IPO in this case , and pursuant to 15 U.S.C. § 77z-2(b)(2)(A), the Safe Harbor does not apply

to information included in a financial statement prepared in accordance with GAAP.

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COUNT III

FOR VIOLATIONS OF SECTION 10(B) OF THE 1934 ACT AND RULE 10B-5AGAINST LQMTAND JOHN KANG

272. Plaintiffs repeat and reallege the allegations set forth in paragraphs 1 to 271 as

though fully set forth herein . This claim is asserted against Defendants LQMT and John Kang

(the "Section 10(b) Defendants ).

273. During the Class Period, the Section 10(b) Defendants carried out a plan, scheme

and course of conduct which was intended to, and did: (a) deceive the investing public, including

Plaintiffs and other Class members, as alleged herein; (b) artificially inflate and maintain the

market price of LQMT common stock; and (c) cause Plaintiffs and other members of the Class to

purchase LQMT stock at artificially inflated prices during the Class Period . In furtherance of

this unlawful scheme, plan and course of conduct, the Section 10(b) Defendants, and each of

them, took the actions set forth herein.

274. These Defendants: (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary to make

the statements not misleading; and (c) engaged in acts, practices and a course of business which

operated as a fraud and deceit upon the purchasers of the Company' s common stock in an effort

to maintain artificially high market prices for LQMT common stock in violation of Section 10(b)

of the Exchange Act and Rule IOb-5. These Defendants are sued as primary participants in the

wrongful and illegal conduct charged herein. These Defendants are also sued herein as

controlling persons of LQMT, as alleged below.

275. In addition to the duties of full disclosure imposed on Defendants as a result of

their making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, they each had a duty to promptly disseminate

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truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et

seq.) and S-K (17 C.F.R. § 229.10 et seq.) and other SEC regulations, including accurate and

truthful information with respect to the Company's operations, financial condition and

performance so that the market prices of the Company's publicly-traded securities would be

based on truthful, complete and accurate information.

276. The Section 10(b) Defendants, individually and in concert, directly and indirectly,

by the use of means or instrumentalities of interstate commerce and/or of the mails , engaged and

participated in a continuous course of conduct to conceal adverse material information about the

business , business practices , performance, operations and future prospects of LQMT as specified

herein. These Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of LQMT's value and

performance and substantial growth, which included the making of, or the participation in the

making of, untrue statements of material facts and omitting to state material facts necessary in

order to make the statements made about LQMT and its business , operations and future

prospects in the light of the circumstances under which they were made, not misleading, as set

forth more particularly herein, and engaged in transactions, practices and a course of business

which operated as a fraud and deceit upon the purchasers of LQMT securities during the Class

Period.

277. At the time of said misrepresentations and omissions , Plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs

and the other members of the Class and the marketplace known of the true performance, business

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practices, future prospects and intrinsic value of LQMT, which were not disclosed by these

Defendants, Plaintiffs and other members of the Class would not have purchased or otherwise

acquired their LQMT securities during the Class Period, or, if they had acquired such securities

during the Class Period, they would not have done so at the artificially inflated prices which they

paid.

278. By virtue of the foregoing , LQMT and John Kang each violated Section 10(b) of

the Exchange Act and Rule IOb-5 promulgated thereunder.

279. As a direct and proximate result of the Section 10(b) Defendants ' wrongful

conduct, Plaintiffs and the other members of the Class suffered damages in connection with their

purchases of the Company' s securities during the Class Period.

COUNT TV

FOR VIOLATIONS OF SECTION 20(A) OF THE 1934 ACT AGAINST JOHN KANG

280. Plaintiffs repeat and reallege the allegations set forth in paragraphs 1 to 279 above

as if set forth fully herein. This claim is asserted against John Kang.

281. John Kang was and acted as a controlling person of LQMT within the meaning of

Section 20(a) of the Exchange Act as alleged herein. By virtue ofhis high level position with the

Company, participation in and/or awareness of the Company' s operations and/or intimate

knowledge of the Company's actual performance, John Kang had the requisite power to directly

or indirectly control or influence the specific corporate policy which resulted in the

dissemination of the various statements which Plaintiffs contend are false and misleading. John

Kang was provided with or had unlimited access to copies of the Company's reports, press

releases, public filings and other statements alleged by Plaintiffs to be misleading prior to and/or

shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

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282. In addition, John Kang had direct involvement in the day-to-day operations of the

Company and, therefore , is presumed to have had the power to control or influence the particular

transactions giving rise to the securities violations as alleged herein, and exercised the same.

283. As set forth above, John Kang violated Section 10(b) and Rule IOb-5 by his acts

and omissions as alleged in this Complaint. By virtue of his controlling position, John Kang is

liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of John

Kang's wrongful conduct, Plaintiffs and other members of the Class suffered damages in

connection with their purchases of the Company' s securities during the Class Period.

XI. CLASS ACTION ALLEGATIONS

284. Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of

the Federal Rules of Civil Procedure on behalf of a class (the "Class ) consisting of all persons

who purchased or otherwise acquired the common stock of LQMT between May 21, 2002 and

May 13, 2004, inclusive , including those who purchased LQMT shares pursuant or traceable to

the Company's Registration Statement and Prospectus for its May 21, 2002 IPO of 5,000,000

shares of LQMT common stock at $15 .00 per share . Excluded from the Class are the Defendants

herein, members of each Individual Defendant's immediate family, any entity in which any

Defendant has a controlling interest, and the legal affiliates, representatives, heirs, controlling

persons , successors , and predecessors in interest or assigns of any such excluded party.

285. Because LQMT has millions of shares of common stock outstanding , and because

the Company's common stock was actively traded on the NASDAQ National Markets during the

Class Period, members of the Class are so numerous that joinder of all members is impracticable.

As of December 17 , 2004, LQMT had 41 ,609,652 shares outstanding . While the exact number

of Class members can only be determined by appropriate discovery, Plaintiffs believe that Class

members number at least in the thousands and that they are geographically dispersed.

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286. Plaintiffs' claims are typical of the claims of the members of the Class, because

Plaintiffs and all of the Class members sustained damages arising out of Defendants' wrongful

conduct complained of herein.

287. Plaintiffs will fairly and adequately protect the interests of the Class members and

have retained counsel who are experienced and competent in class and securities litigation.

Plaintiffs have no interests that are contrary to or in conflict with the members of the Class

Plaintiffs seek to represent.

288. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual members of the Class may be relatively small, the expense

and burden of individual litigation make it impossible for the members of the Class individually

to redress the wrongs done to them. There will be no difficulty in the management of this action

as a class action.

289. Questions of law and fact common to the members of the Class predominate over

any questions that may affect only individual members, in that Defendants have acted on

grounds generally applicable to the entire Class. Among the questions of law and fact common

to the Class are:

is whether the federal securities laws were violated by Defendants'

acts as alleged herein;

ii. whether the Registration Statement and Prospectus for the May 21,

2002 IPO contained material misstatements or omissions;

iii. whether the Company's other publicly disseminated releases and

statements during the Class Period omitted and/or misrepresented material facts and whether

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Defendants breached any duty to convey material facts or to correct material facts previously

disseminated;

iv. whether the Section 10(b) Defendants participated in and pursued

the fraudulent scheme or course of business complained of;

v. whether the Section 10(b) Defendants acted willfully, with

knowledge or recklessly, in omitting and/or misrepresenting material facts;

vi. whether the market prices of LQMT common stock during the

Class Period were artificially inflated due to the material nondisclosures and/or

misrepresentations complained of herein; and

vii. whether the members of the Class have sustained damages and, if

so, what is the appropriate measure of damages.

XII. APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD ON THEMARKET DOCTRINE

290. Plaintiffs will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that, among other things:

a. Defendants made public misrepresentations or failed to disclose facts

during the Class Period;

b. The omissions and misrepresentations were material;

c. LQMT securities traded in an efficient market;

d. The misrepresentations alleged would tend to induce a reasonable investor

to misjudW the value of the Company's securities; and

e. Plaintiffs and the other members of the Class purchased LQMT securities

between the time Defendants misrepresented or failed to disclose material facts and the time the

true facts were disclosed, without knowledge of the misrepresented or omitted facts.

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291. At all relevant times, the market for LQMT securities was an efficient market for

the following reasons, among others:

a. LQMT securities were listed and actively traded during the Class Period

on the NASDAQ exchange , an open, highly efficient and automated market;

b. As a regulated issuer, LQMT regularly made public filings , including its

Forms 10-K, Forms 10-Q and related press releases , with the SEC. Additionally, LQMT met the

eligibility requirements for filing a SEC Form S-1 Registration Statement and in fact filed such a

statement on November 20, 2001;

c. LQMT was followed by analysts from major brokerages including Robert

W. Baird & Co. and Merrill Lynch. The reports of these analysts were redistributed to the

brokerages' sales force, their customers, and the public at large; and

d. LQMT regularly communicated with public investors via established

market communication mechanisms , including the Company's website, regular disseminations of

press releases on the major news wire services, and other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services.

292. As a result , the market for LQMT securities digested current information

regarding the Company from the publicly available sources described above and reflected such

information in the prices of LQMT' s securities . As would be expected where a security is traded

in an efficient market, material news concerning LQMT' s business had an immediate effect on

the market price of LQMT's securities , as evidenced by the rapid decline in the market price in

the immediate aftermath of LQMT' s corrective disclosures as described herein . Under these

circumstances , all purchasers of LQMT's securities during the Class Period suffered similar

injury due to the fact that the price of LQMT securities was artificially inflated throughout the

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Class Period. At the times they purchased or otherwise acquired LQMT's securities, Lead

Plaintiffs and other members of the Class were without knowledge of the facts concerning the

wrongful conduct alleged herein and could not reasonably have discovered those facts. As a

result, the presumption of reliance applies. Plaintiffs will also rely, in part, upon the presumption

of reliance established by a material omission.

XIII. PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for

judgment as follows:

A. Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of theFederal Rules of Civil Procedure on behalf of the Class defined herein;

B. Awarding Plaintiffs and the other members of the Class damages in an amountwhich may be proven at trial, together with interest thereon;

C. Awarding Plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as their reasonable attorneys' and experts' witness feesand other costs;

D. Such other relief as this Court deems appropriate.

XIV. JURY DEMAND

Plaintiffs demand a trial by jury.

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Dated: January 12, 2005 Respectfully submitted,

MILBERG WEISS BERSHAD& SCHULMAN LLP

By: s/Maya SaxenaMaya SaxenaFla. Bar No. 0095494msaxena @milbergweiss.comChristopher S. PolaszekFla. Bar No. 0116866cpolaszek@milbergweiss.comKristi Stahnke McGregorFla. Bar No. 0732931kmcgregor@milbergweiss.com5200 Town Center Circle, Suite 600Boca Raton, FL 33486Tel: (561) 361-5000Fax: (561) 367-8400

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLPJack ReiseDouglas Wilens197 S. Federal Highway, Suite 200Boca Raton, FL 33432Tel: (561) 750-3000Fax: (561) 750-3364

Co-Lead Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on the 12th day of January, 2005, I presented the foregoing tothe Clerk of the Court for filing and uploading to the CM/ECF system. I further certify that onthe same date I mailed the foregoing document to the following counsel of record:

Tracy A. NicholsTiffani G. LeeHOLLAND & KNIGHT, LLP701 Brickell Avenue, Suite 3000P.O. Box 015441Miami, FL 33131-5441Tel: (305) 375-8500Fax: (305) 789-7799

s/ Maya SaxenaMaya Saxena

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