##### Table of Contents



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|                                              |  |                                                                                         
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------
|[X]                                           |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|                                             
|For the quarterly period ended March 31, 2002
|                                             
|OR                                           
|                                             
|[    ]                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                      to

Commission file number 000-31019

ARGONAUT TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

|                                |  |                       
|------------------------------- |  | ----------------------
|DELAWARE                        |  | 94-3216714            
|(State or other jurisdiction of |  | (IRS Employer         
|incorporation or organization)  |  | Identification Number)

1101 Chess Drive
Foster City, CA 94404
(Address of principal executive offices, including zip code)

(650) 655-4200
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]    No [    ]

As of April 30, 2002, 19,931,471 shares of the Registrants Common Stock,
$0.0001 par value, were outstanding.





---

TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                              
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3: DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5: OTHER INFORMATION                                                                    
|                              | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                



---



##### Table of Contents



Argonaut Technologies, Inc.

Form 10-Q

Quarter Ended March 31, 2002

INDEX

|           |  |                                                                                                                       |  |     
|---------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|ITEM NO.   |  |                                                                                                                       |  | PAGE
|PART I.    |  | FINANCIAL INFORMATION                                                                                                 |  |     
|Item 1.    |  | Condensed Consolidated Financial Statements (Unaudited)                                                               |  | 3   
|           |  | Condensed Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and
December 31, 2001                          |  | 3   
|           |  | Condensed Consolidated Statements of Operations for the Three-Month Periods Ended
March 31, 2002 and 2001 (Unaudited) |  | 4   
|           |  | Condensed Consolidated Statement of Cash Flows for the Three-Month Periods Ended
March 31, 2002 and 2001 (Unaudited)  |  | 5   
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                      |  | 6   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations                                 |  | 9   
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 17  
|PART II.   |  | OTHER INFORMATION                                                                                                     |  |     
|Item 1.    |  | Legal Proceedings                                                                                                     |  | 18  
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                             |  | 18  
|Item 3.    |  | Defaults Upon Senior Securities                                                                                       |  | 18  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 18  
|Item 5.    |  | Other Information                                                                                                     |  | 18  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                      |  | 18  
|Signatures |  |                                                                                                                       |  | 20  

2



---



##### Table of Contents






PART I: FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                                    |                                              |                            |        |             |        |              |        |         |        | 
|--------------------------------------------------- | -------------------------------------------- | -------------------------- | ------ | ----------- | ------ | ------------ | ------ | ------- | ------ | 
|                                                    |                                              |                            |        | March 31,   |        | December 31,
|                                                    |                                              |                            |        | 2002        |        | 2001        
|                                                    |                                              |                            |        |             |        |             
|                                                    |                                              |                            |        | (Unaudited) |        | (1)         
|ASSETS                                              |                                              |                            |        |             |        |              |        |        
|Current assets:                                     |                                              |                            |        |             |        |              |        |        
|                                                    | Cash and cash equivalents                    |                            | $      | 5,799       |        |              | $      | 17,996  |       
|                                                    | Short-term investments                       |                            |        | 30,876      |        |              |        | 39,636  |       
|                                                    | Accounts receivable, net                     |                            |        | 5,047       |        |              |        | 4,187   |       
|                                                    | Inventories                                  |                            |        | 7,215       |        |              |        | 4,096   |       
|                                                    | Prepaid expenses & other current assets      |                            |        | 552         |        |              |        | 784     |       
|                                                    | Notes receivable                             |                            |        | 162         |        |              |        |        |       
|                                                    |                                              |                            |        |             |        |              |        |        
|                                                    |                                              | Total current assets       |        |             | 49,651 |              |        |         | 66,699 | 
|Restricted cash                                     |                                              |                            | 10,863 |             |        |              |       |        
|Property and equipment, net                         |                                              |                            | 6,160  |             |        |              | 3,233  |        
|Goodwill and other purchased intangible assets, net |                                              |                            | 13,902 |             |        |              | 2,213  |        
|Other assets                                        |                                              |                            | 177    |             |        |              | 26     |        
|                                                    |                                              |                            |        |             |        |              |        |        
|                                                    |                                              | $                          | 80,753 |             |        | $            | 72,171 |        
|                                                    |                                              |                            |        |             |        |              |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY                |                                              |                            |        |             |        |              |        |        
|Current liabilities:                                |                                              |                            |        |             |        |              |        |        
|                                                    | Accounts payable                             |                            | $      | 2,044       |        |              | $      | 1,681   |       
|                                                    | Accrued compensation                         |                            |        | 861         |        |              |        | 1,421   |       
|                                                    | Other accrued liabilities                    |                            |        | 904         |        |              |        | 1,679   |       
|                                                    | Deferred revenue                             |                            |        | 2,873       |        |              |        | 3,439   |       
|                                                    | Current portion of capital lease obligations |                            |        | 152         |        |              |        | 187     |       
|                                                    | Current portion of notes payable             |                            |        | 181         |        |              |        |        |       
|                                                    |                                              |                            |        |             |        |              |        |        
|                                                    |                                              | Total current liabilities  |        |             | 7,015  |              |        |         | 8,407  | 
|Non-current portion of notes payable                |                                              |                            | 283    |             |        |              |       |        
|Long
term debt                                      |                                              |                            | 10,863 |             |        |              |       |        
|Stockholders equity:                               |                                              |                            |        |             |        |              |        |        
|                                                    | Common stock                                 |                            |        | 2           |        |              |        | 2       |       
|                                                    | Additional paid-in capital                   |                            |        | 121,950     |        |              |        | 120,036 |       
|                                                    | Deferred stock compensation                  |                            |        | (820        | )      |              |        | (1,008  | )     
|                                                    | Accumulated other comprehensive loss         |                            |        | (189        | )      |              |        | (32     | )     
|                                                    | Accumulated deficit                          |                            |        | (58,351     | )      |              |        | (55,234 | )     
|                                                    |                                              |                            |        |             |        |              |        |        
|                                                    |                                              | Total stockholders equity |        |             | 62,592 |              |        |         | 63,764 | 
|                                                    |                                              |                            |        |             |        |              |        |        
|                                                    |                                              | $                          | 80,753 |             |        | $            | 72,171 |        
|                                                    |                                              |                            |        |             |        |              |        |        

(1)  The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.

The accompanying notes are an integral part of these condensed consolidated
financial statements.

3



---



##### Table of Contents






ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |       |       |       | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------- | --------------- | ----- | ------------------ | ----- | ------ | ----- | ----- | ----- | 
|                                                                                       |                                                                                                                                             |          |                 |       | Three Months Ended
|                                                                                       |                                                                                                                                             |          |                 |       | March 31,         
|                                                                                       |                                                                                                                                             |          |                 |       |                   
|                                                                                       |                                                                                                                                             |          |                 |       | 2002               |       | 2001  
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |       
|Net sales:                                                                             |                                                                                                                                             |          |                 |       |                    |       |        |      
|                                                                                       |                                                                                                                                             | Products |                 | $     | 4,214              |       |        | $     | 4,570 |      
|                                                                                       |                                                                                                                                             | Services |                 |       | 543                |       |        |       | 223   |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|                                                                                       |                                                                                                                                             |          | Total net sales |       |                    | 4,757 |        |       |       | 4,793 | 
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Costs and Expenses:                                                                    |                                                                                                                                             |          |                 |       |                    |       |        |      
|                                                                                       | Costs of products                                                                                                                           |          |                 | 2,318 |                    |       |        | 2,306 |      
|                                                                                       | Costs of services                                                                                                                           |          |                 | 272   |                    |       |        | 16    |      
|                                                                                       | Research and development (Note 1)                                                                                                           |          |                 | 1,380 |                    |       |        | 1,576 |      
|                                                                                       | Selling, general and administrative (Note 1)                                                                                                |          |                 | 3,913 |                    |       |        | 4,123 |      
|                                                                                       | Amortization of goodwill and other purchased intangible assets                                                                              |          |                 | 119   |                    |       |        | 72    |      
|                                                                                       | Acquired in-process research and development                                                                                                |          |                 |      |                    |       |        | 270   |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Total costs and expenses                                                               |                                                                                                                                             |          | 8,002           |       |                    |       | 8,363  |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Loss from operations                                                                   |                                                                                                                                             |          | (3,245          | )     |                    |       | (3,570 | )    
|Other income (expenses):                                                               |                                                                                                                                             |          |                 |       |                    |       |        |      
|                                                                                       | Interest and other income                                                                                                                   |          |                 | 304   |                    |       |        | 1,027 |      
|                                                                                       | Interest and other expense                                                                                                                  |          |                 | (139  | )                  |       |        | (104  | )    
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Net loss before provision for income taxes                                             |                                                                                                                                             |          | (3,080          | )     |                    |       | (2,647 | )    
|Provision for income taxes                                                             |                                                                                                                                             |          | (37             | )     |                    |       |       |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Net loss                                                                               |                                                                                                                                             | $        | (3,117          | )     |                    | $     | (2,647 | )    
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Net loss per common share, basic and diluted                                           |                                                                                                                                             | $        | (0.16           | )     |                    | $     | (0.14  | )    
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Weighted-average shares used in
computing net loss per common share, basic and diluted |                                                                                                                                             |          | 19,564          |       |                    |       | 18,586 |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|Note 1:                                                                                | Research and development expenses and selling, general and administrative
expenses include charges for stock-based compensation as follows: |          |                 |       |                    |       |        |       |      
|Research and development                                                               |                                                                                                                                             | $        | 81              |       |                    | $     | 294    |      
|Selling, general and administrative                                                    |                                                                                                                                             |          | 132             |       |                    |       | 408    |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      
|                                                                                       |                                                                                                                                             | $        | 213             |       |                    | $     | 702    |      
|                                                                                       |                                                                                                                                             |          |                 |       |                    |       |        |      

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



---



##### Table of Contents






ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |        |     |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | ----- | ------------------ | ------ | ------ | --- | ------ | ------ | -
|                                                     |                                                                             |                                                          |                                                     |                                       |       | Three Months Ended
|                                                     |                                                                             |                                                          |                                                     |                                       |       | March 31,         
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                   
|                                                     |                                                                             |                                                          |                                                     |                                       |       | 2002               |        | 2001  
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Cash flows from operating activities:                |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     | Net loss                                                                    |                                                          | $                                                   | (3,117                                | )     |                    | $      | (2,647 | )  
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                          |                                                     |                                       |       |                    |        |        |    
|                                                     |                                                                             | Depreciation and amortization                            |                                                     |                                       | 297   |                    |        |        | 252 |       
|                                                     |                                                                             | Amortization of goodwill and other purchased intangibles |                                                     |                                       | 119   |                    |        |        |    |       
|                                                     |                                                                             | Stock-based compensation                                 |                                                     |                                       | 213   |                    |        |        | 702 |       
|                                                     |                                                                             | Acquired in-process research and development             |                                                     |                                       |      |                    |        |        | 270 |       
|                                                     |                                                                             | Change in cumulative translation adjustment              |                                                     |                                       | (10   | )                  |        |        | (73 | )     
|                                                     |                                                                             | Changes in assets and liabilities:                       |                                                     |                                       |       |                    |        |        |     |       
|                                                     |                                                                             |                                                          | Accounts receivable                                 |                                       |       | 1,612              |        |        |     | 1,011  |       
|                                                     |                                                                             |                                                          | Inventories                                         |                                       |       | 329                |        |        |     | (398   | )     
|                                                     |                                                                             |                                                          | Prepaid expenses and other current assets           |                                       |       | 254                |        |        |     | 81     |       
|                                                     |                                                                             |                                                          | Other assets                                        |                                       |       |                   |        |        |     | 23     |       
|                                                     |                                                                             |                                                          | Accounts payable                                    |                                       |       | (1,703             | )      |        |     | 313    |       
|                                                     |                                                                             |                                                          | Accrued compensation                                |                                       |       | (591               | )      |        |     | (250   | )     
|                                                     |                                                                             |                                                          | Other accrued liabilities                           |                                       |       | (1,035             | )      |        |     | (479   | )     
|                                                     |                                                                             |                                                          | Deferred revenue                                    |                                       |       | (753               | )      |        |     | (858   | )     
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     |                                                                             |                                                          |                                                     | Net cash used in operating activities |       |                    | (4,385 | )      |     |        | (2,053 | )
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Cash flows from investing activities:                |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     | Capital expenditures                                                        |                                                          |                                                     | (183                                  | )     |                    |        | (159   | )  
|                                                     | Business acquisition (net of cash received)                                 |                                                          |                                                     | (5,404                                | )     |                    |        | (3,964 | )  
|                                                     | Purchase of short-term investments                                          |                                                          |                                                     | (2,671                                | )     |                    |        | (6,100 | )  
|                                                     | Proceeds
from the sales of short-term investments                           |                                                          |                                                     | 4,510                                 |       |                    |        |       |    
|                                                     | Proceeds
from the maturities of short-term investments                      |                                                          |                                                     | 6,774                                 |       |                    |        | 32,344 |    
|                                                     | Restricted
Cash                                                             |                                                          |                                                     | (10,863                               | )     |                    |        |       |    
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     |                                                                             |                                                          | Net cash provided by (used in) investing activities |                                       |       | (7,837             | )      |        |     | 22,121 |       
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Cash flows from financing activities:                |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     | Principal payments on capital lease obligations                             |                                                          |                                                     | (35                                   | )     |                    |        | (60    | )  
|                                                     | Net proceeds from issuances of common stock                                 |                                                          |                                                     | 60                                    |       |                    |        | 111    |    
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     |                                                                             | Net cash provided by (used in) financing activities      |                                                     |                                       | 25    |                    |        |        | 15  |       
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                          | (12,197                                             | )                                     |       |                    | 20,119 |       
|Cash and cash equivalents at beginning of period     |                                                                             |                                                          | 17,996                                              |                                       |       |                    | 39,147 |       
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Cash and cash equivalents at end of period           |                                                                             | $                                                        | 5,799                                               |                                       |       | $                  | 59,266 |       
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|Cash flow for acquisition of the Jones Group         |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     | Tangible assets acquired                                                    |                                                          | $                                                   | 9,296                                 |       |                    |        |        |    
|                                                     | Goodwill and other intangible assets acquired                               |                                                          |                                                     | 11,829                                |       |                    |        |        |    
|                                                     | Acquisition costs incurred                                                  |                                                          |                                                     | (584                                  | )     |                    |        |        |    
|                                                     | Liabilities assumed                                                         |                                                          |                                                     | (2,445                                | )     |                    |        |        |    
|                                                     | Notes
payable issued                                                        |                                                          |                                                     | (10,863                               | )     |                    |        |        |    
|                                                     | Common stock issued                                                         |                                                          |                                                     | (1,829                                | )     |                    |        |        |    
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       
|                                                     |                                                                             | Cash
paid for acquisition (net of $28 cash received)     |                                                     | $                                     | 5,404 |                    |        |        |     |       
|                                                     |                                                                             |                                                          |                                                     |                                       |       |                    |        |       

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



---



##### Table of Contents






ARGONAUT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of normal
recurring accruals and adjustments, which Argonaut Technologies, Inc. (Argonaut or the
Company) considers necessary to present fairly the financial information
included herein. This Quarterly Report on Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Form 10-K, for the year ended December 31, 2001 as
filed with the Securities and Exchange Commission. The interim results
presented herein are not necessarily indicative of the results of operations
that may be expected for the full fiscal year ending December 31, 2002, or any
other future period.

NOTE 2  INVENTORIES

Inventories consist of the following (in thousands):

|                |  |           |       |              |  |   |       | 
|--------------- |  | --------- | ----- | ------------ |  | - | ----- | 
|                |  | March 31, |       | December 31,
|                |  | 2002      |       | 2001        
|                |  |           |       |             
|Raw materials   |  | $         | 3,851 |              |  | $ | 3,375 | 
|Work in process |  |           | 858   |              |  |   | 658   | 
|Finished goods  |  |           | 2,506 |              |  |   | 63    | 
|                |  |           |       |              |  |   |       | 
|                |  | $         | 7,215 |              |  | $ | 4,096 | 
|                |  |           |       |              |  |   |       | 

NOTE 3  NET LOSS PER SHARE

Net loss per share has been computed according to Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which requires disclosure
of basic and diluted earning per share. Basic and diluted net loss per share
was computed using the weighted-average number of common shares outstanding.
Options to purchase 3,051,612 and 2,115,833 shares of common stock were
outstanding at March 31, 2002 and March 31, 2001, respectively, and warrants to
purchase 80,665 shares of common stock were outstanding at March 31, 2002 and
March 31, 2001, but were not included in the computation of diluted net loss
per share, since the effect would be antidilutive.

NOTE 4  COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and other items of comprehensive
income (loss). Other comprehensive income (loss) includes unrealized gains and
losses on the Companys short-term investments and foreign currency translation
adjustments.

For the three months ended March 31, 2002 and 2001, comprehensive loss is as
follows (in thousands):

|                                   |  |                    |        |      |  |   |        |  
|---------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                   |  | Three Months Ended
|                                   |  | March 31,         
|                                   |  |                   
|                                   |  | 2002               |        | 2001
|                                   |  |                    |        |     
|Net loss                           |  | $                  | (3,117 | )    |  | $ | (2,647 | )
|Unrealized gain (loss)             |  |                    | (147   | )    |  |   |       |  
|Cumulative
translation adjustments |  |                    | (10    | )    |  |   | (73    | )
|                                   |  |                    |        |      |  |   |        |  
|Comprehensive loss                 |  | $                  | (3,274 | )    |  | $ | (2,720 | )
|                                   |  |                    |        |      |  |   |        |  

6



---



##### Table of Contents



NOTE 5  BUSINESS COMBINATION

On February 20, 2002, Argonaut completed its acquisition of Jones
Chromatography Limited, a company organized under the laws of England and Wales
(JCL), and its wholly owned subsidiaries International Sorbent Technology (IST)
and Jones Chromatography U.S.A., Inc. (JCI) (together with JCL, Jones Group),
pursuant to a Share Purchase Agreement (the Purchase Agreement), dated
February 11, 2002, among Argonaut and the stockholders of JCL.

The strategic acquisition of Jones Group creates a
combined company serving as a global provider of solutions for
chemistry development. The addition of Jones Group to Argonaut
strengthens and expands the Companys position in chemistry
consumables sales, and increases the Companys
European business. The Jones group is a leading manufacturer and
distributor of high quality chromatography and purification
accessories, consumables and instrumentation. Consumable items
include leading brand sorbents, solid phase extraction (SPE) columns
and 96-well plates, flash chromatography and High Performance Liquid
Chromatography (HPLC) columns. It manufactures purification and other
chemistry development instruments for the drug discovery market.

In the transaction, the stockholders of JCL exchanged all of their respective
shares of JCLs stock for (i) cash in an aggregate amount of £3,825,000
($5,431,500), (ii) 572,152 shares of unregistered Argonaut Common Stock, and
(iii) notes payable in the aggregate principal amount of £7,650,000
($10,863,000). The aggregate purchase price, including transaction
costs of $584,000, was approximately $18.7 million.
The notes payable, which are redeemable for cash over a two year period
following the closing date, are guaranteed by Barclays Bank PLC. In addition,
certain employees of the Jones Group that remain as employees after the
transaction will receive stock options to purchase an aggregate 349,800 shares
of Argonauts Common Stock.

All shares of Argonauts Common Stock issued to JCLs stockholders in the
transaction were issued in reliance on exemptions from registration under the
Securities Act of 1933, as amended (the Securities Act). As a result, all such
shares of Argonauts Common Stock are subject to restrictions on transfer under
the applicable provisions of the Securities Act. Under the terms of the
Registration Rights Agreement dated February 20, 2002, Argonaut has granted
JCLs stockholders certain rights to register under the Securities Act the
shares of Argonauts Common Stock received in the transaction.

Immediately prior to the acquisition of the Jones Group by the Company, the
shareholders of JCL effected a series of transactions whereby JCL acquired all
of the shares in the capital of IST and JCI which were not previously held by
JCL.

The acquisition was accounted for under the purchase method of accounting. The
572,152 shares of unregistered Argonaut Common Stock issued in the transaction
were valued at $3.196 per share based on the average closing price of
Argonauts Common Stock on the Nasdaq National Market System on the two trading
days prior and two trading days subsequent to the announcement date of the
acquisition (February 11, 2002).

The Condensed Consolidated Statements of Operations include the results of
Jones Group for the period from February 21, 2002 to March 31, 2002.

The Company preliminarily allocated the purchase price based on the estimated
fair value of the net tangible and intangible assets acquired. Based on the
preliminary independent valuation, and subject to material changes upon receipt
of the final valuation and validation of its result by the Company, the
preliminary estimated purchase price is allocated as follows (in thousands):

|                                                |                      |   |        |       | 
|----------------------------------------------- | -------------------- | - | ------ | ----- | 
|Net tangible assets                             |                      | $ | 6,879  |      
|Goodwill and other purchased intangible assets: |                      |   |        |      
|                                                | Completed technology |   |        | 4,130 | 
|                                                | Trade names          |   |        | 250   | 
|                                                | Goodwill             |   |        | 7,449 | 
|                                                |                      |   |        |      
|Total preliminary estimated purchase price      |                      | $ | 18,708 |      
|                                                |                      |   |        |      

7



---



##### Table of Contents



Approximately $7.4 million of the total preliminary purchase price has been
allocated to goodwill and intangible assets with indefinite lives. Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the underlying net tangible and intangible assets. In accordance
with the Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, goodwill and intangible assets with indefinite lives
resulting from business combinations completed subsequent to
June 30, 2001 will
not be amortized but instead will be tested for impairment at least annually
(more frequently if certain indicators are present).

The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the acquisition of Jones Group had occurred at
the beginning of 2002 and does not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or of results which
may occur in the future.

|                   |  |                           |        |      |  |   |        |  
|------------------ |  | ------------------------- | ------ | ---- |  | - | ------ | -
|                   |  | Three months ended       
|                   |  | March 31,                
|                   |  |                          
|                   |  | 2002                      |        | 2001
|                   |  |                           |        |     
|                   |  | (In thousands, except per
|                   |  | share data)              
|Total revenue      |  | $                         | 6,513  |      |  | $ | 8,129  |  
|Net loss           |  |                           | (2,974 | )    |  |   | (2,382 | )
|Net
Loss per share |  |                           | (0.15  | )    |  |   | (0.12  | )

8



---



##### Table of Contents



NOTE 6  RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144) that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. These new
rules on asset impairment supersede FASB 121 and provide a single accounting
model for long-lived assets to be disposed of. SFAS 144 removes goodwill from
its scope, describes a profitability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, establishes a
primary-asset approach to determine the cash flow estimation period for a
group of assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The adoption of SFAS 144 in the quarter
ended March 31, 2002 did not have a material adverse effect on the results of
operations, financial position, or cash flows.

In June 2001, the Financial Accounting Standards Board issued SFAS 141,
Business Combinations (SFAS 141), and SFAS 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 141 also includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. SFAS 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. Additionally, SFAS 142 requires that goodwill included in the carrying
value of equity method investments no longer be amortized.

The Company adopted SFAS 142 on January 1, 2002. The Company reclassified
identifiable intangible assets with indefinite lives, as defined by SFAS 142,
to goodwill at the date of adoption. The Company will test for
goodwill and indefinite lived intangible assets impairment
using a two-step process prescribed by SFAS 142. The first step is a screen
for potential impairment, while the second step measures the amount of
impairment by reporting unit, if any. The Company expects to perform the first step of the required
impairment test of goodwill and indefinite lived intangible assets in
the second quarter of fiscal 2002. Any impairment charge resulting
from these transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principles as of
January 1, 2002.

The following pro forma information reflects the
impact on net loss and net loss per share assuming the adoption of
SFAS 142 had occurred on January 1, 2001:

|                                                                                                 |   |                           |        |                          |   |       |        |  
|------------------------------------------------------------------------------------------------ | - | ------------------------- | ------ | ------------------------ | - | ----- | ------ | -
|                                                                                                 |   | Three months ended       
|                                                                                                 |   | March 31,                
|                                                                                                 |   |                          
|                                                                                                 |   | 2002                      |        | 2001
        (Pro forma)
|                                                                                                 |   |                           |        |                         
|                                                                                                 |   | (In thousands, except per
|                                                                                                 |   | share data)              
|Reported net loss                                                                                |   | $                         | (3,117 | )                        |   | $     | (2,647 | )
|Amortization
of goodwill and identifiable intangible assets with indefinite lives                |   |                           |       |                          |   |       | 39     |  
|                                                                                                 |   |                           |        |                         
|Pro
forma net loss                                                                               |   | $                         | (3,117 | )                        |   | $     | (2,608 | )
|                                                                                                 |   |                           |        |                         
|Basic
and diluted net loss per share:                                                            |   |                           |        |                          |   |       |        |  
|Reported
net loss                                                                                | $ | (0.16                     | )      |                          | $ | (0.14 | )     
|Income
related to goodwill and identifiable intangible assets with
indefinite lives amortization |   |                           |       |                          |   |       |       |  
|                                                                                                 |   |                           |        |                         
|Pro
forma net loss per share                                                                     |   | $                         | (0.16  | )                        |   | $     | (0.14  | )
|                                                                                                 |   |                           |        |                         

NOTE 7  RESTRUCTURING CHARGE

In the fourth quarter of fiscal 2001, the Company announced a restructuring
program to downsize its organizational structure in order to reduce its
operating expenses and improve workforce processes and efficiencies. As a
result, the Company recorded a charge of $384,000, which includes termination
benefits and related expenses of $362,000 related to a reduction of the
workforce by 23 employees, including termination benefits and related expenses,
and expenses of $22,000 for abandonment of excess equipment. At March 31,
2002, 19 of 23 employees had been terminated, and
the accrued restructuring liability was $35,000. For the quarter
ended March 31, 2002, cash payments related to the restructuring
program were $327,000.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This quarterly report contains forward-looking statements for purposes of the
Private Securities Litigation Reform Act of 1995, and it is the Companys
intention that such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements about future
revenues, expenses, losses and cash flows, statements about research and
development activities, statements about possible future acquisitions,
statements about sales and marketing efforts and statements about our
expectations as to the duration of our negative cash flows from operations and
the sufficiency of existing cash reserves for the next 12 months. Actual
results may differ materially from these projected in such forward-looking
statements due to various known and unknown risks and uncertainties, including
the risk that a decline in the economy generally or the market for our products
will adversely affect our business, the risk that the market for our products
and services does not develop as anticipated, the risk that we are unable to
successfully integrate the product and service offerings of the company we
recently acquired and successfully capitalize an anticipated synergies and
growth opportunities.

9



---



##### Table of Contents



For a further discussion of these and other risks related to our business see
the discussion set forth herein under Additional Factors That May Affect
Future Results, as well as the discussion of risk factors set forth in our
Form 10-K for the fiscal year ended December 31, 2001 filed on April 1, 2002,
and our other filings with the Securities Exchange Commission. Since our
inception, we have incurred significant losses and, as of March 31, 2002, we
had an accumulated deficit of $58.4 million. We anticipate incurring additional
losses, which may increase, for the foreseeable future.

Overview

Argonaut develops innovative products designed to
accelerate and optimize how chemists
discover and test new chemical entities. Our products are designed to enable chemists to
increase their productivity, reduce their operating costs through automation
and process simplification, achieve faster time-to-market for new
products, and
cost effectively explore the increasing number of drug targets available for
drug development. We derive revenues primarily from the sale of our instrument
products, consumable products, software and service products. We commenced
commercial shipment of our first generation instrument in 1996, the Quest
product line in 1997, the Trident product line in 1998 and the Surveyor and the
Endeavor in 2000. Revenue from sales of our instrument products is recognized
when delivery and installation of the product is complete. We also derive
revenues from the sale of reagents and other instrument related consumables, as
well as revenues derived from products and integration services in connection
with the acquisition of Argonaut Technologies Systems, Inc. (ATSI) completed
on March 1, 2001 and the sale of instruments and consumables
products of Jones  Chromatography Limited (Jones Group), which we acquired on February 20, 2002. Our expenses have
consisted primarily of costs incurred in research and development,
manufacturing and general and administrative costs associated with our
operations, and our sales and marketing organization. Our
research and development expenses may increase in the future as we continue to
develop our products. Our selling and marketing expenses may increase as we
continue to expand the geographic coverage of our direct sales and support
organization.

Recent Developments

Acquisition of Jones Group
On February 20, 2002, Argonaut completed its acquisition of
Jones Chromatography Limited, a company organized under the laws of
England and Wales (JCL), and its wholly owned subsidiaries
International Sorbent Technology (IST) and Jones Chromatography
U.S.A., Inc. (JCI) (together with JCL, Jones Group), pursuant to a
Share Purchase Agreement (the Purchase Agreement), dated
February 11, 2002, among Argonaut and the stockholders of JCL. The Jones Group became a wholly owned subsidiary of Argonaut and will
continue to operate out of its current Cardiff, Wales, U.K. locations. Jones
Group has approximately 118 employees worldwide with the majority located in
the United Kingdom. It operates two manufacturing plants totaling approximately
50,000 square feet.

The Jones Group is a leading manufacturer and distributor of high quality
chromatography and purification accessories, consumables and instrumentation.
Consumable items include leading brand sorbents, solid phase extraction (SPE)
columns and 96-well plates, flash chromatography and High Performance Liquid
Chromatography (HPLC) columns. It manufactures purification and other chemistry
development instruments for the drug discovery market.

In the transaction, the stockholders of JCL exchanged all of their respective
shares of JCLs stock for (i) cash in an aggregate amount of £3,825,000
($5,431,500), (ii) 572,152 shares of unregistered Argonaut Common Stock, and
(iii) notes payable in the aggregate principal amount of £7,650,000
($10,863,000). The aggregate purchase price was approximately $18.7 million.
The notes payable, which are redeemable for cash over a two year period
following the closing date, are guaranteed by Barclays Bank PLC. In addition,
certain employees of the Jones Group that remain as employees after the
transaction will receive stock options to purchase an aggregate 349,800 shares
of Argonauts Common Stock.

All shares of Argonauts Common Stock issued to JCLs stockholders in the
transaction were issued in reliance on exemptions from registration under the
Securities Act of 1933, as amended (the Securities Act). As a result, all such
shares of Argonauts Common Stock are subject to restrictions on transfer under
the applicable provisions of the Securities Act. Under the terms of the
Registration Rights Agreement dated February 20, 2002, Argonaut has granted
JCLs stockholders certain rights to register under the Securities Act the
shares of Argonauts Common Stock received in the transaction.

Immediately prior to the acquisition of the Jones Group by the Company, the
shareholders of JCL effected a series of transactions whereby JCL acquired all
of the shares in the capital of IST and JCI which were not previously held by
JCL.

Under the terms of the Share Purchase Agreement, notes payable in the aggregate
principal amount of £2,550,000 ($3.6 million) will be held in escrow until the
second anniversary of the closing date, and may be used to satisfy certain
indemnification obligations of the principal JCL shareholders.

Restructuring charge

In the fourth quarter of 2001, the Company
announced a restructuring program to downsize our organizational
structure in order to reduce operating expenses and improve workforce
processes and efficiencies. As a result, the Company recorded a
charge of $384,000, which includes termination benefits and related
expenses of $362,000 related to a reduction of our workforce by 23
employees and expenses of $22,000 for abandonment of excess
equipment. Remaining cash expenditures relating to workforce reduction
will be paid in the first two quarters of fiscal 2002. The
restructuring program is expected to yield cash savings of
approximately $3.4 million annually, beginning in fiscal 2002.
These savings largely relate to reduced employee related costs and
are expected to be realized primarily in operating expenses. At
March 31, 2002, 19 of 23 employees had been terminated and the
accrued restructuring liability was $35,000. For the quarter ended
March 31, 2002, cash payments related to the restructuring
program were $327,000.

Critical Accounting Policies

Restructuring

During fiscal year 2001, we recorded significant
reserves in connection with our restructuring program. These reserves
include estimates pertaining to employee separation costs and related
abandonment of excess equipment. Although we do not anticipate
significant changes, the actual costs may differ from these estimates.

Purchase Accounting

In June 2001, the Financing Accounting Standards
Board issued SFAS 141, Business Combinations
(SFAS 141). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001. SFAS 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after
June 30, 2001. We accounted for the acquisition of ATSI and Jones Group
under the purchase method of accounting and accordingly, the acquired
assets and liabilities assumed are recorded at their respective fair
values. The recorded values of assets and liabilities are based on
third-party estimates and valuations. The remaining values are based
on our judgments and estimates, and accordingly, the Companys
financial position or results of operations may be affected by
changes in estimates and judgments.

Amortization of Goodwill and Other
Purchased Intangibles

In June 2001, the Financing Accounting Standards
Board issued SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. SFAS 142
requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives. Additionally,
SFAS 142 requires that goodwill included in the carrying value
of equity method investments no longer be amortized.

The Company adopted SFAS 142 on
January 1, 2002. The Company reclassified identifiable
intangible assets with indefinite lives, as defined by SFAS 142,
to goodwill at the date of adoption. The Company will test for
goodwill and indefinite lived intangible assets impairment using
a two-step process prescribed by SFAS 142. The first step is a
screen for potential impairment, while the second step measures the
amount of impairment by reporting unit, if any. The Company expects
to perform the first step of the required impairment test of goodwill
and indefinite lived intangible assets in the second quarter of
fiscal 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a
change in accounting principles as of January 1, 2002.

RESULTS OF OPERATIONS ENDED MARCH 31, 2002

Operating results for the quarter include Jones
Group for the period from February 21, 2002 through
March 31, 2002.

10



---



##### Table of Contents



Net Sales

Net sales were $4.8 million for the three months ended March 31, 2002,
essentially unchanged from $4.8 million in the same period of 2001. Reduced net
sales of all instrument groups and related instrument disposable products was
offset by improved net sales of chemistry products and services, and sales from
our acquired businesses. For the first quarter of 2002, instrument and
chemistry consumables sales were approximately equal to one another
with each comprising a little more than 44% of net sales. Service,
integration and contract R&D constituted the remaining 11% of net
sales. From a geographic standpoint, the net sales to customers
located in the Americas were
approximately 62% of our total net sales for the quarter. Net sales
to customers located in Europe was
approximately 33% and net sales to customers located in the Far East
accounted for the balance of 5%. The Jones Group accounted for
approximately 32% of net sales for the three month period ended March
31, 2002.

Cost of sales

Cost of sales increased to $2.6 million in the first quarter of 2002 from $2.3
million in the first quarter of 2001. This increase was primarily attributable
to changes in the product mix relative to the prior year. Gross
margin as a percent of net sales was 46% in the first quarter of 2002
versus 52% in the same quarter of 2001. The Jones Group accounted for
approximately 32% of cost of sales for the three month period ended
March 31, 2002.

Research and development expenses

Research and development expenses decreased to $1.4 million in the first
quarter of 2002 from $1.6 million in the first quarter of 2001. These expenses
include salaries and related costs of research and development
personnel, the costs of facilities and related expenses, as
well as the costs of parts and supplies associated with research and
development projects. The decrease was primarily attributable to the effects
of the restructuring initiated in the fourth quarter of 2001 and reduced
stock-based compensation expenses. Stock-based compensation expenses related to
research and development decreased by $213,000 for the first quarter of 2002 as
compared to the same quarter in 2001. The Jones Group accounted for
approximately 4% of research and development expense for the three
month period ended March 31, 2002.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased to $3.9 million in the
first quarter of 2002 from $4.1 million in the same period of 2001. These
expenses consist primarily of salaries and related costs for executive, sales
and marketing, finance and other administrative personnel and the cost of
facilities and related spending. The decrease was primarily attributable to the
effects of the restructuring initiated in the fourth quarter of 2001 and
reduced stock-based compensation charges. Stock-based compensation expenses
related to selling, general and administration decreased by $276,000 for the
first quarter of 2002, as compared to the same period in 2001. The
Jones Group accounted for approximately 12% of selling, general and
administrative expense for the three month period ended March 31,
2002.

Amortization of purchased intangible assets and acquired in-process research &
development expense

During the three months ended March 31, 2002, the
Company adopted SFAS 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 prohibits the amortization of
goodwill and intangible assets with indefinite useful lives and
requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives. As of March 31, 2002,
the Company had $8.2 million in goodwill and intangible assets, which
have an indefinite useful life and thus no amortization expense was
recorded during the three months ended March 31, 2002. Goodwill
arising from acquisitions accounted for $39,000 in amortization in
the three months ended March 31, 2001. For the three month period ended March 31, 2002, the
Company recorded amortization of purchased intangibles of $119,000
related to the March 1, 2001 acquisition of ATSI and the
February 20, 2002 acquisition of Jones Group compared to $33,000
in the same period of 2001. The Company recorded in-process research
and development expense of zero, and $270,000 for the first quarter
of 2002 and 2001, respectively.

Interest and Other Income (Expense), net

Interest and other income decreased to $304,000 for the three-month period
ended March 31, 2002 as compared to $1.0 million for the three months ended
March 31, 2001 primarily because of lower average balances of invested cash,
cash equivalents, and short term investments and reduced interest rate yields
consistent with the overall interest rate decline of high quality short term
investment. Interest and other expenses was $139,000 for
the three-month period ended March 31, 2002 compared to $104,000
in the same period in 2001.

Provision for Income Taxes

The Company recorded a provision for income taxes
of approximately $37,000 to record the UK corporate tax liability of
Jones Group for the period included in these operating results.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, the Company had cash, cash equivalents, short-term
investments and restricted cash of $47.5 million compared to $57.6 million at
December 31, 2001. The decrease was primarily due to the use of $6.0 million in
connection

11



---



##### Table of Contents



with the purchase of the Jones Group and related expenses, approximately
$327,000 in cash payments related to the restructuring initiated in the fourth
quarter of 2001, and cash used in operating activities of
approximately $3.8 million. The restricted cash amount is
denominated in British pounds sterling and represents the cash used to
secure the notes payable of £7,650,000 ($10.9 million) as
purchase consideration in the acquisition of Jones Group. The notes
are payable over two years carrying an initial interest rate of 3.9%
per annum for the twelve month period commencing on the date of note
issuance, payable quarterly.

Net cash used to support operating activities has historically fluctuated based
on the timing of payments of accounts payable balances, receipts of customer
deposits, receipt of payments of accounts receivable balances, changes in
inventory balances resulting from varying levels of manufacturing activities,
the timing of research and development projects, expansion of our sales and
marketing organization and fluctuations in the Companys net loss.

The acquisition of Jones Group was completed on
February 20, 2002 for purchase consideration of approximately
572,000 shares of unregistered Argonaut common stock. £3,825,000
($5.4 million) cash due at closing, and notes payable
aggregating £7,650,000 ($10.9 million) payable over two
years, plus acquisition related legal accounting, due diligence, and
other transaction expenses. We expect Jones Group to provide
approximately $10 million to our 2002 net sales performance and
to be accretive to pre-tax operating results.

The Company expects to have negative cash flows from operations through at
least the end of 2002. In addition, we expect to incur increasing development
expenses, as well as expenses for additional personnel for production and
commercialization efforts. We may also use cash resources to fund additional
acquisitions or investments in other businesses, technologies or product lines.
Our future capital requirements depend on a number of factors, including market
acceptance of our products, the resources we devote to developing and
supporting our products, continued progress of our research and development of
potential products, the need to acquire licenses to new technology and the
availability of other financing. We believe that our current cash balances will
be sufficient to fund our operations through at least the next 12 months. To
the extent that our capital resources are insufficient to meet future capital
requirements, we will need to raise additional capital or incur indebtedness to
fund our operations. There can be no assurance that additional debt or equity
financing will be available on acceptable terms, if at all. If adequate funds
are not available, we may be required to delay, reduce the scope of, or
eliminate, our operations or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain technologies or products that we might otherwise seek to retain.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

We have a history of operating losses and we may never achieve or sustain
profitability and may be required to raise additional funds if losses continue.

We have incurred operating losses and negative cash flows from operations
since our inception. As of March 31, 2002 we had an accumulated deficit of
$58.4 million and we recorded net losses of $3.1 million for the three month
period ended March 31, 2002. We expect to continue to incur operating and net
losses for the foreseeable future and we may never generate positive cash
flows.

To the extent our capital resources are insufficient to meet our future
capital requirements, we will have to raise additional funds to continue the
development and commercialization of our products. Funds may not be available
on favorable terms, if at all. To the extent that we raise additional capital
through the sale of equity, the issuance of those securities will result in
dilution to our stockholders.

If our products do not become widely used in the life sciences and chemical
industries, it is unlikely that we will ever become profitable.

Pharmaceutical, biotechnology, life sciences and chemical companies have
historically performed chemistry development using traditional laboratory
methods. To date, our products have not been widely adopted by these
industries. The commercial success of our products will depend upon the
adoption of these products as a method to develop chemical compounds for the
life sciences and other industries. In order to be successful, our products
must meet the performance and pricing requirements for chemistry development
within the life sciences and other industries. Market acceptance will depend on
many factors, including our ability to:



| |  | Convince prospective customers that our products are a cost-effective alternative to
traditional methods and other technologies that may be introduced for chemistry development.         
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Convince prospective customers that our products provide the same or enhanced quality and
accuracy as compared with traditional methods and other new technologies which may be
developed.
| 
| |  | Manufacture products in sufficient quantities with acceptable quality and at an acceptable cost.                                                                                          
| 
| |  | Install and service sufficient quantities of our products.                                                                                                                                

If we cannot achieve these objectives, our products will not gain market
acceptance.

12



---



##### Table of Contents



We face risks associated with past and future acquisitions.

Our success depends in part on our ability to continually enhance and
broaden our product offerings in response to changing technologies, customer
demands and competitive pressures. To meet these challenges, we have recently
acquired complementary businesses and may choose to acquire others in the
future. We completed our acquisition of ATSI in March 2001 and Jones Group in
February 2002. We have never integrated a business as financially significant
as Jones Group or a business based outside of the United States. Our failure to
successfully integrate these businesses may materially affect our business
going forward. We do not know if we will be able to complete any future
acquisitions, or whether we will be able to successfully integrate any acquired
business, operate it profitably or retain its key employees. Integrating any
business, product or technology we acquire could be expensive and time
consuming, and may disrupt our ongoing business and distract our management. If
we are unable to effectively integrate any acquired entities, products or
technologies, our business may suffer. In addition, any amortization of
goodwill or other assets or charges resulting from the costs of acquisitions
could negatively impact our operating results. Our available cash and
securities may be used to buy or invest in companies or products, possibly
resulting in significant acquisition-related charges to earnings and dilution
to our stockholders. Due to volatile market conditions, the value of long live
assets maybe negatively impacted, which may result in future, additional
impairment charges. Moreover, if we buy a company, we may have to incur or
assume that companys liabilities, including liabilities that are unknown at
the time of acquisition.

Our product development efforts may not produce commercially viable products.

We continue to devote significant personnel and financial resources to
research and development activities to develop new products. We may not be
successful in developing new products, and we may never realize any benefits
from such research and development activities, including both our current
research collaboration with Pfizer and our product development consortium with
Pfizer and ICI, which may not produce commercially viable products. Our ability
to increase our revenues and achieve and sustain profitability is dependent
upon our ability to successfully develop new and commercially viable products.

The capital spending policies of life sciences and other chemical research
companies have a significant effect on the demand for our products.

We market our products to and receive our revenues principally from
pharmaceutical, biotechnology, life sciences and other chemical research
companies, and the capital spending policies of these entities can have a
significant effect on the demand for our products. These policies are based on
a wide variety of factors, including the resources available for purchasing
research equipment, the spending priorities among various types of research
equipment and the policies regarding capital expenditures. In particular, the
volatility of the public stock market for biotechnology and related companies
has at times significantly impacted their ability to raise capital, which has
directly affected their capital spending budgets. In addition, continued
consolidation within the pharmaceutical industry will likely delay and may
potentially reduce capital spending by pharmaceutical companies involved in
such consolidations. Any decrease or delay in capital spending by life sciences
companies could cause our revenues to decline and harm our profitability.

Our products have lengthy sales cycles, which could cause our operating results
to fluctuate significantly from quarter to quarter.

Our ability to obtain customers for our products depends in significant
part upon the perception that our products can help accelerate efforts in
chemical development. The sale of many of our products typically involves a
significant technical evaluation and commitment of capital by customers.
Accordingly, the sales cycles of many of our products are lengthy and subject
to a number of risks that are beyond our control, including customers
budgetary constraints and internal acceptance reviews. Our revenues could
fluctuate significantly from quarter to quarter, due to this lengthy and
unpredictable sales cycle. A large portion of our expenses, including expenses
for facilities, equipment and personnel, are relatively fixed. Accordingly, if
our revenues decline or do not grow as we anticipate, we might not be able to
correspondingly reduce our operating expenses. Our failure to achieve our
anticipated levels of revenues could significantly harm our operating results
for a particular fiscal period. Due to the possibility of fluctuations in our
operating results, we believe that quarter-to-quarter comparisons of our
operating results are not always a good indication of our future performance.

In order to be successful, we must recruit, retain and motivate key employees,
and failure to do so could seriously harm us.

13



---



##### Table of Contents



In order to be successful, we must recruit, retain and motivate executives
and other key employees, including those in managerial, technical, marketing
and sales positions. In particular, our product generation efforts depend on
hiring and retaining qualified technical personnel. Attracting and retaining
qualified sales representatives is also critical to our future. Experienced
management and technical, marketing and support personnel in the
instrumentation industry are in high demand and competition for their talents
is intense. This is particularly the case in Silicon Valley, where our
headquarters and certain key research and development facilities are located.
The loss of key employees could have a significant impact on our operations. We
also must continue to motivate employees and keep them focused on Argonauts
strategies and goals, which may be particularly difficult due to morale
challenges posed by workforce reductions and general uncertainty. Changes in
management may be disruptive to our business and may result in the departure of
existing employees, customers and/or research collaborators. It may take
significant time to locate, retain and integrate qualified management personal.

Our direct world wide sales force and network of distributors may not be
sufficient to successfully address the market for our products.

We sell a major portion of our products through our own sales force. We
may not be able to build an efficient and effective sales and marketing force
and continue to expand our network of distributors. Our failure to build an
efficient and effective sales and marketing force could negatively impact sales
of our products, thus reducing our revenues and profitability. In addition, we
need to successfully and efficiently integrate Jones Group sales force
otherwise we may not realize expected synergies.

We are exposed to general global economic and market conditions.

Our business is subject to the effects of general economic conditions in
the United States, United Kingdom and globally, and, in particular, market
conditions in the life science and chemical industries. In recent quarters, our
operating results have been adversely affected as a result of unfavorable
economic conditions and reduced capital spending in the United States, Europe,
and Asia. If the economic conditions in the United States and globally do not
improve, or if we experience a worsening in the global economic slowdown, we
may continue to experience material adverse impacts on our business, operating
results, and financial condition.

Our business is subject to risks from international operations.

We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; and natural disasters.
Any or all of these factors could have a material adverse impact on our future
international business.

We are exposed to fluctuations in the exchange rates of foreign currency.

As a global concern, we face exposure to adverse movements in foreign
currency exchange rates. With the Jones Group acquisition, approximately 44% of
our net sales are exposed to foreign currency risk. These exposures may change
over time as business practices evolve and could have a material adverse impact
on our financial results. The use of the Euro as a common currency for members
of the European Union could impact our foreign exchange exposure. We will
monitor our exposure and may hedge against this and any other emerging market
currencies as necessary.

We are exposed to the credit risk of some of our customers.

Due to the current slowdown in the economy, the credit risks relating to
our customers have increased. Although we have programs in place to monitor and
mitigate the associated risk, there can be no assurance that such programs will
be effective in reducing our credit risks. We have experienced losses due to
customers failing to meet their obligations. Although these losses have not
been significant, future losses, if incurred, could harm our business and have
a material adverse effect on our operating results and financial conditions.

If we lose our exclusive license to proprietary technology incorporated into
our products we may be unable to continue selling those products.

We have developed some of our products based on proprietary technology
originally developed by third parties. We currently have exclusive licenses to
use such technology in our products that are subject to termination in certain
events. In

14



---



##### Table of Contents



particular, our license to proprietary technology belonging to Symyx, which is
incorporated into our Endeavor product. Our sales of this product constitute a
significant portion of our revenue. We estimate that sales of this product will
constitute approximately 10% to 15% of our revenues for 2002. This estimate
depends on a variety of factors, including increased demand, and we cannot be
certain that this estimate will be accurate. If licensors terminate our
licenses to any such technology, our revenues will decline.

Because we outsource our product assembly, our ability to produce and supply
our products could be impaired.

We outsource most of the assembly of our products to vendors. Our reliance
on our outside vendors exposes us to risks including:



| |  | the possibility that one or more of our vendors could terminate their services at any time without notice;                 
|- |  | ---------------------------------------------------------------------------------------------------------------------------
| 
| |  | reduced control over pricing, quality and timely delivery, due to the difficulties in switching to alternative vendors; and
| 
| |  | the potential delays and expenses of seeking alternative sources of manufacturing services.                                

Consequently, in the event that components from our suppliers or work performed
by our vendors are delayed or interrupted for any reason, our ability to
produce and deliver our products would decline.

The life sciences industry is highly competitive and subject to rapid
technological change, and we may not have the resources necessary to
successfully compete.

We compete with companies world wide that are engaged in the development
and production of similar products. We face competition primarily from the
following three sectors:



| |  | companies marketing conventional products based on traditional chemistry methodologies;                                                                                     
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | pharmaceutical companies developing their own instruments; and                                                                                                              
| 
| |  | companies marketing products based upon parallel synthesis and other innovative
technologies, such as Mettler-Toledo AG and several smaller instrument and reagent
companies

Many of our competitors have access to greater financial, technical,
research, marketing, sales, distribution, service and other resources than we
do. We face, and will continue to face, intense competition from organizations
serving the life sciences industry that are developing or marketing competing
products and technologies. These organizations may develop products or
technologies that are superior to our products or technologies in terms of
performance, cost or both. These organizations may offer price discounts or
other concessions as a competitive tactic that we may not be in a position to
match.

We may need to develop new applications for our products to remain
competitive. Our present or future products could be rendered obsolete or
uneconomical by technological advances of one or more of our current or future
competitors. In addition, the introduction or announcement of new products by
us or by others could result in a delay of or decrease in sales of existing
products, as customers evaluate these new products. Our future success will
depend on our ability to compete effectively against current technology as well
as to respond effectively to technological advances.

If we infringe on or misappropriate the proprietary rights of others or we are
unable to protect our own intellectual property rights our revenues could be
harmed.

We may be sued for infringing on the intellectual property rights of
others. Intellectual property litigation is costly, and, even if we prevail,
the cost of such litigation could affect our profitability. In addition,
litigation is time consuming and could divert management attention and
resources away from our business. If we do not prevail in any litigation, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. We may not be able to obtain required
licenses on acceptable terms, or at all. In addition, some licenses may be
nonexclusive, and therefore, our competitors may have access to the technology
licensed to us. If we fail to obtain a required license or are unable to design
around a patent, we may be unable to sell some of our products, which could
harm our ability to compete and result in a decline in our revenues.

15



---



##### Table of Contents



Our success will depend on our ability to obtain and enforce patents on
our technology and to protect our trade secrets. Any patents we own may not
afford meaningful protection for our technology and products. Others may
challenge our patents and, as a result, our patents could be narrowed,
invalidated or rendered unenforceable. In addition, our current and future
patent applications may not result in the issuance of patents to us in the
United States or foreign countries. Moreover, competitors may develop products
similar to ours that are not covered by our patents.

We try to protect our unpatented trade secrets by requiring our employees,
consultants and advisors to execute confidentiality agreements. However, we
cannot guarantee that these agreements will provide us with adequate protection
against improper use or disclosure of our trade secrets. Further, others may
independently develop substantially equivalent proprietary information and
techniques. If we are unable to protect our proprietary information and
techniques, our ability to exclude certain competitors from the market will be
limited.

Risks Related to Our Common Stock

Our stock price has been highly volatile, and your investment could suffer a
further decline in value.

The trading price of our common stock has been highly volatile and ranged
in 2001 from a per-share high of $10.81 to a low of $2.35 and could continue to
be subject to wide fluctuations in price in response to various factors, many
of which are beyond our control, including;



| |  | actual or anticipated variations in quarterly operating results;                                               
|- |  | ---------------------------------------------------------------------------------------------------------------
| 
| |  | failure to achieve, or changes in, financial estimates by securities analysts;                                 
| 
| |  | announcements of new products or services or technological innovations by us or our competitors;               
| 
| |  | conditions or trends in the pharmaceutical, biotechnology, life sciences and chemical industries;              
| 
| |  | announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| 
| |  | additions or departures of key personnel;                                                                      
| 
| |  | sales of our common stock; and                                                                                 
| 
| |  | developments regarding our patents or other intellectual property or that of our competitors.                  

In addition, the stock market in general, and the Nasdaq Stock Markets
National Market and the market for technology companies in particular, have
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies.
Further, there has been particular volatility in the market prices of
securities of life science companies. These broad market and industry factors
may seriously harm the market price of our common stock, regardless of our
operating performance. In the past, following periods of volatility in the
market price of a companys securities, securities class action litigation has
often been instituted. A securities class action suit against us could result
in substantial costs, potential liabilities and the diversion of managements
attention and resources.

There may not be an active, liquid trading market for our common stock.

There is no guarantee that an active trading market for our Common Stock
will be maintained on the NASDAQ National Market. You may not be able to sell
your shares quickly or at the market price if trading in our stock is not
active. If we fail to comply with the continued listing requirements of the
NASDAQ National Market, including the minimum bid price per share requirement,
we may be delisted from trading on such market, and thereafter trading in our
common stock, if any, would be conducted through the over-the-counter market or
on the Electronic Bulletin Board of the National Association of Securities
Dealers, Inc.

Our principal stockholders, directors and executive officers own approximately
54% of our common stock, which may prevent new investors from influencing
corporate decisions.

Our principal stockholders who currently own over 5% of our common stock
and our directors and executive officers who beneficially own approximately 54%
of our outstanding common stock, will be able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and the approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of us
even if beneficial to our

16



---



##### Table of Contents



other stockholders.

Sales of large numbers of shares of our common stock could cause our stock
price to decline.

The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. All
of the shares sold in our initial public offering are now freely transferable
without restriction or further registration under the Securities Act, except
for any shares purchased by our affiliates, as defined in Rule 144 of the
Securities Act. The remaining shares of common stock outstanding are restricted
securities as defined in Rule 144. These shares may be sold in the future
without registration under the Securities Act, to the extent permitted by Rule
144 or other exemptions under the Securities Act.

On March 1, 2001, we issued 666,667 shares of unregistered common stock in
connection with the acquisition of ATSI.

On February 5, 2002, we registered 2,628,618 shares of common stock that
are reserved for issuance upon exercise of options granted under our stock
option and employee stock purchase plans. These shares can be sold in the
public market upon issuance, subject to restrictions under the securities laws
applicable to resales by affiliates.

On February 20, 2002, we issued 572,152 shares of unregistered common
stock in connection with the acquisition of Jones Group.

Anti-takeover provisions in our charter and bylaws and under Delaware law could
make a third-party acquisition of us difficult.

Pursuant to our charter, our board of directors has the authority to issue
up to 10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote of action by our stockholders. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Our certificate of
incorporation and bylaws contain other provisions that could make it more
difficult for a third party to acquire us, even if doing so might be deemed
beneficial by our stockholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
We are also subject to certain provisions of Delaware law that could delay,
deter or prevent a change in control of us.




Item 3.Quantitative and Qualitative Disclosures about Market Risk

Our market risk disclosures have not changed significantly from those set forth
in the Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Form 10-K for the year ended December 31, 2001filed with
the Securities and Exchange Commission on April 1, 2002.

17



---



##### Table of Contents






PART II. OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

The Company is not currently involved in any material legal proceedings.




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 20, 2002, Argonaut issued 572,152 shares of Common Stock to the
shareholders of Jones Chromatography LTD, in connection with Argonauts
acquisition of the Jones Group. The issuance was exempt from registration
pursuant to Regulation S and Section 4(2) under the Securities Act of 1933, as
amended, because of the limited number of investors, the foreign residence of
most of the investors, the sophistication of the investors, and the manner in
which the transaction was conducted.




ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.




ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




ITEM 5: OTHER INFORMATION

None.




ITEM 6: EXHIBITS AND REPORTS ON
FORM 8-K

(a)  Exhibits.

The exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this Report on Form 10-Q.

(b)  Reports on Form 8-K.

The following report on Form 8-K have been filed during this reporting quarter ended March 31, 2002:

Form 8-K filed on March 6, 2002 reporting the acquisition of Jones Group.

18



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                   |  |                                                                                                    |                            
|------------------ |  | -------------------------------------------------------------------------------------------------- | ---------------------------
|                   |  |                                                                                                    | ARGONAUT TECHNOLOGIES, INC.
|                  
|Date: May 13, 2002 |  | By: /s/ LISSA A. GOLDENSTEIN
President, Chief Executive Officer
and acting Chief Financial Officer

19



---



##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.
Form 10-Q
for Quarter Ending March 31, 2002




EXHIBIT INDEX

|        |  |                                                                                                                                                                                                       |  |  |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Number  |  | Description of Document                                                                                                                                                                               |  |  |  | 
|        |  |                                                                                                                                                                                                       |  |  |  | 
|2.1***  |  | Agreement and Plan of Merger dated January 31, 2001, by and among the Registrant, CPL
Acquisition Corp. and Camile Products, LLC.                                                                    
|2.2**** |  | Agreement for the sale and purchase of the entire issued share capital of Jones
Chromatography Limited, dated February 11, 2002, by and among the Registrant and the
former Jones Group shareholders.
|3.1*    |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                                                 
|3.2*    |  | Bylaws of Registrant.                                                                                                                                                                                
|4.3***  |  | Registration Rights Agreement dated March 1, 2001, by and among the Registrant and the
members of Camile Products, LLC.                                                                              
|4.4**** |  | Registration Rights Agreement dated February 20, 2002, by and among the Registrant and the
former Jones Group shareholders.                                                                          
|4.5**** |  | £7,650,000 Loan Note Instrument Creating Principal Amount Guaranteed Loan Notes 2004
guaranteed by Barclays Bank PLC dated February 20, 2002.                                                        
|10.1*   |  | Amended and Restated Stockholder Rights Agreement, dated May 21, 1999.                                                                                                                               
|10.2*   |  | Offer Letter, dated October 29, 1996, from Registrant to David P. Binkley, Ph.D.                                                                                                                     
|10.3*   |  | Promissory Note Secured by Deed of Trust between the Registrant and David P. Binkley,
dated December 17, 1996.                                                                                       
|10.4*   |  | Lease Agreement between the Registrant and Tanklage Family Partnership, dated July 9, 1999.                                                                                                          
|10.5*   |  | Lease Agreement between the Registrant and MK Kojimachi Building Co., Ltd., dated
September 16, 1997, as amended.                                                                                    
|10.6*   |  | Lease Agreement between the Registrant and Personalvorsorgestiftung Rapp AG, dated April
16, 1997.                                                                                                   
|10.7*   |  | License and Supply Agreement between the Registrant and Symyx Technologies, Inc., dated
August 6, 1999.                                                                                              
|10.8*   |  | Manufacturing Agreement between the Registrant and Merck, Inc. dated June 24, 1997, as
amended.                                                                                                      
|10.9*   |  | Form of Indemnification Agreement between the Registrant and each of its directors and
officers.                                                                                                     
|10.10*  |  | 1995 Stock Plan.                                                                                                                                                                                     
|10.11*  |  | 1995 Stock Plan Form of Stock Option Agreement.                                                                                                                                                      
|10.12*  |  | 2000 Stock Incentive Plan.                                                                                                                                                                           
|10.13*  |  | 2000 Employee Stock Purchase Plan.                                                                                                                                                                   
|10.14** |  | Amendment to License and Supply Agreement between the Registrant and Symyx Technologies,
Inc., dated January 1, 2002.                                                                                
|10.15** |  | Agreement between the Registrant and David P. Binkley dated December 5, 2001.                                                                                                                        
|10.16** |  | Agreement between the Registrant and John T. Supan dated January 10, 2002.                                                                                                                           



---

|*    |  | Incorporated by reference from our registration statement on Form S-1,
registration number 333-35782, declared effective by the Securities and
Exchange Commission on July 18, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|**   |  | Incorporated by reference from our Form 10-K filed with the Securities
and Exchange Commission on April 1, 2002.                                                                    
|    
|    
|    
|    
|***  |  | Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on March 16, 2001.                                                                    
|    
|    
|    
|    
|**** |  | Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on March 6, 2002.                                                                     

20