##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

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
    incorporation or organization)             |  | (IRS Employer
    Identification Number)
|                                                                              
|220 Saginaw Drive
    Redwood City, CA(Address of principal executive offices) |  | 94063(zip code)                         

(650) 716-1600


(Registrants telephone number, including area code)


þ o


þ


o þ




DOCUMENTS INCORPORATED BY REFERENCE












---










Argonaut Technologies, Inc.


Form 10-K


TABLE OF CONTENTS


|              |  |                                                                                                     |    |      |    | 
|------------- |  | --------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                     |    | Page
|              |  |                                                                                                     |    |     
|PART I       
|Item 1.       |  | Business.                                                                                           |    |      | 2  | 
|Item 2.       |  | Properties.                                                                                         |    |      | 13 | 
|Item 3.       |  | Legal Proceedings.                                                                                  |    |      | 14 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders.                                            |    |      | 14 | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity
    and Related Stockholder Matters.                          |    |      | 14 | 
|Item 6.       |  | Selected Financial Data.                                                                            |    |      | 15 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.          |    |      | 17 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk.                                     |    |      | 35 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data.                                                    |    |      | 37 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure.           |    |      | 63 | 
|Item 9A.      |  | Controls and Procedures.                                                                            |    |      | 63 | 
|Item 9B.      |  | Other Information.                                                                                  |    |      | 63 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant.                                             |    |      | 63 | 
|Item 11.      |  | Executive Compensation.                                                                             |    |      | 64 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters. |    |      | 64 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions.                                                 |    |      | 64 | 
|Item 14.      |  | Principal Accountant Fees and Services.                                                             |    |      | 64 | 
|PART IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules.                                                     |    |      | 64 | 
|              |  |                                                                                                     |    |      |    | 
|SIGNATURES    |  |                                                                                                     | 67 |     
|EXHIBIT 10.21
|EXHIBIT 10.22
|EXHIBIT 10.23
|EXHIBIT 10.24
|EXHIBIT 10.25
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32   



1



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##### Table of Contents






PART I









|        |          
|------- | ---------
|Item 1. | Business.

OVERVIEW










INDUSTRY




| |           
| | ----------
| | Background



2



---



##### Table of Contents





Science.




| |                                   
| | ----------------------------------
| | Chemical Discovery and Development





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Discovery Phase.Discovery is the process by which
    biologists and chemists organize drug targets identified through
    biology, including genomics, which is the study of gene
    function, and proteomics, which is the study of protein
    function, into biological screens. Chemists then test millions
    of compounds using high throughput biological screens to
    identify possible compounds that interact with the drug target.
|
| |  | Development Phase.Chemists optimize the pharmacological
    (potency), pharmacokinetic (availability and specificity) and
    toxicology (safety) of chemical leads for human testing and
    approval during the development phase. The development phase can
    be further broken down into three stages:                                                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lead Identification. During lead identification, chemists
    evaluate, using a specific process, the hundreds of potential
    lead chemicals that could be drug candidates that may emerge
    from the discovery phase. Chemists perform successive rounds of
    chemical syntheses to create numerous variants of the drug
    candidates to find compounds likely to have appropriate drug
    properties. They then work to optimize these compounds for their
    biological potency, thus creating lead compounds.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Lead Optimization. In pre-clinical development, chemists
    further refine a limited number of lead compounds into clinical
    drug candidates by applying additional chemistry methodologies
    in the pre-clinical development process. During this process,
    chemists make relatively small changes to the compounds in order
    to optimize their safety and pharmacokinetic properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Process Development. During clinical development,
    chemists test clinical drug candidates in humans to demonstrate
    their safety and effectiveness, or efficacy. The successful
    outcome of clinical trails may result in regulatory approval to
    commercialize the new drug product. During this phase of
    development, chemists optimize the methods by which they will
    manufacture much larger quantities of the compound being tested.
    Manufacturing process development involves optimizing the
    chemical synthesis process in order to yield much larger
    quantities of the drug than were needed in the previous phases.
    By optimizing and selecting the most effective method of
    compound synthesis, chemists reduce the cost of synthesis. This
    may be achieved by reducing the number of products used in
    synthesis, improving the yield of the desired compound or
    reducing the time needed for synthesis.

Traditional Chemistry Methods for Chemical Development




3



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##### Table of Contents







|   |                                 
|-- | --------------------------------
|1. | Set-up and Execution of Reaction





|   |                
|-- | ---------------
|2. | Product Work-up





|   |                     
|-- | --------------------
|3. | Product Purification





|   |                 
|-- | ----------------
|4. | Product Analysis





Limitations of Existing Chemical Development Technologies






| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Limited Productivity. Traditional methods are time
    consuming, inefficient and labor-intensive. Industry experts
    estimate that chemists can create approximately 100 compounds
    per year using the traditional approach of performing one
    reaction at a time. Since it is not economically feasible for

4



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | customers to employ chemists in the large numbers necessary to
    take advantage of the thousands of expected drug targets, we
    believe that efficiency, or throughput in the development phase
    must increase dramatically.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Long Drug Development Timelines. Traditional methods
    require chemists to synthesize, purify and test compounds one at
    a time in an inefficient, sequential process. This results in
    long drug development timelines, which delay product
    commercialization and reduce the commercial value of the
    exclusivity period provided by patent protection.                                                                                                                                                                                                                                                                                                                      
|
| |  | High Cost. Traditional methods are expensive due to the
    time and labor required of a chemist to produce a single
    compound. In addition, companies utilizing the traditional
    methods incur the costs associated with the high volumes of
    solvents and chemicals utilized and the expense associated with
    their disposal.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | High Rate of Drug Candidate Failures. Traditional methods
    limit the number of compounds synthesized, which can lead to
    companies or chemists selecting sub-optimal drug candidates,
    often resulting in drug candidate failures. These failures
    greatly increase the average length of time and cost required to
    bring a specific drug to market. If a drug candidate fails
    during clinical trials, a company must incur the time and
    expense of repeating all of the development steps or face
    abandoning the project altogether. The cost of a failed
    candidate increases significantly as it progresses to later
    stages of the development process.
|
| |  | Lack of Flexibility. To date, chemists have lacked
    flexible tools and systems to easily perform the wide variety of
    complex experiments required for chemistry development. Instead,
    chemists have had to repeatedly assemble various components into
    complicated systems, personally monitor the process and manually
    collect critical data to comply with corporate and governmental
    requirements.                                                                                                                                                                                                                                                                 
|
| |  | Difficulty of Use. The steps required for a chemist to
    put together an apparatus, perform the reaction, work-up,
    purification and analysis are cumbersome, time consuming and
    susceptible to human error. In addition, to design and
    successfully complete an experiment requires experience to
    determine the best protocols and methods to use. Therefore,
    traditional methods require the experience of skilled chemists
    with many years of training, yet the productivity of those
    chemists is handicapped by requiring them to spend time on
    trivial, manual tasks.                                                                                  



THE ARGONAUT SOLUTION




5



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##### Table of Contents







| |                       
| | ----------------------
| | Increased Productivity





| |                                   
| | ----------------------------------
| | Reduced Drug Development Timelines





| |              
| | -------------
| | Reduced Costs





| |                                                                     
| | --------------------------------------------------------------------
| | Increase Probability of Success Early in the Development
    Process





| |            
| | -----------
| | Flexibility





| |            
| | -----------
| | Ease of Use



6



---



##### Table of Contents



OUR STRATEGY






| |                                   
| | ----------------------------------
| | Focus on the Pharmaceutical Market





| |                                          
| | -----------------------------------------
| | Expand Our Chemistry Consumables Business

tm




| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Focus Our Instrument Business on the Process Development
    and the Flash Chromatography Markets

tm tm




| |                                                             
| | ------------------------------------------------------------
| | Continue to Invest in Product Development
    Collaborations





| |                                                             
| | ------------------------------------------------------------
| | Build Global Customer Relationships Through Direct
    Sales



7



---



##### Table of Contents





PRODUCTS






| |                      
| | ---------------------
| | Chemistry Consumables





| |                                        
| | ---------------------------------------
| | Polymer Reagent and Scavenger Products:





| |                        
| | -----------------------
| | Solid Phase Extraction:



tm




| |                                   
| | ----------------------------------
| | Flash Chromatography Purification:



8



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##### Table of Contents







| |                
| | ---------------
| | Instrumentation

Advantage
Series tm Flashmaster tm




| |                                 
| | --------------------------------
| | Advantage
    SeriestmEndeavor®:





| |                                                          
| | ---------------------------------------------------------
| | Advantage
    Seriestm3400 process chemistry workstation:

tm tm




| |                                                     
| | ----------------------------------------------------
| | Advantage
    Seriestm4100 process scale-up reactor:

tm tm




| |                            
| | ---------------------------
| | Advantage
    Seriestm2410:

tm


9



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##### Table of Contents







| |                                           
| | ------------------------------------------
| | Flashmastertmflash chromatography systems:

tm tm


tm


tm


tm


tm


tm




| |         
| | --------
| | Services

tm


PRODUCT DEVELOPMENT STRATEGY


tm


10



---



##### Table of Contents





tm






CUSTOMERS




|                     |  |                       |  |                                 
|-------------------- |  | --------------------- |  | --------------------------------
|Abbott Laboratories  |  | Eli Lilly and Company |  | Novartis Pharmaceuticals        
|Advion Biosciences   |  | GlaxoSmithKline       |  | Pfizer, Inc.                    
|AstraZeneca          |  | MDS Pharma            |  | Procter & Gamble Pharmaceuticals
|Bristol-Myers Squibb |  | Merck & Company       |  |                                 





SALES, MARKETING AND SERVICE






11



---



##### Table of Contents









MANUFACTURING








INTELLECTUAL PROPERTY






BACKLOG




12



---



##### Table of Contents





COMPETITION




GOVERNMENT REGULATION




EMPLOYEES




AVAILABLE INFORMATION


http://www.sec.gov







|        |            
|------- | -----------
|Item 2. | Properties.



| |           
| | ----------
| | Facilities



13



---



##### Table of Contents










|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters



| |                            
| | ---------------------------
| | Price Range of Common Stock

|              |  |             |      |  |             |   |      |      |  |   |      |  |  |   |      | 
|------------- |  | ----------- | ---- |  | ----------- | - | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|              |  | 2004        |      |  | 2003        |  
|              |  | Sales Price |      |  | Sales Price |  
|              |  |             |      |  |             |  
|Quarter Ended |  | High        |      |  | Low         |   |      | High |  |   | Low  | 
|              |  |             |      |  |             |   |      |      |  |   |      | 
|March 31      |  | $           | 2.68 |  |             | $ | 1.34 |      |  | $ | 0.99 |  |  | $ | 0.81 | 
|June 30       |  |             | 1.80 |  |             |   | 1.06 |      |  |   | 1.61 |  |  |   | 0.84 | 
|September 30  |  |             | 1.33 |  |             |   | 0.89 |      |  |   | 1.48 |  |  |   | 1.14 | 
|December 31   |  |             | 1.10 |  |             |   | 0.59 |      |  |   | 1.91 |  |  |   | 1.17 | 





| |                
| | ---------------
| | Dividend Policy





| |                        
| | -----------------------
| | Holders of Common Stock



14



---



##### Table of Contents





| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under Equity
    Compensation Plans

|                                                           |  |                      |           |  |                      |                         |                       |                         |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- |  | -------------------- | ----------------------- | --------------------- | ----------------------- |  |  | --------- | 
|                                                           |  |                      |           |  |                      | Number of Securities    |                      
|                                                           |  |                      |           |  |                      | Remaining Available for |                      
|                                                           |  | Number of Securities |           |  |                      |                         | Future Issuance Under |                        
|                                                           |  | to be Issued Upon    |           |  | Weighted-Average     |                         |                       | Equity Compensation     | 
|                                                           |  | Exercise of          |           |  | Exercise Price of    |                         |                       | Plans (Excluding        | 
|                                                           |  | Outstanding Options, |           |  | Outstanding Options, |                         |                       | Securities Reflected in | 
|Plan Category                                              |  | Warrants and Rights  |           |  | Warrants and Rights  |                         |                       | Column (a))             | 
|                                                           |  |                      |           |  |                      |                         |                       |                         | 
|                                                           |  | (a)                  |           |  | (b)                  |                         |                       | (c)                     | 
|Equity compensation plans approved by security holders     |  |                      | 3,272,419 |  |                      | $                       | 2.46                  |                         |  |  | 1,675,921 | 
|Equity compensation plans not approved by security holders |  |                      |          |  |                      |                         |                      |                         |  |  |          | 
|                                                           |  |                      |           |  |                      |                         |                       |                         | 
|Total                                                      |  |                      | 3,272,419 |  |                      | $                       | 2.46                  |                         |  |  | 1,675,921 | 
|                                                           |  |                      |           |  |                      |                         |                       |                         | 






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data





15



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|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |         |        |        |   |        |        |        | 
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------ | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                                     |                                                          | Year Ended December 31,              |        
|                                                                                                     |                                                          |                                      |        
|                                                                                                     |                                                          | 2004                                 |         |        | 2003   |   |        | 2002   |        |   | 2001    |        |        | 2000 |        
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|                                                                                                     |                                                          | (In thousands except per share data) |        
|Statements of Operations Data:                                                                       |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |         |        |        |   |        |       
|Net sales                                                                                            |                                                          | $                                    | 20,204  |        |        | $ | 24,469 |        |        | $ | 26,317  |        |        | $    | 17,063  |        |        | $ | 17,449 |       
|Costs and expenses:                                                                                  |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |         |        |        |   |        |       
|                                                                                                     | Cost of sales                                            |                                      |         | 13,315 |        |   |        | 13,256 |        |   |         | 15,004 |        |      |         | 9,431  |        |   |        | 7,994  |       
|                                                                                                     | Research and development                                 |                                      |         | 4,019  |        |   |        | 4,368  |        |   |         | 5,627  |        |      |         | 7,089  |        |   |        | 5,057  |       
|                                                                                                     | Selling, general and administrative                      |                                      |         | 12,443 |        |   |        | 13,060 |        |   |         | 17,453 |        |      |         | 16,686 |        |   |        | 13,819 |       
|                                                                                                     | Amortization of goodwill and purchased intangible assets |                                      |         | 483    |        |   |        | 738    |        |   |         | 735    |        |      |         | 1,157  |        |   |        |       |       
|                                                                                                     | Acquired in-process research and development             |                                      |         |       |        |   |        |       |        |   |         |       |        |      |         | 270    |        |   |        |       |       
|                                                                                                     | Restructuring charges (recoveries)                       |                                      |         |       |        |   |        | (184   | )      |   |         | 1,802  |        |      |         | 384    |        |   |        |       |       
|                                                                                                     | Asset impairment charges                                 |                                      |         | 2,249  |        |   |        | 1,612  |        |   |         |       |        |      |         | 5,520  |        |   |        |        |       
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|                                                                                                     |                                                          | Total costs and expenses             |         |        | 32,509 |   |        |        | 32,850 |   |         |        | 40,621 |      |         |        | 40,537 |   |        |        | 26,870 | 
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Loss from operations                                                                                 |                                                          |                                      | (12,305 | )      |        |   | (8,381 | )      |        |   | (14,304 | )      |        |      | (23,474 | )      |        |   | (9,421 | )     
|Realized gain from the sale of asset                                                                 |                                                          |                                      |        |        |        |   | 460    |        |        |   |        |        |        |      |        |        |        |   |       |       
|Interest and other income (expenses), net                                                            |                                                          |                                      | 637     |        |        |   | 552    |        |        |   | 663     |        |        |      | 2,679   |        |        |   | 1,900  |       
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Net loss before provision for income taxes                                                           |                                                          |                                      | (11,668 | )      |        |   | (7,369 | )      |        |   | (13,641 | )      |        |      | (20,795 | )      |        |   | (7,521 | )     
|Provision (benefit) for income taxes                                                                 |                                                          |                                      | (150    | )      |        |   | 783    |        |        |   | 217     |        |        |      |        |        |        |   |       |       
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Net loss                                                                                             |                                                          | $                                    | (11,518 | )      |        | $ | (8,152 | )      |        | $ | (13,858 | )      |        | $    | (20,795 | )      |        | $ | (7,521 | )     
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Net loss per common share, basic and diluted                                                         |                                                          | $                                    | (0.56   | )      |        | $ | (0.40  | )      |        | $ | (0.70   | )      |        | $    | (1.09   | )      |        | $ | (0.79  | )     
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Weighted-average shares used in computing net loss per common
    share, basic and diluted           |                                                          |                                      | 20,494  |        |        |   | 20,160 |        |        |   | 19,876  |        |        |      | 19,048  |        |        |   | 9,538  |       
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Pro forma net loss per common share, basic and diluted                                               |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |         |        |        | $ | (0.50  | )     
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        
|Weighted-average shares used in computing pro forma net loss per
    common share, basic and diluted |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |         |        |        |   | 15,009 |       
|                                                                                                     |                                                          |                                      |         |        |        |   |        |        |        |   |         |        |        |      |        

|                                                  |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | Year Ended December 31, |        
|                                                  |  |                         |        
|                                                  |  | 2004                    |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                  |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                  |  | (In thousands)          |        
|Balance Sheets Data:                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $                       | 10,158  |   |      | $ | 13,470  |      |  | $ | 26,894  |   |  | $    | 57,632  |   |  | $ | 73,372  |  
|Working capital                                   |  |                         | 18,211  |   |      |   | 8,978   |      |  |   | 31,001  |   |  |      | 58,292  |   |  |   | 76,131  |  
|Total assets                                      |  |                         | 39,405  |   |      |   | 63,315  |      |  |   | 72,373  |   |  |      | 71,772  |   |  |   | 83,032  |  
|Long-term obligations, less current portion       |  |                         | 523     |   |      |   | 23      |      |  |   | 12,334  |   |  |      |        |   |  |   | 180     |  
|Accumulated deficit                               |  |                         | (88,762 | ) |      |   | (77,244 | )    |  |   | (69,092 | ) |  |      | (55,234 | ) |  |   | (34,439 | )
|Total stockholders equity                        |  |                         | 35,388  |   |      |   | 45,243  |      |  |   | 52,513  |   |  |      | 63,764  |   |  |   | 77,720  |  

16



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations



OVERVIEW












CRITICAL ACCOUNTING POLICIES AND MANAGEMENTS
ESTIMATES




| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates



17



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##### Table of Contents







| |                    
| | -------------------
| | Revenue Recognition









| |                
| | ---------------
| | Product Revenue





| |                 
| | ----------------
| | Services Revenue





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |                          
| | -------------------------
| | Impairment of Investments



18



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##### Table of Contents







| |            
| | -----------
| | Inventories





| |           
| | ----------
| | Warranties





| |              
| | -------------
| | Restructuring





| |                    
| | -------------------
| | Purchase Accounting





| |                                         
| | ----------------------------------------
| | Goodwill and Other Purchased Intangibles







19



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##### Table of Contents







| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets





| |             
| | ------------
| | Income Taxes





| |                         
| | ------------------------
| | Stock-Based Compensation





COMPARATIVE RESULTS OF OPERATIONS




| |                                       
| | --------------------------------------
| | Years Ended December 31, 2004 and 2003



| |          
| | ---------
| | Net sales



20



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| |              
| | -------------
| | Cost of sales





| |                                  
| | ---------------------------------
| | Research and development expenses





| |                                             
| | --------------------------------------------
| | Selling, general and administrative expenses





| |                                                                                 
| | --------------------------------------------------------------------------------
| | Amortization and write-off of goodwill and other purchased
    intangible assets



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| |                      
| | ---------------------
| | Restructuring charges





| |                         
| | ------------------------
| | Asset impairment charges





| |                        
| | -----------------------
| | Other income (expenses)







| |                           
| | --------------------------
| | Provision for income taxes





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| |                                       
| | --------------------------------------
| | Years Ended December 31, 2003 and 2002





| |          
| | ---------
| | Net sales





| |              
| | -------------
| | Cost of sales





| |                                  
| | ---------------------------------
| | Research and development expenses





| |                                             
| | --------------------------------------------
| | Selling, general and administrative expenses



23



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| |                                                                                 
| | --------------------------------------------------------------------------------
| | Amortization and write-off of goodwill and other purchased
    intangible assets





| |                      
| | ---------------------
| | Restructuring charges





| |                        
| | -----------------------
| | Other income (expenses)







| |                           
| | --------------------------
| | Provision for income taxes





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LIQUIDITY AND CAPITAL RESOURCES














25



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| |                                             
| | --------------------------------------------
| | Off-Balance Sheet Financings and Liabilities





| |                        
| | -----------------------
| | Contractual Obligations



|                                   |  |                         |       |           |        |   |        |       |  |        |       |  |  |   |     | 
|---------------------------------- |  | ----------------------- | ----- | --------- | ------ | - | ------ | ----- |  | ------ | ----- |  |  | - | --- | 
|                                   |  | Payments Due by Period: |      
|                                   |  |                         |      
|                                   |  |                         |       | Less than |        |   | 1 to 3 |       |  | 4 to 7 |      
|Contractual Obligations            |  | Total                   |       |           | 1 Year |   |        | Years |  |        | Years | 
|                                   |  |                         |       |           |        |   |        |       |  |        |       | 
|Capital lease obligations          |  | $                       | 83    |           |        | $ | 26     |       |  | $      | 57    |  |  | $ |    | 
|Operating lease obligations        |  |                         | 1,941 |           |        |   | 289    |       |  |        | 892   |  |  |   | 760 | 
|Minimum royalty payments           |  |                         | 175   |           |        |   | 100    |       |  |        | 75    |  |  |   |    | 
|                                   |  |                         |       |           |        |   |        |       |  |        |       | 
|Total contractual cash obligations |  | $                       | 2,199 |           |        | $ | 415    |       |  | $      | 1,024 |  |  | $ | 760 | 
|                                   |  |                         |       |           |        |   |        |       |  |        |       | 

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FACTORS THAT MAY AFFECT OUR FUTURE RESULTS




| |                                                                          
| | -------------------------------------------------------------------------
| | We may sell substantially all of our assets and wind up
    our business.





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







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





| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 that may be
    developed.
|
| |  | Manufacture products in sufficient quantities with acceptable
    quality and at an acceptable cost.                                                                                                 
|
| |  | Install and service sufficient numbers of our instruments,
    particularly new instruments such as the Advantage
    Seriestm
    3400 process chemistry workstation.                               
|
| |  | Convince prospective customers that our products and our ability
    to supply and support our products are equivalent or better as
    compared to competitor companies.                            



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| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our product development efforts may not produce
    commercially viable products.

tm




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





| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The capital spending policies of pharmaceutical,
    biotechnology, life sciences and other chemical research
    organizations have a significant effect on the demand for our
    instruments.





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





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



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





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







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





| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we outsource our instrument component, chemical
    intermediates and product manufacturing, our ability to produce
    and supply our products could be impaired.





| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                

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| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We may face litigation from some of our stockholders that
    might be costly to resolve.





| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | We are exposed to fluctuations in the exchange rates of
    foreign currency and the U.S. dollar.





| |                                                                    
| | -------------------------------------------------------------------
| | Our business is subject to risks from international
    operations.







| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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





| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, including any
    directors;                                                                                  
|
| |  | developments in the application or interpretation of new or
    existing accounting pronouncements and reporting obligations;                           
|
| |  | purchases or sales of our common stock, including any
    repurchases of our common stock under the existing or future
    stock repurchase program; and
|
| |  | developments regarding our patents or other intellectual
    property or that of our competitors.                                                       





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Recently Enacted and Proposed Changes in Securities Laws
    and Regulations are Likely to Increase Our Costs



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| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Legislative Actions, Potential New Accounting
    Pronouncements and Higher Compliance Costs are Likely to
    Adversely Impact Our Future Financial Position and Results of
    Operations.





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











| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter, bylaws and
    Preferred Stock Rights Agreement and under Delaware law could
    make a third-party acquisition of us difficult.





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FACTORS RELATED TO THE POTENTIAL SALE AND WINDING UP OF THE
COMPANY




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We cannot assure you of the amount, if any, or timing of
    any distributions to our stockholders.











| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | The announcement of our entry into a stock and asset
    purchase agreement with Biotage AB could have a negative
    impact on our business.



33



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| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We will continue to incur claims, liabilities and expenses
    that will reduce the amount available for distribution to
    stockholders.





| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We will continue to incur the expenses of complying with
    public company reporting requirements.







| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | If we fail to retain the services of key personnel, the
    winding up of our business may not succeed.







| |                                                            
| | -----------------------------------------------------------
| | Our common stock may be delisted from the Nasdaq
    Market







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RECENT ACCOUNTING PRONOUNCEMENTS













|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk

INTEREST RATE RISK




|                                                                          |  |              |     |   |              |   |     |  
|------------------------------------------------------------------------- |  | ------------ | --- | - | ------------ | - | --- | -
|                                                                          |  | December 31, |     |   | December 31, |  
|                                                                          |  | 2004         |     |   | 2003         |  
|                                                                          |  |              |     |   |              |  
|Principal notional amount with an expected maturity in following
    year |  | $            | 3.7 |   |              | $ | 6.5 |  
|Weighted average interest rate                                            |  |              | 4.4 | % |              |   | 5.0 | %
|Average contractual maturity of investments (days)                        |  |              | 188 |   |              |   | 257 |  



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FOREIGN CURRENCY EXCHANGE RATE EXPOSURE








36



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                        |  |      |    | 
|------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                        |  | Page |   
|                                                                                                        |  |      |   
|Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                          |  |      | 38 | 
|Consolidated Balance Sheets at December 31, 2004 and 2003                                               |  |      | 39 | 
|Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003 and 2002          |  |      | 40 | 
|Consolidated Statement of Stockholders Equity for the
    years ended December 31, 2004, 2003 and 2002 |  |      | 41 | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002          |  |      | 42 | 
|Notes to Consolidated Financial Statements                                                              |  |      | 43 | 

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REPORT OF ERNST & YOUNG LLP,


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP





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ARGONAUT TECHNOLOGIES, INC.


CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                                                                                                               |                            |        |         |        |   |        |         |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                                     |                                                                                                                                                                                                               | December 31,               |       
|                                     |                                                                                                                                                                                                               |                            |       
|                                     |                                                                                                                                                                                                               | 2004                       |        |         | 2003   |  
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | (In thousands, except      |       
|                                     |                                                                                                                                                                                                               | share data)                |       
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                     | Cash and cash equivalents                                                                                                                                                                                     |                            | $      | 8,321   |        |   | $      | 9,620   |       
|                                     | Short-term investments                                                                                                                                                                                        |                            |        | 1,837   |        |   |        | 3,850   |       
|                                     | Accounts receivable, less allowance for doubtful accounts of
    $121 in 2004 and $102 in 2003                                                                                                                |                            |        | 4,353   |        |   |        | 5,993   |       
|                                     | Inventories                                                                                                                                                                                                   |                            |        | 6,615   |        |   |        | 6,946   |       
|                                     | Prepaid expenses and other current assets                                                                                                                                                                     |                            |        | 532     |        |   |        | 562     |       
|                                     | Note receivable                                                                                                                                                                                               |                            |        | 47      |        |   |        | 56      |       
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | Total current assets       |        |         | 21,705 |   |        |         | 27,027 | 
|Restricted cash                      |                                                                                                                                                                                                               |                            | 169    |         |        |   | 12,317 |        
|Property and equipment, net          |                                                                                                                                                                                                               |                            | 4,231  |         |        |   | 4,454  |        
|Goodwill                             |                                                                                                                                                                                                               |                            | 9,410  |         |        |   | 9,410  |        
|Other intangible assets, net         |                                                                                                                                                                                                               |                            | 3,017  |         |        |   | 4,471  |        
|Long-term investments                |                                                                                                                                                                                                               |                            | 699    |         |        |   | 5,432  |        
|Other assets                         |                                                                                                                                                                                                               |                            | 174    |         |        |   | 204    |        
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | $                          | 39,405 |         |        | $ | 63,315 |        
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                     | Accounts payable                                                                                                                                                                                              |                            | $      | 1,100   |        |   | $      | 1,494   |       
|                                     | Accrued compensation                                                                                                                                                                                          |                            |        | 534     |        |   |        | 971     |       
|                                     | Other accrued liabilities                                                                                                                                                                                     |                            |        | 1,136   |        |   |        | 2,406   |       
|                                     | Deferred revenue                                                                                                                                                                                              |                            |        | 618     |        |   |        | 978     |       
|                                     | Current portion of deferred rent                                                                                                                                                                              |                            |        | 82      |        |   |        |        |       
|                                     | Current portion of notes payable and capital lease obligations                                                                                                                                                |                            |        | 24      |        |   |        | 12,200  |       
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | Total current liabilities  |        |         | 3,494  |   |        |         | 18,049 | 
|Capital lease obligations            |                                                                                                                                                                                                               |                            | 53     |         |        |   | 23     |        
|Long term portion of deferred rent   |                                                                                                                                                                                                               |                            | 470    |         |        |   |       |        
|Commitments                          |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|Stockholders equity:                |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                     | Convertible preferred stock, $0.0001 par value;
    10,000,000 shares authorized at December 31, 2004 and
    2003, issuable in series; no shares issued and outstanding at
    December 31, 2004 and 2003    |                            |        |        |        |   |        |        |       
|                                     | Common stock, $0.0001 par value; 120,000,000 shares
    authorized at December 31, 2004 and 2003; 20,625,102 and
    20,376,918 shares issued and outstanding at
    December 31, 2004 and 2003, respectively |                            |        | 2       |        |   |        | 2       |       
|                                     | Additional paid-in capital                                                                                                                                                                                    |                            |        | 121,822 |        |   |        | 121,670 |       
|                                     | Deferred stock compensation                                                                                                                                                                                   |                            |        | (4      | )      |   |        | (9      | )     
|                                     | Accumulated other comprehensive income (loss)                                                                                                                                                                 |                            |        | 2,330   |        |   |        | 824     |       
|                                     | Accumulated deficit                                                                                                                                                                                           |                            |        | (88,762 | )      |   |        | (77,244 | )     
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | Total stockholders equity |        |         | 35,388 |   |        |         | 45,243 | 
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  
|                                     |                                                                                                                                                                                                               | $                          | 39,405 |         |        | $ | 63,315 |        
|                                     |                                                                                                                                                                                                               |                            |        |         |        |  



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ARGONAUT TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                                                            |                                                    | Years Ended December 31,              |        
|                                                                                                                                                            |                                                    |                                       |        
|                                                                                                                                                            |                                                    | 2004                                  |         |        | 2003   |   |        | 2002   |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|                                                                                                                                                            |                                                    | (In thousands, except per share data) |        
|Net sales:                                                                                                                                                  |                                                    |                                       |         |        |        |   |        |        |        |   |         |       
|                                                                                                                                                            | Products                                           |                                       | $       | 18,844 |        |   | $      | 21,801 |        |   | $       | 22,994 |       
|                                                                                                                                                            | Services                                           |                                       |         | 1,360  |        |   |        | 2,668  |        |   |         | 3,323  |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|                                                                                                                                                            |                                                    | Total net sales                       |         |        | 20,204 |   |        |        | 24,469 |   |         |        | 26,317 | 
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Costs and expenses:                                                                                                                                         |                                                    |                                       |         |        |        |   |        |        |        |   |         |       
|                                                                                                                                                            | Costs of products                                  |                                       |         | 12,643 |        |   |        | 11,492 |        |   |         | 13,202 |       
|                                                                                                                                                            | Costs of services                                  |                                       |         | 672    |        |   |        | 1,764  |        |   |         | 1,802  |       
|                                                                                                                                                            | Research and development (Note A)                  |                                       |         | 4,019  |        |   |        | 4,368  |        |   |         | 5,627  |       
|                                                                                                                                                            | Selling, general and administrative (Note A)       |                                       |         | 12,443 |        |   |        | 13,060 |        |   |         | 17,453 |       
|                                                                                                                                                            | Amortization of goodwill and purchased intangibles |                                       |         | 483    |        |   |        | 738    |        |   |         | 735    |       
|                                                                                                                                                            | Acquired in-process research and development       |                                       |         |       |        |   |        |       |        |   |         |       |       
|                                                                                                                                                            | Restructuring charges (recoveries)                 |                                       |         |       |        |   |        | (184   | )      |   |         | 1,802  |       
|                                                                                                                                                            | Asset impairment charges                           |                                       |         | 1,416  |        |   |        |       |        |   |         |       |       
|                                                                                                                                                            | Goodwill and other purchased intangibles write-off |                                       |         | 833    |        |   |        | 1,612  |        |   |         |       |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|                                                                                                                                                            |                                                    | Total costs and expenses              |         |        | 32,509 |   |        |        | 32,850 |   |         |        | 40,621 | 
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Loss from operations                                                                                                                                        |                                                    |                                       | (12,305 | )      |        |   | (8,381 | )      |        |   | (14,304 | )     
|Other income (expenses):                                                                                                                                    |                                                    |                                       |         |        |        |   |        |        |        |   |         |       
|                                                                                                                                                            | Realized gain on the sale of assets                |                                       |         |       |        |   |        | 460    |        |   |         |       |       
|                                                                                                                                                            | Interest and other income                          |                                       |         | 925    |        |   |        | 1,240  |        |   |         | 1,191  |       
|                                                                                                                                                            | Interest and other expense                         |                                       |         | (288   | )      |   |        | (688   | )      |   |         | (528   | )     
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Net loss before provision for income taxes                                                                                                                  |                                                    |                                       | (11,668 | )      |        |   | (7,369 | )      |        |   | (13,641 | )     
|Provision (benefit) for income tax                                                                                                                          |                                                    |                                       | (150    | )      |        |   | 783    |        |        |   | 217     |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Net loss                                                                                                                                                    |                                                    | $                                     | (11,518 | )      |        | $ | (8,152 | )      |        | $ | (13,858 | )     
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Net loss per common share, basic and diluted                                                                                                                |                                                    | $                                     | (0.56   | )      |        | $ | (0.40  | )      |        | $ | (0.70   | )     
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Weighted-average shares used in computing net loss per common
    share, basic and diluted                                                                  |                                                    |                                       | 20,494  |        |        |   | 20,160 |        |        |   | 19,876  |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|Note A: Research and development expenses and selling,
    general and administrative expenses include charges for
    stock-based compensation as follows:
|Research and development                                                                                                                                    |                                                    | $                                     | 5       |        |        | $ | 65     |        |        | $ | 145     |       
|Selling, general and administrative                                                                                                                         |                                                    |                                       |        |        |        |   | 46     |        |        |   | 126     |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       
|                                                                                                                                                            |                                                    | $                                     | 5       |        |        | $ | 111    |        |        | $ | 271     |       
|                                                                                                                                                            |                                                    |                                       |         |        |        |   |        |        |       



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ARGONAUT TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |       |         |  
|----------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------- | ---------- | - | - | -------- | - | ----- | ------------ | ----------- | ------------- | ------- | ------ | ----- | ------------- | - | ------- | ------- | - | - | ----- | - | ----- | - | ------ | ------- | ----- | ------- | -
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              | Accumulated |               |         |       
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   | Other |              |             |              
|                              |                                                                                       | Common Stock                             |                          |         | Additional |   |   | Deferred |   |       |              |             | Comprehensive |         |        | Total |              
|                              |                                                                                       |                                          |                          |         | Paid-In    |   |   | Stock    |   |       | Accumulated  |             |               | Income  |        |       | Stockholders |  
|                              |                                                                                       | Shares                                   |                          |         | Amount     |   |   | Capital  |   |       | Compensation |             |               | Deficit |        |       | (Loss)        |   |         | Equity  |  
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|                              |                                                                                       | (In thousands, except share data)        |                         
|BALANCES AT DECEMBER 31, 2001 |                                                                                       |                                          | 19,281,691               |         |            | $ | 2 |          |   | $     | 120,036      |             |               | $       | (1,008 | )     |               | $ | (55,234 | )       |   | $ | (32   | ) |       | $ | 63,764 |        
|                              | Net loss                                                                              |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        |      |               |   |         | (13,858 | ) |   |       |  |       |   |        | (13,858 | )    
|                              | Other comprehensive income (loss):                                                    |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |      
|                              |                                                                                       | Unrealized gain on investments           |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | (167  | ) |        |         | (167  | )      
|                              |                                                                                       | Foreign currency translation adjustments |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | 488   |   |        |         | 488   |        
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|                              |                                                                                       |                                          | Total comprehensive loss |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |       | (13,537 | )
|                              | Issuance of common stock upon exercise of stock options, net of
    repurchase        |                                          |                          | 92,769  |            |   |   |         |   |       |              | 81          |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 81      |      
|                              | Issuance of common stock related to the acquisition of Jones
    Chromatography, Ltd. |                                          |                          | 572,152 |            |   |   |         |   |       |              | 1,829       |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 1,829   |      
|                              | Issuance of common stock related to employee stock purchase plan                      |                                          |                          | 119,096 |            |   |   |         |   |       |              | 152         |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 152     |      
|                              | Stock repurchase                                                                      |                                          |                          | (50,000 | )          |   |   |          |   |       |              | (47         | )             |         |        |       |               |   |         |         |   |   |       |   |       |   |        | (47     | )    
|                              | Compensation expense related to issuance of options to
    consultants                |                                          |                          |        |            |   |   |         |   |       |              | 49          |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 49      |      
|                              | Deferred stock compensation associated with stock options
    cancelled               |                                          |                          |        |            |   |   |         |   |       |              | (712        | )             |         |        | 712   |               |   |         |        |   |   |       |  |       |   |        |        |      
|                              | Amortization of deferred stock compensation                                           |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        | 222   |               |   |         |        |   |   |       |  |       |   |        | 222     |      
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|BALANCES AT DECEMBER 31, 2002 |                                                                                       |                                          | 20,015,708               |         |            | $ | 2 |          |   | $     | 121,388      |             |               | $       | (74    | )     |               | $ | (69,092 | )       |   | $ | 289   |   |       | $ | 52,513 |        
|                              | Net loss                                                                              |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        |      |               |   |         | (8,152  | ) |   |       |  |       |   |        | (8,152  | )    
|                              | Other comprehensive income (loss):                                                    |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |      
|                              |                                                                                       | Unrealized gain on investments           |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | 11    |   |        |         | 11    |        
|                              |                                                                                       | Foreign currency translation adjustments |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | 524   |   |        |         | 524   |        
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|                              |                                                                                       |                                          | Total comprehensive loss |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |       | (7,617  | )
|                              | Issuance of common stock upon exercise of stock options, net of
    repurchase        |                                          |                          | 249,697 |            |   |   |         |   |       |              | 155         |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 155     |      
|                              | Issuance of common stock related to employee stock purchase plan                      |                                          |                          | 111,513 |            |   |   |         |   |       |              | 81          |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 81      |      
|                              | Compensation expense related to issuance of options to
    consultants                |                                          |                          |        |            |   |   |         |   |       |              | 46          |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 46      |      
|                              | Amortization of deferred stock compensation                                           |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        | 65    |               |   |         |        |   |   |       |  |       |   |        | 65      |      
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|BALANCES AT DECEMBER 31, 2003 |                                                                                       |                                          | 20,376,918               |         |            | $ | 2 |          |   | $     | 121,670      |             |               | $       | (9     | )     |               | $ | (77,244 | )       |   | $ | 824   |   |       | $ | 45,243 |        
|                              | Net loss                                                                              |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        |      |               |   |         | (11,518 | ) |   |       |  |       |   |        | (11,518 | )    
|                              | Other comprehensive income (loss):                                                    |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |      
|                              |                                                                                       | Unrealized gain on investments           |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | (12   | ) |        |         | (12   | )      
|                              |                                                                                       | Foreign currency translation adjustments |                          |         |           |   |   |          |  |       |              |             |              |         |        |       |              |   |         |         |  |   |       |   | 1,518 |   |        |         | 1,518 |        
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|                              |                                                                                       |                                          | Total comprehensive loss |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |   |   |       |   |       |   |        |         |       | (10,012 | )
|                              | Issuance of common stock upon exercise of stock options, net of
    repurchase        |                                          |                          | 231,715 |            |   |   |         |   |       |              | 185         |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 185     |      
|                              | Issuance of common stock related to employee stock purchase plan                      |                                          |                          | 66,469  |            |   |   |         |   |       |              | 49          |               |         |        |      |               |   |         |        |   |   |       |  |       |   |        | 49      |      
|                              | Stock repurchase                                                                      |                                          |                          | (50,000 | )          |   |   |         |   |       |              | (81         | )             |         |        |      |               |   |         |        |   |   |       |  |       |   |        | (81     | )    
|                              | Compensation expense related to issuance of options to
    consultants                |                                          |                          |        |            |   |   |         |   |       |              | (1          | )             |         |        |      |               |   |         |        |   |   |       |  |       |   |        | (1      | )    
|                              | Amortization of deferred stock compensation                                           |                                          |                          |        |            |   |   |         |   |       |              |            |               |         |        | 5     |               |   |         |        |   |   |       |  |       |   |        | 5       |      
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  
|BALANCES AT DECEMBER 31, 2004 |                                                                                       |                                          | 20,625,102               |         |            | $ | 2 |          |   | $     | 121,822      |             |               | $       | (4     | )     |               | $ | (88,762 | )       |   | $ | 2,330 |   |       | $ | 35,388 |        
|                              |                                                                                       |                                          |                          |         |            |   |   |          |   |       |              |             |               |         |        |       |               |   |         |         |  

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ARGONAUT TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |         |       |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------- | ------------------------------------------------ | ------ | ------ | ------- | ------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | -
|                                                     |                                                                                 | Years Ended December 31,                                       |                                  
|                                                     |                                                                                 |                                                                |                                  
|                                                     |                                                                                 | 2004                                                           |                                   |                                                  | 2003   |        |         | 2002    |      
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|                                                     |                                                                                 | (In thousands)                                                 |                                  
|Cash flows from operating activities:                |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |        
|                                                     | Net loss                                                                        |                                                                | $                                 | (11,518                                          | )      |        | $       | (8,152  | )     |        | $      | (13,858 | )    
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                |                                   |                                                  |        |        |         |         |       |        |        |         |      
|                                                     |                                                                                 | Depreciation and amortization                                  |                                   |                                                  | 1,209  |        |         |         | 1,363 |        |        |         | 1,467 |       
|                                                     |                                                                                 | Amortization of goodwill and other purchased intangible assets |                                   |                                                  | 621    |        |         |         | 850   |        |        |         | 785   |       
|                                                     |                                                                                 | Disposal of fixed assets                                       |                                   |                                                  | 356    |        |         |         | 229   |        |        |         |      |       
|                                                     |                                                                                 | Stock-based compensation                                       |                                   |                                                  | 5      |        |         |         | 65    |        |        |         | 222   |       
|                                                     |                                                                                 | Issuance of equity for noncash benefits                        |                                   |                                                  | (1     | )      |         |         | 46    |        |        |         | 49    |       
|                                                     |                                                                                 | Impairment charges                                             |                                   |                                                  | 2,249  |        |         |         | 1,612 |        |        |         |      |       
|                                                     |                                                                                 | Non-cash portion of restructuring charges                      |                                   |                                                  |       |        |         |         | (184  | )      |        |         | 683   |       
|                                                     |                                                                                 | Foreign currency translation                                   |                                   |                                                  | (1,069 | )      |         |         | (16   | )      |        |         | (39   | )     
|                                                     |                                                                                 | Changes in assets and liabilities:                             |                                   |                                                  |        |        |         |         |       |        |        |         |       |       
|                                                     |                                                                                 |                                                                | Accounts receivable               |                                                  |        | 1,640  |         |         |       | (1,818 | )      |         |       | 2,271  |        
|                                                     |                                                                                 |                                                                | Inventories                       |                                                  |        | 331    |         |         |       | (1,269 | )      |         |       | 197    |        
|                                                     |                                                                                 |                                                                | Prepaid expenses and other assets |                                                  |        | 69     |         |         |       | 116    |        |         |       | 154    |        
|                                                     |                                                                                 |                                                                | Accounts payable                  |                                                  |        | (394   | )       |         |       | (387   | )      |         |       | (1,304 | )      
|                                                     |                                                                                 |                                                                | Accrued compensation              |                                                  |        | (438   | )       |         |       | (116   | )      |         |       | (365   | )      
|                                                     |                                                                                 |                                                                | Other accrued liabilities         |                                                  |        | (1,225 | )       |         |       | 26     |        |         |       | (106   | )      
|                                                     |                                                                                 |                                                                | Deferred rent                     |                                                  |        | 552    |         |         |       |       |        |         |       |       |        
|                                                     |                                                                                 |                                                                | Deferred revenue                  |                                                  |        | (360   | )       |         |       | (994   | )      |         |       | (1,255 | )      
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|                                                     |                                                                                 |                                                                |                                   | Net cash used in operating activities            |        |        | (7,973  | )       |       |        | (8,629 | )       |       |        | (11,099 | )
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Cash flows from investing activities:                |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |        
|                                                     | Capital expenditures                                                            |                                                                |                                   | (1,699                                           | )      |        |         | (1,260  | )     |        |        | (781    | )    
|                                                     | Business acquisition (net of cash received)                                     |                                                                |                                   |                                                 |        |        |         |        |       |        |        | (6,464  | )    
|                                                     | Proceeds from the sale of the HPLC business                                     |                                                                |                                   |                                                 |        |        |         | 1,228   |       |        |        |        |      
|                                                     | Purchase of short-term investments                                              |                                                                |                                   |                                                 |        |        |         | (14,941 | )     |        |        | (10,749 | )    
|                                                     | Purchase of long-term investments                                               |                                                                |                                   | (2,866                                           | )      |        |         | (5,432  | )     |        |        |        |      
|                                                     | Proceeds from the sales of short-term investments                               |                                                                |                                   | 2,170                                            |        |        |         | 3,902   |       |        |        | 4,910   |      
|                                                     | Proceeds from the maturities of short-term investments                          |                                                                |                                   | 3,693                                            |        |        |         | 13,195  |       |        |        | 39,309  |      
|                                                     | Proceeds from sale of long-term investments                                     |                                                                |                                   | 2,649                                            |        |        |         |        |       |        |        |        |      
|                                                     | Proceeds from the maturities of long-term investments                           |                                                                |                                   | 1,100                                            |        |        |         |        |       |        |        |        |      
|                                                     | Purchases of licenses                                                           |                                                                |                                   |                                                 |        |        |         | (35     | )     |        |        | (1,400  | )    
|                                                     | Restricted cash                                                                 |                                                                |                                   | 12,148                                           |        |        |         | 1,167   |       |        |        | (10,863 | )    
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|                                                     |                                                                                 |                                                                |                                   | Net cash provided (used) in investing activities |        |        | 17,195  |         |       |        | (2,176 | )       |       |        | 13,962  |  
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Cash flows from financing activities:                |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |        
|                                                     | Principal payments on notes payable                                             |                                                                |                                   | (12,192                                          | )      |        |         |        |       |        |        |        |      
|                                                     | Principal payments on capital lease obligations                                 |                                                                |                                   |                                                 |        |        |         | (94     | )     |        |        | (187    | )    
|                                                     | Proceeds from capital lease obligations                                         |                                                                |                                   |                                                 |        |        |         | 31      |       |        |        | 94      |      
|                                                     | Repayment of long-term debt                                                     |                                                                |                                   |                                                 |        |        |         | (1,167  | )     |        |        | (200    | )    
|                                                     | Repurchase of common stock                                                      |                                                                |                                   | (81                                              | )      |        |         |        |       |        |        | (47     | )    
|                                                     | Net proceeds from issuances of common stock                                     |                                                                |                                   | 234                                              |        |        |         | 236     |       |        |        | 233     |      
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|                                                     |                                                                                 |                                                                |                                   | Net cash used in financing activities            |        |        | (12,039 | )       |       |        | (994   | )       |       |        | (107    | )
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Effect of exchange rate changes on cash              |                                                                                 |                                                                | 1,518                             |                                                  |        |        | 524     |         |       |        | 143    |        
|Net increase (decrease) in cash and cash equivalents |                                                                                 |                                                                | (1,299                            | )                                                |        |        | (11,275 | )       |       |        | 2,899  |        
|Cash and cash equivalents at beginning of year       |                                                                                 |                                                                | 9,620                             |                                                  |        |        | 20,895  |         |       |        | 17,996 |        
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Cash and cash equivalents at end of year             |                                                                                 | $                                                              | 8,321                             |                                                  |        | $      | 9,620   |         |       | $      | 20,895 |        
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Supplemental Disclosure of Cash Flow Information     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |        
|Interest paid                                        |                                                                                 | $                                                              | 162                               |                                                  |        | $      | 394     |         |       | $      | 426    |        
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Taxes paid                                           |                                                                                 | $                                                              | 1,225                             |                                                  |        | $      | 247     |         |       | $      | 524    |        
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      
|Supplemental Disclosure of Cash Flow Information     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |       |        |        |        
|Deferred stock compensation (cancellations)          |                                                                                 | $                                                              | 5                                 |                                                  |        | $      | 111     |         |       | $      | (712   | )      
|                                                     |                                                                                 |                                                                |                                   |                                                  |        |        |         |         |      

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |                                           
|-------- | ------------------------------------------
|NOTE 1  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                                               
| | ----------------------------------------------
| | Nature of Operations and Basis of Presentation









| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Reclassification





| |                             
| | ----------------------------
| | Foreign Currency Translation





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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                 
| | ----------------
| | Use of Estimates





| |                                                  
| | -------------------------------------------------
| | Cash, Cash Equivalents and Short-Term Investments







| |                
| | ---------------
| | Restricted Cash





| |                    
| | -------------------
| | Revenue Recognition





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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




Product Revenue




Services Revenue






| |                            
| | ---------------------------
| | Shipping and Handling Costs





| |                 
| | ----------------
| | Product Warranty





|                                     |  |           |     |  |             |  |     |          |  |  |         |   |  |   |     | 
|------------------------------------ |  | --------- | --- |  | ----------- |  | --- | -------- |  |  | ------- | - |  | - | --- | 
|                                     |  | Balance   |     |  | Increase in |  |     | Cost of  |  |  | Balance |  
|                                     |  | Beginning |     |  | Warranty    |  |     | Warranty |  |  | End of  |  
|Accrued Product Warranty Year Ended: |  | of Period |     |  | Accrual     |  |     | Repair   |  |  | Period  |  
|                                     |  |           |     |  |             |  |     |          |  |  |         |  
|December 31, 2003                    |  | $         | 211 |  |             |  | 324 |          |  |  | (336    | ) |  | $ | 199 | 
|December 31, 2004                    |  | $         | 199 |  |             |  | 199 |          |  |  | (142    | ) |  | $ | 256 | 



| |                           
| | --------------------------
| | Software Development Costs





| |                  
| | -----------------
| | Advertising Costs





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |            
| | -----------
| | Inventories



Property and
Equipment




Impairment of Long-Lived
Assets




Goodwill and Other Purchased
Intangible Assets








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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




Concentrations of
Risk














Accounting for Stock-Based Compensation




47



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                               |  |                          |           |   |      |  |           |      |  |  |           |  
|------------------------------ |  | ------------------------ | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                               |  | Years Ended December 31, |          
|                               |  |                          |          
|                               |  | 2004                     |           |   | 2003 |  |           | 2002 | 
|                               |  |                          |           |   |      |  |           |      | 
|Risk-free interest rate        |  |                          | 2.21      | % |      |  | 2.36      | %    |  |  | 3.61      | %
|Dividend yield                 |  |                          |          |   |      |  |          |      |  |  |          |  
|Weighted-average expected life |  |                          | 3.7 years |   |      |  | 3.6 years |      |  |  | 4.0 years |  
|Volatility                     |  |                          | 0.70      |   |      |  | 1.06      |      |  |  | 0.94      |  



|                               |  |                          |            |   |      |  |            |      |  |  |            |  
|------------------------------ |  | ------------------------ | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                               |  | Years Ended December 31, |           
|                               |  |                          |           
|                               |  | 2004                     |            |   | 2003 |  |            | 2002 | 
|                               |  |                          |            |   |      |  |            |      | 
|Risk-free interest rate        |  |                          | 2.29       | % |      |  | 1.68       | %    |  |  | 1.94       | %
|Dividend yield                 |  |                          |           |   |      |  |           |      |  |  |           |  
|Weighted-average expected life |  |                          | 0.5  years |   |      |  | 0.5  years |      |  |  | 0.5  years |  
|Volatility                     |  |                          | 0.70       |   |      |  | 0.81       |      |  |  | 0.94       |  



|                                                                                                             |  |                          |         |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                             |  | Years Ended December 31, |        
|                                                                                                             |  |                          |        
|                                                                                                             |  | 2004                     |         |   | 2003 |   |        | 2002 | 
|                                                                                                             |  |                          |         |   |      |   |        |      | 
|Net loss, as reported                                                                                        |  | $                        | (11,518 | ) |      | $ | (8,152 | )    |  | $ | (13,858 | )
|Stock-based employee compensation expense included in reported
    net loss                                  |  |                          | 5       |   |      |   | 65     |      |  |   | 222     |  
|Total stock-based employee compensation expense determined under
    fair value based methods for all awards |  |                          | (1,234  | ) |      |   | (1,570 | )    |  |   | (1,383  | )
|                                                                                                             |  |                          |         |   |      |   |        |      | 
|Pro forma net loss                                                                                           |  | $                        | (12,747 | ) |      | $ | (9,657 | )    |  | $ | (15,019 | )
|                                                                                                             |  |                          |         |   |      |   |        |      | 
|Basic and diluted net loss per common share, as reported                                                     |  | $                        | (0.56   | ) |      | $ | (0.40  | )    |  | $ | (0.70   | )
|                                                                                                             |  |                          |         |   |      |   |        |      | 
|Pro forma basic and diluted net loss per common share                                                        |  | $                        | (0.62   | ) |      | $ | (0.48  | )    |  | $ | (0.76   | )
|                                                                                                             |  |                          |         |   |      |   |        |      | 



Comprehensive Loss




48



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Net Loss Per Share






|                     |  |              |       |  |      |  |       |      |  |  |       | 
|-------------------- |  | ------------ | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                     |  | December 31, |      
|                     |  |              |      
|                     |  | 2004         |       |  | 2003 |  |       | 2002 | 
|                     |  |              |       |  |      |  |       |      | 
|Outstanding options  |  |              | 3,240 |  |      |  | 3,637 |      |  |  | 4,062 | 
|Outstanding warrants |  |              |      |  |      |  | 63    |      |  |  | 81    | 

Income Taxes




Recent Accounting
Pronouncements






49



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




NOTE 2  BUSINESS COMBINATION












|                                                |                      |   |        |       | 
|----------------------------------------------- | -------------------- | - | ------ | ----- | 
|Net tangible assets                             |                      | $ | 5,250  |      
|Goodwill and other purchased intangible assets: |                      |   |        |      
|                                                | Completed technology |   |        | 4,090 | 
|                                                | Trade names          |   |        | 250   | 
|                                                | Goodwill             |   |        | 9,410 | 
|                                                |                      |   |       
|Total purchase price                            |                      | $ | 19,000 |      
|                                                |                      |   |       



50



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                   |  |                   |         |  
|------------------ |  | ----------------- | ------- | -
|                   |  | Twelve Months     |        
|                   |  | Ended             |        
|                   |  | December 31, 2002 |        
|                   |  |                   |        
|                   |  | (In thousands,    |        
|                   |  | except per share  |        
|                   |  | data)             |        
|Total net sales    |  | $                 | 28,073  |  
|Net loss           |  |                   | (13,756 | )
|Net loss per share |  | $                 | (0.69   | )



|         |                      
|-------- | ---------------------
|NOTE 3  | RESTRUCTURING CHARGES





|                                        |  |                  |     |      |          |   |         |              |  |                  |              |         |  |          |         |  |              |                  |      |              |  |   |    |   |  |   |   | 
|--------------------------------------- |  | ---------------- | --- | ---- | -------- | - | ------- | ------------ |  | ---------------- | ------------ | ------- |  | -------- | ------- |  | ------------ | ---------------- | ---- | ------------ |  | - | -- | - |  | - | - | 
|                                        |  |                  |     | 2003 |          |   | 2004   
|                                        |  |                  |     |      |          |   |        
|                                        |  | Accrued          |     |      |          |   | Accrued |              |  |                  |              | Accrued
|                                        |  | Restructuring at |     |      |          |   | Noncash |              |  | Restructuring at |              |         |  |          | Noncash |  |              | Restructuring at
|                                        |  | December 31,     |     |      | Cash     |   |         | Charges      |  |                  | December 31, |         |  | Cash     |         |  | Charges      |                  |      | December 31,
|                                        |  | 2002             |     |      | Payments |   |         | (Recoveries) |  |                  | 2003         |         |  | Payments |         |  | (Recoveries) |                  |      | 2004        
|                                        |  |                  |     |      |          |   |         |              |  |                  |              |         |  |          |         |  |              |                  |      |             
|Workforce reductions                    |  | $                | 418 |      |          | $ | (348    | )            |  | $                |             |         |  | $        | 70      |  |              | $                | (65  | )            |  | $ | (5 | ) |  | $ |  | 
|Abandonment of excess equipment         |  |                  |    |      |          |   |        |              |  |                  |             |         |  |          |        |  |              |                  |     |              |  |   |   |   |  |   |  | 
|Abandonment of excess leased facilities |  |                  | 356 |      |          |   | (49     | )            |  |                  | (219         | )       |  |          | 88      |  |              |                  | (88  | )            |  |   |   |   |  |   |  | 
|Other                                   |  |                  | 103 |      |          |   | (138    | )            |  |                  | 35           |         |  |          |        |  |              |                  |      |              |  |   |    |   |  |   |  | 
|                                        |  |                  |     |      |          |   |         |              |  |                  |              |         |  |          |         |  |              |                  |      |              | 
|Total                                   |  | $                | 877 |      |          | $ | (535    | )            |  | $                | (184         | )       |  | $        | 158     |  |              | $                | (153 | )            |  | $ | (5 | ) |  | $ |  | 
|                                        |  |                  |     |      |          |   |         |              |  |                  |              |         |  |          |         |  |              |                  |      |              | 





|         |                                         
|-------- | ----------------------------------------
|NOTE 4  | GOODWILL AND OTHER PURCHASED INTANGIBLES





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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|                             |                      |          |   |       |              |  |       |          |        |   |              |       |       |  |   |        |        |  
|---------------------------- | -------------------- | -------- | - | ----- | ------------ |  | ----- | -------- | ------ | - | ------------ | ----- | ----- |  | - | ------ | ------ | -
|                             |                      | 2004     |   |       | 2003         | 
|                             |                      |          |   |       |              | 
|                             |                      | Gross    |   |       |              |  | Gross |          |        |  
|                             |                      | Carrying |   |       | Accumulated  |  |       | Carrying |        |   | Accumulated  |      
|                             |                      | Amount   |   |       | Amortization |  |       | Amount   |        |   | Amortization |      
|                             |                      |          |   |       |              |  |       |          |        |   |              |      
|Amortized intangible assets: |                      |          |   |       |              |  |       |          |        |   |              |       |       |  |   |       
|                             | Completed technology |          | $ | 5,533 |              |  | $     | (2,690   | )      |   | $            | 5,540 |       |  | $ | (2,522 | )     
|                             | Licenses             |          |   | 609   |              |  |       | (609     | )      |   |              | 1,435 |       |  |   | (180   | )     
|                             | Tradenames           |          |   | 250   |              |  |       | (76      | )      |   |              | 250   |       |  |   | (52    | )     
|                             |                      |          |   |       |              |  |       |          |        |   |              |      
|                             |                      | Total    |   | $     | 6,392        |  |       | $        | (3,375 | ) |              | $     | 7,225 |  |   | $      | (2,754 | )
|                             |                      |          |   |       |              |  |       |          |        |   |              |      



|                                |                                |       |   |     |       | 
|------------------------------- | ------------------------------ | ----- | - | --- | ----- | 
|Estimated amortization expense: |                                |       |   |    
|                                | For the year ending 12/31/2005 |       | $ | 443 |      
|                                | For the year ending 12/31/2006 |       |   | 443 |      
|                                | For the year ending 12/31/2007 |       |   | 443 |      
|                                | For the year ending 12/31/2008 |       |   | 443 |      
|                                | For the year ending 12/31/2009 |       |   | 443 |      
|                                | Thereafter                     |       |   | 802 |      
|                                |                                |       |  
|                                |                                | Total |   | $   | 3,017 | 
|                                |                                |       |  

52



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                             |                      |       |  |     |     | 
|---------------------------- | -------------------- | ----- |  | --- | --- | 
|                             |                      | Years | 
|                             |                      |       | 
|Amortized intangible assets: |                      |       |  |    
|                             | Completed technology |       |  | 6.2 |    
|                             | Tradenames           |       |  | 6.2 |    
|                             |                      |       | 
|                             |                      | Total |  |     | 6.2 | 
|                             |                      |       | 



|                               |                                                 |       |   |       |       |  |   |       |       | 
|------------------------------ | ----------------------------------------------- | ----- | - | ----- | ----- |  | - | ----- | ----- | 
|                               |                                                 | 2004  |   |       | 2003  | 
|                               |                                                 |       |   |       |       | 
|Unamortized intangible assets: |                                                 |       |   |       |       |  |   |      
|                               | Assembled workforce                             |       | $ | 1,460 |       |  | $ | 1,460 |      
|                               | Customer base                                   |       |   | 1,220 |       |  |   | 1,220 |      
|                               | Goodwill and indefinite lived intangible assets |       |   | 6,730 |       |  |   | 6,730 |      
|                               |                                                 |       |   |       |       | 
|                               |                                                 | Total |   | $     | 9,410 |  |   | $     | 9,410 | 
|                               |                                                 |       |   |       |       | 



|                       |  |      |       |  |      |   |        |  
|---------------------- |  | ---- | ----- |  | ---- | - | ------ | -
|                       |  | 2004 |       |  | 2003 |  
|                       |  |      |       |  |      |  
|Balance at January 1   |  | $    | 9,410 |  |      | $ | 10,173 |  
|Impairment losses      |  |      |      |  |      |   | (763   | )
|                       |  |      |       |  |      |  
|Balance at December 31 |  | $    | 9,410 |  |      | $ | 9,410  |  
|                       |  |      |       |  |      |  



|         |                                
|-------- | -------------------------------
|NOTE 5  | IMPAIRMENT OF LONG-LIVED ASSETS





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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


NOTE 6  INVESTMENTS






|                            |                        |               |       |       |      |   |        |       | 
|--------------------------- | ---------------------- | ------------- | ----- | ----- | ---- | - | ------ | ----- | 
|                            |                        | Fair Value at |      
|                            |                        | December 31,  |      
|                            |                        |               |      
|                            |                        | 2004          |       |       | 2003 |  
|                            |                        |               |       |       |      |  
|Money market funds          |                        | $             | 1,796 |       |      | $ | 2,807  |      
|U.S. government obligations |                        |               |      |       |      |   | 3,850  |      
|Corporate bonds             |                        |               | 2,533 |       |      |   | 5,432  |      
|                            |                        |               |       |       |      |  
|                            |                        | $             | 4,329 |       |      | $ | 12,089 |      
|                            |                        |               |       |       |      |  
|Reported as:                |                        |               |       |       |      |   |        |      
|                            | Cash equivalents       |               | $     | 1,793 |      |   | $      | 2,807 | 
|                            | Short term investments |               |       | 1,837 |      |   |        | 3,850 | 
|                            | Long term investments  |               |       | 699   |      |   |        | 5,432 | 
|                            |                        |               |       |       |      |  
|                            |                        | $             | 4,329 |       |      | $ | 12,089 |      
|                            |                        |               |       |       |      |  



NOTE 7  INVENTORIES




|                |  |              |       |  |              |   |       | 
|--------------- |  | ------------ | ----- |  | ------------ | - | ----- | 
|                |  | December 31, |       |  | December 31, |  
|                |  | 2004         |       |  | 2003         |  
|                |  |              |       |  |              |  
|Raw materials   |  | $            | 3,836 |  |              | $ | 5,063 | 
|Work in process |  |              | 1,416 |  |              |   | 429   | 
|Finished goods  |  |              | 1,363 |  |              |   | 1,454 | 
|                |  |              |       |  |              |  
|                |  | $            | 6,615 |  |              | $ | 6,946 | 
|                |  |              |       |  |              |  



|         |                            
|-------- | ---------------------------
|NOTE 8  | PROPERTY AND EQUIPMENT, NET



|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  |              |       
|                                               |  | 2004         |        |   | 2003 |  
|                                               |  |              |        |   |      |  
|Laboratory and office equipment                |  | $            | 7,227  |   |      | $ | 6,994  |  
|Property                                       |  |              | 2,816  |   |      |   | 2,095  |  
|Leasehold improvements                         |  |              | 27     |   |      |   | 1,217  |  
|                                               |  |              |        |   |      |  
|                                               |  |              | 10,070 |   |      |   | 10,306 |  
|Less accumulated depreciation and amortization |  |              | (5,839 | ) |      |   | (5,852 | )
|                                               |  |              |        |   |      |  
|Property and equipment, net                    |  | $            | 4,231  |   |      | $ | 4,454  |  
|                                               |  |              |        |   |      |  

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|         |            
|-------- | -----------
|NOTE 9  | COMMITMENTS



| |                              
| | -----------------------------
| | Operating and capital leases:



|                                            |  |         |     |   |           |   |       | 
|------------------------------------------- |  | ------- | --- | - | --------- | - | ----- | 
|                                            |  | Capital |     |   | Operating |  
|Year Ending December 31,                    |  | Leases  |     |   | Leases    |  
|                                            |  |         |     |   |           |  
|2005                                        |  | $       | 26  |   |           | $ | 289   | 
|2006                                        |  |         | 26  |   |           |   | 296   | 
|2007                                        |  |         | 23  |   |           |   | 293   | 
|2008                                        |  |         | 8   |   |           |   | 303   | 
|2009                                        |  |         |    |   |           |   | 306   | 
|Beyond                                      |  |         |    |   |           |   | 454   | 
|                                            |  |         |     |   |           |  
|Total                                       |  | $       | 83  |   |           | $ | 1,941 | 
|                                            |  |         |     |   |           |  
|Less amount representing interest           |  |         | (6  | ) |           |   |       | 
|                                            |  |         |     |   |           |  
|Present value of future lease payments      |  |         | 77  |   |           |   |       | 
|Less current portion                        |  |         | (24 | ) |           |   |       | 
|                                            |  |         |     |   |           |  
|Noncurrent obligations under capital leases |  | $       | 53  |   |           |   |       | 
|                                            |  |         |     |   |           |  



| |           
| | ----------
| | Royalties:



|                         |  |           |     | 
|------------------------ |  | --------- | --- | 
|                         |  | Minimum   |    
|Year Ending December 31, |  | Royalties |    
|                         |  |           |    
|2005                     |  | $         | 100 | 
|2006                     |  |           | 25  | 
|2007                     |  |           | 25  | 
|2008                     |  |           | 25  | 
|                         |  |           |    
|Total                    |  | $         | 175 | 
|                         |  |           |    

Rent expense:




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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Other:






NOTE 10  DEBT




NOTE 11  STOCKHOLDERS EQUITY




| |                            
| | ---------------------------
| | Convertible Preferred Stock





| |             
| | ------------
| | Common Stock







| |                                
| | -------------------------------
| | Common Stock Repurchase Program



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |         
| | --------
| | Warrants









| |                          
| | -------------------------
| | 1995 Incentive Stock Plan







| |                          
| | -------------------------
| | 2000 Incentive Stock Plan



57



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                             |                              |           |           |            |           |          |           |            |   |  |      |      | 
|---------------------------- | ---------------------------- | --------- | --------- | ---------- | --------- | -------- | --------- | ---------- | - |  | ---- | ---- | 
|                             |                              |           |           |            |           | Weighted |          
|                             |                              | Shares    |           |            |           |          | Average   |           
|                             |                              | Available |           |            | Number of |          |           | Exercise   |  
|                             |                              | For Grant |           |            | Options   |          |           | Price      |  
|                             |                              |           |           |            |           |          |           |            |  
|Balance at December 31, 2001 |                              |           | 1,726,832 |            |           |          | 2,810,746 |            |   |  | 4.52 |     
|                             | Additional shares authorized |           |           | 964,084    |           |          |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (2,479,896 | )         |          |           | 2,479,896  |   |  |      | 1.71 | 
|                             | Options exercised            |           |           |           |           |          |           | (92,769    | ) |  |      | 0.84 | 
|                             | Options canceled             |           |           | 1,135,741  |           |          |           | (1,135,741 | ) |  |      | 4.95 | 
|                             |                              |           |           |            |           |          |           |            |  
|Balance at December 31, 2002 |                              |           | 1,346,761 |            |           |          | 4,062,132 |            |   |  | 2.75 |     
|                             | Additional shares authorized |           |           |           |           |          |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (570,720   | )         |          |           | 570,720    |   |  |      | 0.96 | 
|                             | Options exercised            |           |           |           |           |          |           | (249,697   | ) |  |      | 0.62 | 
|                             | Options canceled             |           |           | 746,169    |           |          |           | (746,169   | ) |  |      | 2.78 | 
|                             |                              |           |           |            |           |          |           |            |  
|Balance at December 31, 2003 |                              |           | 1,510,803 |            |           |          | 3,636,986 |            |   |  | 2.62 |     
|                             | Additional shares authorized |           |           |           |           |          |           |           |   |  |      |      | 
|                             | Options granted              |           |           | (666,820   | )         |          |           | 666,820    |   |  |      | 1.38 | 
|                             | Options exercised            |           |           |           |           |          |           | (231,715   | ) |  |      | 0.80 | 
|                             | Options canceled             |           |           | 831,938    |           |          |           | (831,938   | ) |  |      | 2.91 | 
|                             |                              |           |           |            |           |          |           |            |  
|Balance at December 31, 2004 |                              |           | 1,675,921 |            |           |          | 3,240,153 |            |   |  | 2.42 |     
|                             |                              |           |           |            |           |          |           |            |  



|               |  |                     |           |           |                     |  |          |          |  |   |           |          |  |          |           |  |  |   |      | 
|-------------- |  | ------------------- | --------- | --------- | ------------------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | --------- |  |  | - | ---- | 
|               |  | Options Outstanding |           |           |                    
|               |  |                     |           |           | Options Exercisable | 
|               |  |                     |           | Weighted  |                     |  |          |          |  |  
|               |  |                     |           | Average   |                     |  | Weighted |          |  |   |           | Weighted | 
|               |  |                     |           | Remaining |                     |  | Average  |          |  |   |           | Average  | 
|               |  | Number of           |           |           | Contractual         |  |          | Exercise |  |   | Number of |          |  | Exercise |          
|Exercise Price |  | Options             |           |           | Life (Years)        |  |          | Price    |  |   | Options   |          |  | Price    |          
|               |  |                     |           |           |                     |  |          |          |  |   |           |          |  |          |          
|$0.06 - $ 0.85 |  |                     | 706,924   |           |                     |  | 7.26     |          |  | $ | 0.71      |          |  |          | 558,452   |  |  | $ | 0.68 | 
|$0.86 - $ 2.33 |  |                     | 1,374,210 |           |                     |  | 8.08     |          |  | $ | 1.49      |          |  |          | 782,911   |  |  | $ | 1.50 | 
|$2.49 - $ 4.74 |  |                     | 697,090   |           |                     |  | 7.02     |          |  | $ | 3.04      |          |  |          | 555,713   |  |  | $ | 3.08 | 
|$5.68 - $20.13 |  |                     | 461,929   |           |                     |  | 6.07     |          |  | $ | 6.82      |          |  |          | 438,699   |  |  | $ | 6.86 | 
|               |  |                     |           |           |                     |  |          |          |  |   |           |          |  |          |          
|               |  |                     | 3,240,153 |           |                     |  | 7.39     |          |  | $ | 2.42      |          |  |          | 2,335,775 |  |  | $ | 2.69 | 
|               |  |                     |           |           |                     |  |          |          |  |   |           |          |  |          |          







58



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








| |                                  
| | ---------------------------------
| | 2000 Employee Stock Purchase Plan





| |                
| | ---------------
| | Reserved Shares



|                             |  |  |           | 
|---------------------------- |  |  | --------- | 
|Incentive stock plans        |  |  | 3,240,153 | 
|Employee Stock Purchase Plan |  |  | 549,140   | 
|                             |  |  |          
|                             |  |  | 3,789,293 | 
|                             |  |  |          



|          |                               
|--------- | ------------------------------
|NOTE 12  | 401(k) RETIREMENT SAVINGS PLAN





|          |             
|--------- | ------------
|NOTE 13  | INCOME TAXES



59



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|                                           |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|U.S. federal taxes (benefit)               |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                           |  |      |        |   |      |   |        |      | 
|At statutory rate                          |  | $    | (3,967 | ) |      | $ | (2,505 | )    |  | $ | (4,638 | )
|Foreign taxes                              |  |      | (106   | ) |      |   | 783    |      |  |   | 217    |  
|Net operating losses not benefited         |  |      | 3,476  |   |      |   | 1,706  |      |  |   | 4,388  |  
|Impairment and non-deductible amortization |  |      | 447    |   |      |   | 799    |      |  |   | 250    |  
|                                           |  |      |        |   |      |   |        |      | 
|Total                                      |  | $    | (150   | ) |      | $ | 783    |      |  | $ | 217    |  
|                                           |  |      |        |   |      |   |        |      | 



|                              |                                      |                                |         |        |        |   |         |        |        |  
|----------------------------- | ------------------------------------ | ------------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                              |                                      | Years Ended December 31,       |        
|                              |                                      |                                |        
|                              |                                      | 2004                           |         |        | 2003   |  
|                              |                                      |                                |         |        |        |  
|Deferred tax assets:          |                                      |                                |         |        |        |   |         |       
|                              | Net operating loss carryforwards     |                                | $       | 23,655 |        |   | $       | 21,022 |       
|                              | Tax and research credits             |                                |         | 2,929  |        |   |         | 2,780  |       
|                              | Capitalized research and development |                                |         | 1,126  |        |   |         | 860    |       
|                              | Other                                |                                |         | 1,600  |        |   |         | 1,030  |       
|                              |                                      |                                |         |        |        |  
|                              |                                      | Total deferred tax assets      |         |        | 29,310 |   |         |        | 25,692 |  
|                              |                                      |                                |         |        |        |  
|Deferred tax liabilities:     |                                      |                                |         |        |        |   |         |       
|                              | Unremitted foreign earnings          |                                |         | (871   | )      |   |         | (971   | )     
|                              | UK deferred tax liabilities          |                                |         | (313   | )      |   |         | (455   | )     
|                              |                                      |                                |         |        |        |  
|                              |                                      | Total deferred tax liabilities |         |        | (1,184 | ) |         |        | (1,426 | )
|                              |                                      |                                |         |        |        |  
|Valuation allowance           |                                      |                                | (28,439 | )      |        |   | (24,721 | )     
|                              |                                      |                                |         |        |        |  
|Net deferred tax liabilities: |                                      | $                              | (313    | )      |        | $ | (455    | )     
|                              |                                      |                                |         |        |        |  

60



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|          |                                                      
|--------- | -----------------------------------------------------
|NOTE 14  | MARKET SALES, EXPORT SALES, AND SIGNIFICANT CUSTOMERS





|            |  |                          |        |  |      |   |        |      |  |   |        | 
|----------- |  | ------------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|            |  | Years Ended December 31, |       
|            |  |                          |       
|            |  | 2004                     |        |  | 2003 |   |        | 2002 | 
|            |  |                          |        |  |      |   |        |      | 
|Instruments |  | $                        | 8,133  |  |      | $ | 10,148 |      |  | $ | 11,888 | 
|Consumables |  |                          | 10,541 |  |      |   | 11,653 |      |  |   | 11,106 | 
|Services    |  |                          | 1,530  |  |      |   | 2,668  |      |  |   | 3,323  | 
|            |  |                          |        |  |      |   |        |      | 
|            |  | $                        | 20,204 |  |      | $ | 24,469 |      |  | $ | 26,317 | 
|            |  |                          |        |  |      |   |        |      | 



|                             |  |                          |        |  |      |   |        |      |  |   |        | 
|---------------------------- |  | ------------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                             |  | Years Ended December 31, |       
|                             |  |                          |       
|                             |  | 2004                     |        |  | 2003 |   |        | 2002 | 
|                             |  |                          |        |  |      |   |        |      | 
|US                           |  | $                        | 8,046  |  |      | $ | 11,235 |      |  | $ | 14,169 | 
|Europe                       |  |                          | 9,974  |  |      |   | 11,438 |      |  |   | 10,282 | 
|Far East (principally Japan) |  |                          | 2,184  |  |      |   | 1,796  |      |  |   | 1,866  | 
|                             |  |                          |        |  |      |   |        |      | 
|                             |  | $                        | 20,204 |  |      | $ | 24,469 |      |  | $ | 26,317 | 
|                             |  |                          |        |  |      |   |        |      | 





|         |  |              |        |  |      |   |        |      |  |   |        | 
|-------- |  | ------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|         |  | December 31, |       
|         |  |              |       
|         |  | 2004         |        |  | 2003 |   |        | 2002 | 
|         |  |              |        |  |      |   |        |      | 
|US       |  | $            | 13,218 |  |      | $ | 20,489 |      |  | $ | 5,080  | 
|Europe   |  |              | 4,432  |  |      |   | 3,378  |      |  |   | 16,371 | 
|Far East |  |              | 50     |  |      |   | 70     |      |  |   | 68     | 
|         |  |              |        |  |      |   |        |      | 
|         |  | $            | 17,700 |  |      | $ | 23,937 |      |  | $ | 21,519 | 
|         |  |              |        |  |      |   |        |      | 

61



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|          |                 
|--------- | ----------------
|NOTE 15  | SUBSEQUENT EVENT









|          |                         
|--------- | ------------------------
|NOTE 16  | UNAUDITED QUARTERLY DATA

|                                    |  |                                       |        |   |              |   |        |         |  |   |          |   |  |             |        |   |              |   |       |         |  |   |          |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------------------------- | ------ | - | ------------ | - | ------ | ------- |  | - | -------- | - |  | ----------- | ------ | - | ------------ | - | ----- | ------- |  | - | -------- | - |  | - | ------ | - |  | - | ------ | -
|                                    |  | December 31                           |        |   | September 30 |   |        | June 30 |  |   | March 31 |   |  | December 31 |        |   | September 30 |   |       | June 30 |  |   | March 31 |  
|                                    |  | 2004                                  |        |   | 2004         |   |        | 2004    |  |   | 2004     |   |  | 2003        |        |   | 2003         |   |       | 2003    |  |   | 2003     |  
|                                    |  |                                       |        |   |              |   |        |         |  |   |          |   |  |             |        |   |              |   |       |         |  |   |          |  
|                                    |  | (In thousands, except per share data) |       
|Net sales                           |  | $                                     | 5,443  |   |              | $ | 4,796  |         |  | $ | 5,285    |   |  | $           | 4,680  |   |              | $ | 6,166 |         |  | $ | 5,166    |   |  | $ | 6,884  |   |  | $ | 6,253  |  
|Gross profit                        |  |                                       | 2,251  |   |              |   | 792    |         |  |   | 2,279    |   |  |             | 1,567  |   |              |   | 2,837 |         |  |   | 2,608    |   |  |   | 3,012  |   |  |   | 2,756  |  
|Loss from operations                |  |                                       | (4,009 | ) |              |   | (3,536 | )       |  |   | (2,015   | ) |  |             | (2,745 | ) |              |   | (745  | )       |  |   | (3,104   | ) |  |   | (1,994 | ) |  |   | (2,538 | )
|Net loss                            |  |                                       | (3,478 | ) |              |   | (3,469 | )       |  |   | (2,045   | ) |  |             | (2,526 | ) |              |   | (650  | )       |  |   | (3,065   | ) |  |   | (1,906 | ) |  |   | (2,531 | )
|Net loss per share, basic & diluted |  | $                                     | (0.17  | ) |              | $ | (0.17  | )       |  | $ | (0.10    | ) |  | $           | (0.12  | ) |              | $ | (0.03 | )       |  | $ | (0.15    | ) |  | $ | (0.09  | ) |  | $ | (0.13  | )

62



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of disclosure controls and procedures.






Changes in Internal Control Over Financial Reporting.









|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



63



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##### Table of Contents



Code of Ethics




Section 16(a) Beneficial Ownership Reporting
Compliance









|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters.








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV




|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                          
| | -------------------------
| | (1) Financial Statements:



| |  |                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | The following financial statements are filed as part of this
    report under Item 8. Financial Statements and
    Supplementary Data.




64



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##### Table of Contents





| |                                   
| | ----------------------------------
| | (2) Financial Statement Schedules:



| |  |                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II  Valuation and Qualifying Accounts
    for the three fiscal years in the period ended December 31,
    2004.



Schedule II  Valuation and Qualifying
Accounts


Allowance for Doubtful Accounts (in thousands)


|                             |  |            |     |  |                  |  |    |            |  |            |        |  |  |   |     | 
|---------------------------- |  | ---------- | --- |  | ---------------- |  | -- | ---------- |  | ---------- | ------ |  |  | - | --- | 
|                             |  | Balance at |     |  | Additions        |  |    |            |  | Balance at |       
|                             |  | Beginning  |     |  | Charged to Costs |  |    | Deductions |  |            | End of | 
|                             |  | of Period  |     |  | and Expenses     |  |    | Writeoffs  |  |            | Period | 
|                             |  |            |     |  |                  |  |    |            |  |            |        | 
|Year Ended December 31, 2002 |  | $          | 154 |  |                  |  | 58 |            |  |            | 102    |  |  | $ | 110 | 
|Year Ended December 31, 2003 |  | $          | 110 |  |                  |  | 10 |            |  |            | 18     |  |  | $ | 102 | 
|Year Ended December 31, 2004 |  | $          | 102 |  |                  |  | 87 |            |  |            | 68     |  |  | $ | 121 | 





| |              
| | -------------
| | (3) Exhibits:

|         |  |                                                                                                                                                                                                                  
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number   |  | Description of Document                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                  
|2.1(c)   |  | Agreement and Plan of Merger dated January 31, 2001, by and
    among the Registrant, CPL Acquisition Corp. and Camile Products,
    LLC.                                                                        
|2.2(d)   |  | 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(a)   |  | Amended and Restated Certificate of Incorporation of the
    Registrant.                                                                                                                                         
|3.2(h)   |  | Amended and Restated Bylaws of Registrant.                                                                                                                                                                       
|3.3(h)   |  | Certificate of Designation of Rights, Preferences and Privileges
    of Series A Participating Preferred Stock of the Registrant.                                                                                
|4.3(c)   |  | Registration Rights Agreement dated March 1, 2001, by and
    among the Registrant and the members of Camile Products, LLC.                                                                                      
|4.4(d)   |  | Registration Rights Agreement dated February 20, 2002, by
    and among the Registrant and the former Jones Group shareholders.                                                                                  
|4.5(d)   |  | £7,650,000 Loan Note Instrument Creating Principal
    Amount Guaranteed Loan Notes 2004 guaranteed by Barclays
    Bank PLC dated February 20, 2002.                                                            
|4.6(h)   |  | Preferred Stock Rights Agreement, dated as of May 24, 2004.                                                                                                                                                      
|10.19(i) |  | Agreement between the Registrant and Howard Goldstein dated
    April 16, 2004.                                                                                                                                  
|10.20(i) |  | Lease Agreement between the Registrant and Metropolitan Life
    Insurance Company dated April 2, 2004.                                                                                                          
|10.21    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between David Foster and Argonaut
    Technologies, Inc.                                                                     
|10.22    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Lissa Goldenstein and Argonaut
    Technologies, Inc.                                                                
|10.23    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Jeffrey Labadie and Argonaut
    Technologies, Inc.                                                                  
|10.24    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Gordon Tredger and Argonaut
    Technologies, Inc.                                                                   

65



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##### Table of Contents



|         |  |                                                                                                                                                       
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Number   |  | Description of Document                                                                                                                               
|         |  |                                                                                                                                                       
|10.25    |  | Change of Control Severance Agreement dated September 1,
    2004 between Steve Nelson and Argonaut Technologies, Inc.                                
|10.26(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between David Foster and Argonaut
    Technologies, Inc.                  
|10.27(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between Jeffrey Labadie and Argonaut
    Technologies, Inc.               
|10.28(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between Gordon Tredger and Argonaut
    Technologies, Inc.                
|10.29(j) |  | Asset Purchase Agreement by and between Argonaut Technologies,
    Inc. and Biotage AB, dated as of February 21, 2005.                                
|10.30(k) |  | Amended and Restated Stock and Asset Purchase Agreement by and
    between Argonaut Technologies, Inc. and Biotage AB, dated as of
    March 17, 2005.
|23.1     |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                                                      
|31.1     |  | Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a) of the Exchange Act.                                                          
|31.2     |  | Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a) of the Exchange Act.                                                          
|32       |  | Certification of Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                               
|32       |  | Certification of Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                               






|    |  |                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 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.                                                                                                                                               
|   
|(b) |  | Incorporated by reference from our Form 10-K filed with the
    Securities and Exchange Commission on April 1, 2002.                                                                                                                                                                                                                           
|   
|(c) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 16, 2001.                                                                                                                                                                                                                           
|   
|(d) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 6, 2002.                                                                                                                                                                                                                            
|   
|(e) |  | Incorporated by reference from our Form 10-Q filed with the
    Securities and Exchange Commission on September 30, 2002.
    Certain portions of this exhibit have been omitted and filed
    separately with the Securities and Exchange Commission.
    Confidential treatment has been requested with respect to such
    omitted portions.
|   
|(f) |  | Incorporated by reference from our Form 10-K filed with the
    Securities and Exchange Commission on March 31, 2003.                                                                                                                                                                                                                          
|   
|(g) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on May 14, 2003.                                                                                                                                                                                                                             
|   
|(h) |  | Incorporated by reference from our Form 8-K/ A filed with
    the Securities and Exchange Commission on July 2, 2004.                                                                                                                                                                                                                          
|   
|(i) |  | Incorporated by reference from our Form 10-Q filed with the
    Securities and Exchange Commission on May 13, 2004.                                                                                                                                                                                                                            
|   
|(j) |  | Incorporated by reference from our Form 8-K/ A filed with
    the Securities and Exchange Commission on February 24, 2005.                                                                                                                                                                                                                     
|   
|(k) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 21, 2005.                                                                                                                                                                                                                           
|   
|(l) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 22, 2005.                                                                                                                                                                                                                           

66



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##### Table of Contents



SIGNATURES






| |                            
| | ---------------------------
| | ARGONAUT TECHNOLOGIES, INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ LISSA A. GOLDENSTEIN

| |                                      
| | -------------------------------------
| |                                      
| | Lissa A. Goldenstein                 
| | President and Chief Executive Officer



POWER OF ATTORNEY






|                                                     |  |                                                                          |  |                |  | 
|---------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                                            |  | Title                                                                    |  | Date          
|                                                     |  |                                                                          |  |               
|                                                    
|/s/ LISSA A.
    GOLDENSTEINLissa
    A. Goldenstein |  | Chief Executive Officer, Director
    (Principal Executive Officer)      |  | April 15, 2005
|                                                    
|/s/ DAVID J. FOSTERDavid
    J. Foster               |  | Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | April 15, 2005
|                                                    
|/s/ BROOK H. BYERSBrook
    H. Byers                 |  | Director                                                                 |  | April 15, 2005
|                                                    
|/s/ DAVID G. LUDVIGSONDavid
    G. Ludvigson         |  | Director                                                                 |  | April 15, 2005
|                                                    
|/s/ PETER MACINTYREPeter
    Macintyre               |  | Director                                                                 |  | April 15, 2005
|                                                    
|/s/ BRIAN METCALFBrian
    Metcalf, Ph.D.            |  | Director                                                                 |  | April 15, 2005

67



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


FORM 10-K


Annual Period Ended December 31, 2004


EXHIBIT INDEX


|         |  |                                                                                                                                                                                                                  
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number   |  | Description of Document                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                  
|2.1(c)   |  | Agreement and Plan of Merger dated January 31, 2001, by and
    among the Registrant, CPL Acquisition Corp. and Camile Products,
    LLC.                                                                        
|2.2(d)   |  | 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(a)   |  | Amended and Restated Certificate of Incorporation of the
    Registrant.                                                                                                                                         
|3.2(h)   |  | Amended and Restated Bylaws of Registrant.                                                                                                                                                                       
|3.3(h)   |  | Certificate of Designation of Rights, Preferences and Privileges
    of Series A Participating Preferred Stock of the Registrant.                                                                                
|4.3(c)   |  | Registration Rights Agreement dated March 1, 2001, by and
    among the Registrant and the members of Camile Products, LLC.                                                                                      
|4.4(d)   |  | Registration Rights Agreement dated February 20, 2002, by
    and among the Registrant and the former Jones Group shareholders.                                                                                  
|4.5(d)   |  | £7,650,000 Loan Note Instrument Creating Principal
    Amount Guaranteed Loan Notes 2004 guaranteed by Barclays
    Bank PLC dated February 20, 2002.                                                            
|4.6(h)   |  | Preferred Stock Rights Agreement, dated as of May 24, 2004.                                                                                                                                                      
|10.19(i) |  | Agreement between the Registrant and Howard Goldstein dated
    April 16, 2004.                                                                                                                                  
|10.20(i) |  | Lease Agreement between the Registrant and Metropolitan Life
    Insurance Company dated April 2, 2004.                                                                                                          
|10.21    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between David Foster and Argonaut
    Technologies, Inc.                                                                     
|10.22    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Lissa Goldenstein and Argonaut
    Technologies, Inc.                                                                
|10.23    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Jeffrey Labadie and Argonaut
    Technologies, Inc.                                                                  
|10.24    |  | Amended and Restated Change of Control Severance Agreement dated
    August 3, 2004 between Gordon Tredger and Argonaut
    Technologies, Inc.                                                                   
|10.25    |  | Change of Control Severance Agreement dated September 1,
    2004 between Steve Nelson and Argonaut Technologies, Inc.                                                                                           
|10.26(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between David Foster and Argonaut
    Technologies, Inc.                                                                             
|10.27(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between Jeffrey Labadie and Argonaut
    Technologies, Inc.                                                                          
|10.28(l) |  | Amendment to Change of Control Severance Agreement dated
    March 17, 2005 between Gordon Tredger and Argonaut
    Technologies, Inc.                                                                           
|10.29(j) |  | Asset Purchase Agreement by and between Argonaut Technologies,
    Inc. and Biotage AB, dated as of February 21, 2005.                                                                                           
|10.30(k) |  | Amended and Restated Stock and Asset Purchase Agreement by and
    between Argonaut Technologies, Inc. and Biotage AB, dated as of
    March 17, 2005.                                                           
|23.1     |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                                                                                                                 
|31.1     |  | Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a) of the Exchange Act.                                                                                                                     
|31.2     |  | Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a) of the Exchange Act.                                                                                                                     

68



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##### Table of Contents



|       |  |                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------
|Number |  | Description of Document                                                                                
|       |  |                                                                                                        
|32     |  | Certification of Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|32     |  | Certification of Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.






|    |  |                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 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.                                                                                                                                               
|(b) |  | Incorporated by reference from our Form 10-K filed with the
    Securities and Exchange Commission on April 1, 2002.                                                                                                                                                                                                                           
|(c) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 16, 2001.                                                                                                                                                                                                                           
|(d) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 6, 2002.                                                                                                                                                                                                                            
|(e) |  | Incorporated by reference from our Form 10-Q filed with the
    Securities and Exchange Commission on September 30, 2002.
    Certain portions of this exhibit have been omitted and filed
    separately with the Securities and Exchange Commission.
    Confidential treatment has been requested with respect to such
    omitted portions.
|(f) |  | Incorporated by reference from our Form 10-K filed with the
    Securities and Exchange Commission on March 31, 2003.                                                                                                                                                                                                                          
|(g) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on May 14, 2003.                                                                                                                                                                                                                             
|(h) |  | Incorporated by reference from our Form 8-K/ A filed with
    the Securities and Exchange Commission on July 2, 2004.                                                                                                                                                                                                                          
|(i) |  | Incorporated by reference from our Form 10-Q filed with the
    Securities and Exchange Commission on May 13, 2004.                                                                                                                                                                                                                            
|(j) |  | Incorporated by reference from our Form 8-K/ A filed with
    the Securities and Exchange Commission on February 24, 2005.                                                                                                                                                                                                                     
|(k) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 21, 2005.                                                                                                                                                                                                                           
|(l) |  | Incorporated by reference from our Form 8-K filed with the
    Securities and Exchange Commission on March 22, 2005.                                                                                                                                                                                                                           

69