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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,
    2003
|                                               
|                                                |  | OR                                                                                          
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-31019



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

(650) 655-4200


(Registrants telephone number, including
area code)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The aggregate market value of voting and
non-voting equity held by non-affiliates of the Registrant as of
June 30, 2003 was approximately $25.0 million based
the closing price of $1.24 per share reported on the Nasdaq
National Market reported for such date. The number of shares
outstanding of the Registrants common stock on
February 29, 2004 was 20,421,164 shares. The
determination of affiliate status is not necessarily a
conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III
are incorporated by reference from the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held on
June 9, 2004.



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Argonaut Technologies, Inc.

Form 10-K


TABLE OF CONTENTS

|             |  |                                                                                           |    |      |    | 
|------------ |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|             |  |                                                                                           |    | Page
|             |  |                                                                                           |    |     
|PART I      
|Item 1.      |  | Business                                                                                  |    |      | 1  | 
|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                                                                   |    |      | 16 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |      | 17 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |    |      | 32 | 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                           |    |      | 33 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |      | 60 | 
|Item 9A.     |  | Controls and Procedures                                                                   |    |      | 60 | 
|            
|PART III    
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                    |    |      | 60 | 
|Item 11.     |  | Executive Compensation                                                                    |    |      | 60 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management and Related            |    |      |    | 
|             |  | Stockholder Matters                                                                       |    |      | 60 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                        |    |      | 60 | 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                |    |      | 61 | 
|            
|PART IV     
|Item 15.     |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |    |      | 61 | 
|SIGNATURES   |  |                                                                                           | 64 |     
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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PART I

This annual report contains forward-looking
statements for purposes of the Private Securities Litigation
Reform Act of 1995, and it is the Companys intention that
such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements
regarding future revenues, expenses, losses and cash flows, our
ability to be cash flow positive, research and development
activities and sales and marketing initiatives such as our plan
to concentrate our efforts in those areas such as building our
core consumables business, possible future acquisitions, the
anticipated effects of the acquisition of the Jones Group or the
acquisition of ATSI to our net sales performance and pre-tax
operating results, our plans to discontinue non-performing
consumable products and certain legacy instrument products, the
anticipated effects of our recent restructuring program and
related accruals, values of our assets and liabilities over
their remaining useful lives and our testing for impairment of
goodwill, and our expectations as to the duration of our
negative cash flows from operations and the sufficiency of
existing cash reserves for the next 12 months. Actual
results may differ materially from those projected in such
forward-looking statements due to various known and unknown
risks and uncertainties, including the risk that a decline in
the economy generally or the market for our products will
adversely affect our business, the risk that the market for our
products and services does not develop as anticipated, the risk
that we are unable to successfully integrate the product and
service offerings of the company we recently acquired and
successfully capitalize on anticipated synergies and growth
opportunities, and the risk that our restructuring programs do
not proceed as planned and that we incur unexpected expenses in
connection with the implementation thereof. For a further
discussion of these and other risks and uncertainties related to
our business see the discussion set forth herein under
Additional Factors That May Affect Future Results.






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

Overview

Argonaut Technologies, Inc. was incorporated
in the state of Delaware on November 10, 1994. We are a
leader in the development of innovative products designed to
help pharmaceutical chemists engaged in the discovery and
development of new chemical entities increase their productivity
and reduce their operating costs without compromising the
scientific integrity of their research. Pharmaceutical,
biotechnology and chemical industry organizations worldwide have
implemented our solutions to accelerate the development of new
chemical entities. Our chemistry consumables products allow
scientists to optimize their experiments, purify their materials
and yield better compounds than traditional consumable products
used for chemical synthesis. Our instrument products enable
parallel synthesis of new chemical compounds, allowing chemists
to perform multiple experiments under a variety of conditions in
much less time than other traditional chemistry development
methods would take. Our products automate many of the most
labor-intensive steps of chemistry development. By using our
chemistry consumables and instrumentation products, research
chemists are better equipped to address the increased demand for
new lead compounds to address the potential new wealth of
biological targets being generated by genomic and biotechnology
discoveries.

We began marketing our first product in 1996.
Currently, we market several different instrumentation product
lines (instruments and software), and a wide variety of
chemistry consumables. Through December 31, 2003, we have
sold our products to more than 1,200 customers in the
pharmaceutical, biotechnology, life sciences and chemical
research industries and have installed nearly 3,300 instruments
worldwide.

In March 2001, we completed the acquisition of
Camile Products, LLC, a privately held instrumentation and
software company in Indianapolis, Indiana, and renamed this
subsidiary Argonaut Technologies Systems, Inc.
(ATSI).

In February 2002, we completed the strategic
acquisition of Jones Chromatography Limited (and its wholly
owned subsidiaries: International Sorbent Technology Limited and
Jones Chromatography U.S.A., Inc.), a privately held
chemistry consumables and instrument company (Jones
Group) headquartered in Cardiff, Wales, United Kingdom.

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On July 30, 2003, the Company announced the
sale of its HPLC product line to the Grace Vydac business unit
of W.R. Grace & Co. The sale principally included the
Genesis® and ApexTM brands of HPLC columns
inventory as well as HPLC-related capital assets and trademarks.
The sale of these assets enables the Company to focus R&D
and sales and marketing efforts on core product areas providing
consumable and instrument products to the critical areas of drug
development. The pretax gain on the sale of net assets was
approximately $460,000.

Our total business is currently unprofitable and
consumes cash because of its early stage of development and its
limited size and scale.

Industry



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

The pharmaceutical industry faces ever greater
financial pressure to deliver both growth and profitability. One
of the most significant issues is the productivity of research
and development (R&D) efforts. Specifically,
traditional drug discovery efforts have not increased the number
of new drug candidates, new genomics-based technologies will
take longer to exploit, and cost control initiatives are
requiring more scientific output with minimal additional
resources. According to the Pharmaceutical Research &
Manufacturers of America, R&D spending in 2001 had more than
tripled since 1990 ($30.3 billion vs. $8.4 billion in
1990), while only 24 new drugs were approved by the FDA in 2001
versus 30 in 1990. This decrease in R&D productivity is
further amplified by the fact that drugs generating some
$30 billion in U.S. sales are expected to lose
U.S. patent protection or other forms of exclusivity from
2002 to 2006. With these current realities facing the
pharmaceutical industry, there is keen awareness and
justification for pharmaceutical companies to improve
productivity throughout R&D.

With the above challenges, and with competition
in the pharmaceutical industry increasing, many R&D
organizations have been exploring multiple strategies to enhance
success rates. Recent completion of the sequencing of the human
genome will provide an estimated 5,000 to 10,000 relevant new
drug targets according to the publication, Science. The
expected large influx of quality therapeutic targets will
require greater efficiency in all stages of chemical discovery
and development. Due to the high percentage of failed drug
candidates, new strategies are utilizing small molecules with
sufficient potencies to validate a new target before investing
time and money on a faulty therapeutic concept. Such demands
have driven the development of novel instrument and chemistry
consumables technologies which enable chemists to produce more
relevant compounds at a greater rate than previously possible.



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

The process of discovering potential chemicals,
which could prove useful as new medicines, involves a number of
steps that can best be understood in the context of two phases:



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

Chemists typically employ traditional chemistry
synthesis methods in their drug development efforts. Utilizing
traditional methods of chemical synthesis, a chemist performs a
series of chemical reactions, or transformations, until the
desired compound is obtained. Chemists generally achieve each
transformation in a four-part process:



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

Chemists build a reaction apparatus as the first
step in chemical synthesis. Chemists often construct the
apparatus using a variety of traditional laboratory components
depending on the type of chemistry they are performing. Chemists
use the apparatus to combine chemicals, reagents and solutions,
which the chemist will often heat or cool to specific
temperatures under air and moisture-free, or inert, conditions.
The chemist then monitors reactions over time to determine
reaction progress. In traditional chemistry development, the
assembly of a specific apparatus and the periodic addition of
chemicals can often be very complicated and time-consuming
depending on the complexity of the desired reaction.



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

Chemists perform a product work-up as the second
step in chemical synthesis. Once the chemist determines that a
reaction has proceeded to completion, the chemist subjects the
reaction mixture to an extensive reaction work-up. During the
work-up the chemist stops the reaction and carries out an
initial cleanup of the reaction mixture prior to purification.
The chemist performs a series of washes with a variety of
solvents, a drying process and a filtration process during the
work-up. The chemist usually takes several hours to complete
this labor-intensive work-up process.



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

Chemists perform product purification as the
third step in chemical synthesis. During this step, the chemist
isolates the desired product from its starting materials and
various byproducts. Product purification is an integral step in
chemical synthesis due to the fact that impurities may interfere
in the next chemical transformation or mask a drugs
potency and toxicity. Chemists commonly use column
chromatography, which is a tedious technique. This product
purification step often takes the chemists days to complete.



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

Chemists perform product analysis as the final
step in chemical synthesis. In this step, the chemist confirms
that the desired drug has been synthesized and isolated before
continuing on in the synthetic pathway or submitting the
compound for biological testing. A variety of biological tests
are performed on synthesized compounds. In many cases,
analytical chemists perform bio-analysis on serum extracts.
Bio-analysis supports

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investigations of compound activity,
pharmocokinetics, and toxicity. In recent years HPLC-mass
spectroscopy has become a standard tool for performing
bio-analysis. Bio-analysis with this tool utilizes serum
extracts obtained by sample preparation techniques, e.g., solid
phase extraction. Many thousands of bio-analytical samples are
generated during the progression of a drug candidate through
pre-clinical and clinical trials. Analysis requires a large
amount of data collection and is labor-intensive.


Chemists must repeat this laborious, four-step
process until the desired compound is obtained. In the Lead
Identification and Lead Optimization phase of a pharmaceutical
project, the development of a particular compound could take
months and even years to complete before researchers can
determine whether the compound has the desired drug properties.
In the later stage of Process Development, chemists not only
repeat this four-step chemical reaction process for every
synthesis, but they must document and analyze the reaction
information in more detail for growing regulatory needs.



| |                                                              
| | -------------------------------------------------------------
| | Limitations of Existing Chemical
    Development Technologies

Traditional chemistry development methods
described above have the following limitations:



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

These limitations restrict the ability of
chemists in the pharmaceutical industry to efficiently identify
and produce new chemical compounds as potential candidates for
the large, increasing number of therapeutic targets that are
emerging from genomics and proteomics. In order to be
competitive in the pharmaceutical

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industry, we believe that research and
development organizations will need to increase productivity by
shortening the drug development process. We believe that these
objectives will be achieved through advances and innovations in
chemistry development technologies and tools such as our
instruments and chemistry consumables.


The Argonaut Solution

We design, manufacture and market chemistry
consumables and instrumentation products that increase the
productivity of chemists, thereby accelerating and improving the
chemical development process, and therefore, increasing the
likelihood of developing a new drug candidate. Our products
enable rapid synthesis of a wide range of compounds at a reduced
cost. Our products also enable high throughput bio-analytical
evaluation of a potential drug candidate against a wide variety
of tests to evaluate potency, selectivity, pharmacokinetics
(what the body does to the drug) and pharmacodynamics (what the
drug does to the body). We design and develop products using
extensive customer assessment, validation and testing. We intend
to promote our products as the laboratory standard for chemists
and the industry standard for companies seeking more efficient
methods of addressing their increasing drug development needs.
We believe our technology provides the following key benefits
over traditional chemistry development methods:



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

We create products that simplify the creation and
isolation of compounds. Chemists can create approximately 100
compounds per year using the traditional approach of performing
one reaction at a time. The same chemist can create between
1,000 to 7,500 compounds per year using our products to rapidly
synthesize and purify large collections of compounds around lead
candidates. During the course of lead generation and lead
optimization, the purity of compounds undergoing biological
testing is paramount. Our flash chromatography instruments
facilitate this process with selected chromatographic conditions
and purified compound collection. We offer the associated
columns with a variety of high quality sorbents to achieve
purification of the vast majority of compounds. The use of our
instruments in conjunction with our columns and sorbents
provides productivity and performance enhancements compared to
traditional chromatography.



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

Our synthesis and purification products enable
chemists to focus their research and experimentation on the
design of promising lead candidates around a particular target.
Our purification automation and consumables products speed the
critical, time-consuming step of product purification prior to
biological testing. Our sample preparation products enable the
efficient processing of large sample sets for bio-analytical
studies, and therefore, reduce the time to obtain biological
test results. By simultaneously producing (synthesizing,
purifying and testing) numerous variants of drug candidates, our
tools provide more comprehensive and timely information for
research management to make critical decisions through out the
drug development project.



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

We believe that our consumable products provide
chemists with a wide variety of synthesis and purification
methodologies to address the demand to rapidly assemble highly
pure compounds in the early stages of chemistry development,
dramatically improving their productivity over traditional
methods. In addition, by synthesizing more drug candidates, our
products provide greater amounts of information and enable our
customers to abandon poor drug candidates sooner compared to
traditional methods; thereby eliminating the costs associated
with later stage drug candidate failures.



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

Our advanced chemistry consumables allow chemists
to rapidly synthesize high quality compounds designed according
to themes of drug-likeness (drugs with a higher probability of
success in humans). We

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believe this increased attention to physical
properties of compounds early in the drug development process
will increase the chance for a successful outcome.




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

Our products are flexible in their configurations
and packaging and chemists can perform a wide range of chemical
reactions, from simple reactions to complex, multi-step
reactions. As a result, chemists are able to perform more
complex and difficult reactions more easily, thereby encouraging
innovation on the part of chemists.



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

Our systems are designed to make the
labor-intensive steps of performing the synthesis, work-up,
purification and product analysis faster and easier for
chemists, and can be operated by chemists with minimal product
training.

Our Strategy

Our objective is to become the leading provider
of chemistry solutions that accelerate the development of new
chemical entities, primarily in the pharmaceutical industry. To
attain that objective, we will leverage our unique strengths to
provide novel, high value tools that improve the productivity of
chemists in all stages of chemical development. To ensure that
we meet that objective, we have implemented the following
strategy:



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

We are focused on the large and fast-growing
sector of drug development within the pharmaceutical market. We
have targeted leading pharmaceutical, biotechnology and life
sciences companies as well as academic institutions for our
principal marketing and sales efforts. We believe that these
customers provide the greatest opportunity for maximizing the
use of our products and that early adoption by these industry
leaders and academic institutions will promote wider market
acceptance of our products.



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

We will continue to invest in our proprietary
consumables business, which includes synthesis and purification,
flash chromatography and bio-analytical products. These products
enable chemists to make and test drug candidates throughout the
drug development process. In 2004, we will concentrate our
manufacturing, research and development in Wales and our
internal product development on new bio-analytical products.



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

We will focus our instrument business on solving
the needs of chemists in two critical areas of the
pharmaceutical drug development process. We will leverage our
knowledge of the process development market to address the needs
of process chemists in the pharmaceutical industry, who are
under increased pressure to scale-up the production of new lead
candidates to support pre-clinical testing and trials.
Leveraging our proprietary Camile TG® control software, we
will work to expand our suite of laboratory instrumentation
products, the Advantage SeriesTM, that addresses the
workflow and reporting requirements of these chemists. In
addition, we are committed to support and enhance our family of
flash chromatography products, the FlashMasterTM
series, which addresses the needs of medicinal chemists who need
to quickly and effectively purify the compounds they make. In
2003 we discontinued further development and manufacturing of
several instruments. We will continue to provide service and
support to ensure the continued satisfaction of customers who
have purchased these instruments, pursuant to our contractual
obligations. In 2004, we will concentrate our manufacturing,
research and development efforts for all instrument product
lines at our offices in California.

6



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

We are continuing to invest in collaborations
with pharmaceutical companies and technology suppliers to
deliver new, novel chemistry solutions to enhance the ability of
chemists to rapidly discover and develop new drug candidates,
although that effort is expected to be less in 2004 than in
recent years. In addition, we intend to selectively in-license
and commercialize technology that can enhance our total product
portfolio and allow us to gain market share.



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

Our marketing approach is based on a thorough
understanding of our customers specific chemistry needs,
which we develop through the close interaction of our direct
sales and applications support personnel with our customers.
Currently, we have approximately 30 sales, service and support
specialists supporting our customers worldwide. We now have a
strong, direct presence in the US, the UK and Japan which is
reflected in our 2003 revenue mix (46% US and 54% international)
and which correlates to the global worldwide pharmaceutical
research market. While we have successful distribution partners
in secondary markets, we may increase our direct presence in
Europe. With this dedicated team of professionals, we are able
to build long term relationships with existing customers, gain
access to new accounts and expand into new geographic
territories.



| |                                     
| | ------------------------------------
| | Acquire Complementary
    Businesses

We may pursue opportunities to expand our core
business by acquiring businesses that have technologies or
capabilities complementary to ours. In March 2001, we completed
the acquisition of ATSI, formerly Camile Products, LLC. In
February 2002, we completed the acquisition of the Jones Group.
We may acquire additional companies that provide synergistic
solutions to our customers need to accelerate the
chemistry development process. In addition, we may explore our
options regarding acquiring distribution channels in specific
geographic regions to speed our market penetration.

Products

Argonaut provides chemistry consumables,
instrumentation (instruments and software), and services to
enable chemists primarily in the pharmaceutical industry to
accelerate the chemical development process and to increase the
number of successful new chemical entities.



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

Chemistry Consumables comprise approximately 48%
of 2003 net sales. Our high value, chemistry consumables
are essential to the challenges associated with lead generation
and lead optimization stages of chemistry development. Our
products address the increased demand for chemists to make
exclusive, novel and high-quality compounds designed according
to themes of drug-likeness (drugs with a higher probability of
success in humans).



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

Chemists primarily use our polymer reagents and
scavengers products to rapidly assemble collections of highly
pure small molecules with the high levels of structural
complexity currently in demand in drug discovery. The polymer
reagents and scavengers are technologies that enable chemists to
markedly improve their productivity in the crucial, multi-step
synthesis aspects of generating novel chemical entities and
complex drug target molecules. Our Solution Phase Toolboxes and
Kits are collections of bound reagents and scavengers that are
pre-configured to enable chemists to rapidly optimize
traditional work-ups and purification processes.

7



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##### Table of Contents





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

A potential drug candidate must continually be
tested from the lead optimization stage through clinical trials
to determine its pharmacological (potency), pharmacokinetic
(availability and specificity) and toxicology (safety). Our
ISOLUTE® brand of solid phase extraction (SPE)
products is used by chemists to extract and purify samples to
test for compatibility of these essential properties. We
manufacture our own sorbents that are subsequently packed into
single columns and 96-well high throughput SPE plates. In
addition, we manufacture sample processing stations that are
designed to simplify the task of processing samples using
disposable ISOLUTE extraction products.



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

A fast and cost-effective technique for the
separation and preparation of complex mixtures, flash
chromatography is quickly replacing traditional column
chromatography. With the increasing number of organic compounds
being produced, there are subsequent demands placed on
purification throughput. Economical and easy to use, our
ISOLUTE® Flash Columns provide flexible method development
and scale-up options for organic chemists. Pre-packed, high
purity polypropylene columns containing ISOLUTE®Flash
sorbents, ISOLUTE® Flash chromatography columns are
time saving and economical alternatives to traditional
self-packed glass columns. The ISOLUTE® Flash columns are
disposable, thereby saving time and effort. Moreover, they
provide consistent chromatographic reproducibility and uniform
flow profiles. All ISOLUTE® Flash columns are fully
compatible with the FlashMaster instrument systems.



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

Instrumentation products comprise approximately
41% of 2003 net sales. Our Advantage
SeriesTM products focus on the needs of chemists
in the process development stage who are under increased
pressure to rapidly develop robust, safe, cost effective and
scale-independent processes for the production of
pharmaceuticals. Our products utilize the benefits of automated
synthesis guided by software to design, execute and collect data
essential to the production of large quantities of the drug
candidate for clinical trials. In addition, our instrumentation
resources fully support our FlashmasterTM
family of flash chromatography instruments, providing chemists
with a full range of purification products. A fast and
cost-effective technique for the separation and preparation of
complex mixtures, flash chromatography is quickly replacing
traditional column chromatography methods. With an increasing
number of organic compounds being produced, there are subsequent
demands placed on purification throughput. Whether providing a
simple single column system to provide simple, proven
chromatography or a fully featured, multiple column system to
optimize throughput, the Flashmaster products provide chemists
with a fast, reliable, and cost-effective way to purify their
compounds.



| |                                 
| | --------------------------------
| | Advantage
    SeriesTMEndeavor®:

The Endeavor® product brings parallel
methodology to catalyst discovery and screening. The process
chemist can run eight individual pressurized, gaseous reactions
simultaneously, while monitoring gas consumption in each
reaction vessel. Based on technology developed by Symyx
Technologies, Endeavor® is used for polymerization,
hydrogenation and catalyst screening which are essential to the
drug development process.



| |                                                             
| | ------------------------------------------------------------
| | Advantage
    SeriesTM2050
    manual chemistry synthesizer:

The Advantage SeriesTM 2050
manual chemistry synthesizer is an easy to use, bench top
synthesizer that enables the individual process chemist to
conduct quick, exploratory, parallel reaction experiments at
different temperatures. This instrument is a compact system with
five reaction vessels and individual temperature control
allowing simultaneous use of a wide range of chemical reagents
to more efficiently optimize reaction processes.

8



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##### Table of Contents





| |                                                              
| | -------------------------------------------------------------
| | Advantage
    SeriesTM3400
    process chemistry workstation:

During 2003, we launched the Advantage
SeriesTM 3400 process chemistry workstation, a
new product from the Pfizer and ICI consortium. The Advantage
SeriesTM 3400 process chemistry workstation is
used by process chemists who need a reproducible and reliable
means to scale-up production of lead compounds for clinical
trials. It is a multi-reactor system designed to automate,
capture and document the process chemistry workflow. Data is
recorded in an easy to use format that both chemistry
departments and individuals can use. The reporting functions are
designed to meet the scale-up needs of departmental review, data
archiving and FDA referencing. This product is important to our
ability to increase revenues in 2004 and therefore, failure to
achieve our anticipated levels of revenues for this product will
harm our ability to achieve our financial goals during 2004.



| |                                                         
| | --------------------------------------------------------
| | Advantage
    SeriesTM4100
    process scale-up reactor:

The Advantage SeriesTM 4100
process scale-up reactor is a fully automated, integrated batch
reactor used for computer-controlled production of intermediate
quantities of pharmaceutical compounds. As an automated system
it simplifies scale-up work by allowing chemists to program and
control reaction conditions such as temperature, reagent
additions and rates using a single computer interface. The
Advantage SeriesTM 4100 process scale-up reactor
uses real-time feedback from analytical devices to automatically
obtain optimum reaction conditions as well as to work at greater
levels of lab safety.



| |                                           
| | ------------------------------------------
| | FlashmasterTMflash chromatography systems:

Our FlashmasterTM family of products
is used for a variety of purification applications and fully
utilizes the advantages of our
FlashmasterTM column consumables. The systems
offered range from low cost single-user purification systems, to
high throughput parallel purification systems, and include a
fully automated software controlled system.

FlashMasterTM II is a complete,
software-controlled flash chromatography system for purification
of multiple samples. The system offers on-line UV detection for
real time tracking of separation, four-solvent isocratic or
gradient elution and intelligent fraction collection and sample
tracking for optimum parallel throughput in purification of
compounds.

FlashMasterTM Solo is a system for use
by an individual chemist involved in purification method
development. This system features an on-line variable wavelength
UV detector for the immediate visualization of the separation,
an intelligent fraction collection system. The systems
highly intuitive peak cutting and tracking logic, eliminates the
need for TLC of collected fractions.

FlashMasterTM Parallel is a manual
system with binary gradient capability for use by medicinal
chemists engaged in drug discovery or agrochemical research
studies. The system is capable of parallel purification of up to
ten samples, provides automated fraction collection and a
stop-valve manifold to eliminate sample losses. The FlashMaster
Parallel system is speeds up throughput in parallel organic
synthesis purification without the need to use a personal
computer.

FlashMasterTM Personal is a compact,
space efficient instrument that facilitates the purification of
compounds for medicinal chemists who wish to eliminate the need
to pack traditional glass purification columns. The benefits of
pre-packed columns, solvent mixing and proven, reliable
chromatography can be realized with this simple system.

FlashMasterTM Personal+ is another
easy-to-use, entry-level flash chromatography system for
medicinal chemists purifying one sample at a time. A second
column position offers the flexibility to perform on-line dry
sample loading, which improves separations and reduces solvent
vapors. The second column can also be used as a guard column, or
for two-column separations.

9



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

We provide a variety of services for our
customers, which include integration services, contract research
and development services, installation of instruments,
instrument warranty services and instrument preventative
maintenance programs. Services comprise approximately 11% of our
2003 net sales. Our integration services focus on creating
customer specific modifications for the chemists who have unique
requirements for the Advantage SeriesTM 4100
process scale-up reactor.

Product Development Strategy

Our product development strategy is to combine
our expertise in chemistry and engineering with an understanding
of the needs of our market to rapidly design, validate and
launch products that fulfill these needs. To understand market
needs, we often form product development teams with our
customers. Through this process of forming product development
consortia and other strategic collaborations with our customers,
we have developed innovative products with the benefit of
extensive customer input, validation and testing prior to
commercial introduction.

Our product development consortia are
non-exclusive arrangements in which we bring together several
companies who share the need to solve a common problem. We meet
with consortium members on a regular basis during the product
development process to review product definition,
specifications, progress, validation and testing. We may give
consortium members prototypes for use in their research programs
and we incorporate their feedback into the final product.
Members typically pay a non-refundable participation fee, pay
development fees based on achieved milestones, and may receive
discounts on initial early commercial products. By participating
in our consortia, and becoming familiar with the performance and
operating characteristics of the product, we believe that
members can achieve a nine-month to one-year competitive
advantage in using the new technology we develop. Consortium
members often become the initial references during the product
development phase and initial customers upon our
commercialization of the product. We have used the consortium
approach to develop five instruments and several reagents. The
most recent consortium was comprised of two major companies,
Pfizer Inc. and ICI, PLC, and was established with the goal of
developing a state-of-the-art, multi-channel synthesizer for
chemical process scale-up and production. As a result of the
consortia efforts, Argonaut released the Advantage
SeriesTM 3400 process chemistry workstation.

Through our collaborations, we frequently
in-license technology that we believe has significant potential
for commercialization. Typically, our partner will have
developed and tested a concept to the prototype level. We
further develop and enhance the prototype into a commercially
viable product. Our contributions include design for
manufacturing, cost reduction, safety and code compliance and
ease of use issues. Our partner may receive royalties on sales
of the final product, or other commercial consideration, in
recognition of their technology contribution.

We used this approach with the
EndeavorTM product, which we developed in
collaboration with Symyx Technologies (Symyx). In
August 1999, we entered into a license and supply agreement,
which was extended in January 2002, with Symyx related to
technology used in the Endeavor product. The agreement was
further expanded and modified in August 2002. Under the August
2002 agreement, we have licensed both exclusive and
non-exclusive worldwide rights under a broader collection of
Symyx patents than was available under the initial agreement.
The agreement provides Argonaut with a fully paid up license for
the life of the issued and pending licensed patents. In
conjunction with the signing of this agreement, Argonaut made a
one-time payment to Symyx, and Symyx will receive no further
royalties or payments from Argonaut in connection with this
license agreement.

In October 2001, we entered into a multi-year
research and development agreement with Pfizer Inc. to assess
and develop new technologies and instrument systems relevant to
Pfizer Global Research & Development programs. Under
the terms of the agreement, Pfizer has funded Argonauts
assessment and development efforts related to these new tools.
Pfizer and Argonaut jointly decided to expand the scope of the
current Collaborative Research Agreement for two programs.
Argonaut will have exclusive rights to commercialize

10



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##### Table of Contents



technologies developed within the collaboration
and we believe that two products developed under these programs
show promising commercial prospects for 2004 and beyond.


In August 2002 GlaxoSmithKline (GSK)
joined Pfizer and Argonaut in the formation of a multi-year
research program in which Argonaut will assess, develop and
validate for future commercialization, a novel new, instrument
system to substantially accelerate the development and synthesis
of new chemical compounds. After reaching a critical milestone
for technical feasibility in July 2003, it was decided that the
project did not warrant commercialization and the program was
discontinued.

Product development of chemistry consumables is
managed by an analogous process to instruments. We often
collaborate with our customer base to develop new products to
address synthesis, purification and sample preparation needs. To
date, we have not used a formal product development consortium
for the development of consumable products. The product
development process is controlled under the ISO9001 project
system.

Company sponsored research and development
activities totaled approximately $4.4 million,
$5.6 million, and $7.1 million for the years 2003,
2002 and 2001, respectively. Customer sponsored research and
development activities totaled approximately $1.1 million
for 2003 and approximately $999,000 for 2002. Customer sponsored
research and development was zero for 2001.

Customers

Our customers consist of a broad range of
companies in the pharmaceutical, life sciences, biotechnology
and chemical industries, as well as academic institutions and
other research organizations. Through December 31, 2003, we
have sold our products to more than 1,200 customers and we have
installed nearly 3,300 instruments worldwide. Our leading
customers include:

|                                                                              |  |                                                                               |  |                                                                               
|----------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|Abbott Laboratories Amgen, Inc.
    Arqule, Inc.
    Array Biopharmaceuticals |  | AstraZeneca
    Eli Lilly and Company
    GlaxoSmithKline
    Merck & Company |  | Novartis Pharmaceuticals
    Pfizer, Inc.
    Procter & Gamble Pharmaceuticals

Sales and long-lived assets by geographic region
and market for fiscal years 2003, 2002 and 2001 are represented
in Note 14 to the Consolidated Financial Statements.

No single customer accounted for more than 10% of
our revenue during fiscal years 2003, 2002 and 2001.

Sales, Marketing and Service

We base our sales strategy on understanding our
customers needs, recommending solutions and ensuring
successful implementation of that solution in our
customers research laboratories. Our approach is designed
to achieve customer satisfaction and build a long-term working
relationship with our customer.

Currently, our direct sales, marketing and
service organizations include 50 full-time employees
located in North America, Europe and Japan. Our team of
professionals is comprised of senior account-oriented sales
people, application chemists, service engineers, telesales
people and marketing specialists who sell directly to our
customers worldwide. We have 20 sales professionals with
experience in selling high technology products to the scientific
industry. In addition to their academic expertise, the
industrial laboratory experience of our sales professionals is
essential to their ability to understand our customers
needs. We have application chemists and service engineers with
expertise in both chemistry and engineering to support our
customers worldwide. We have professional marketing
communication specialists located in the United States and the
United Kingdom dedicated to providing local marketing programs.

We use distributors to provide local sales and
marketing in some 15 foreign countries, including China,
Australia, Korea, Eastern Europe, Finland, Sweden,
Denmark, Italy and Spain. In these countries, we seek to
maintain close contact with our customers and potential
customers by providing application and service support through
our worldwide marketing organization. We have developed
scientific seminars to educate and

11



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train our customers. We conduct on-site seminars
in the use of our chemistry reagents and purification products,
referencing important scientific publications and research that
validate their successful usage.


Our web site provides technical information
regarding the use of our instruments and chemistry consumables
for our customers. The combination of our telesales personnel
and readily available technical information simplifies the
process for a customer to make routine purchases of our reagents
and consumables.

To increase awareness of our products, we have
arrangements with leading academic research institutions to
provide them with our products. In return our products are
validated by reputable institutions through published results in
leading scientific journals and the researchers creation
of application notes. We also work with universities to assist
them in creating and implementing teaching laboratories that
promote the scientific advantages associated with the use of our
products.

Manufacturing

Qualified outside suppliers manufacture important
components of our instruments and reagents to our
specifications. Our suppliers then deliver the finished product
to us for final quality assurance testing. The space available
at our manufacturing facilities will accommodate the current and
near-term production levels. All products are assembled and
tested by qualified personnel at our manufacturing sites in
Foster City, California and Cardiff, Wales, United Kingdom.

Our instrument manufacturing staff is comprised
of skilled manufacturing engineers, material procurement,
assembly and test personnel, which are closely integrated with
our product development group. We focus these resources on the
rapid development of manufacturing processes and methods,
selecting suppliers to minimize the requirements for inspecting,
stocking and testing of components during the manufacturing
process. In 2004, we intend to consolidate manufacturing of our
instrument products at our facility in Foster City, California.

Our chemistry organization develops, validates,
documents and initially manufactures our reagents and functional
silica products at our sites in Foster City, California and
Cardiff, Wales, United Kingdom. Our Cardiff facility has modern
automation equipment for the packaging of our sample preparation
and flash columns into a variety of formats, including columns
and plates. During reagent development, we qualify outside
manufacturers, known as toll manufacturers, so that we can
outsource production as demand and volume increase. In 2004, we
intend to consolidate manufacturing of our chemistry consumable
products at our facility in Cardiff, Wales, United Kingdom.

Intellectual Property

As of December 31, 2003, we owned a patent
portfolio of eight issued U.S. patents and one issued
foreign patent as well as several pending U.S. patent
applications. Corresponding foreign patent applications have
been filed in a number of countries. Of these issued patents,
five U.S. patents relate to the reactor and fluidics
technology incorporated into our instruments. Several of our
patent applications relate to this technology and others relate
to our reagent technologies. We intend to continue to file
patent applications covering any new inventions incorporated
into our products and technologies as appropriate. In addition,
we rely upon copyright protection as well as trade secrets,
know-how and continuing technological innovation to develop and
maintain our competitive position. Our success will depend in
part upon our ability to obtain patent protection for our
products and technologies, to preserve our copyrights and trade
secrets, and to operate without infringing on the proprietary
rights of third parties. Our issued patents expire between 2018
and 2021.

We have an exclusive license from Symyx
Technologies relating to technology incorporated in our Endeavor
product. We have a non-exclusive license to certain other Symyx
patents based on an agreement completed in August 2002. The
exclusive and non-exclusive portions of the license are in
perpetuity.

Backlog

Manufacturing turnaround time has generally been
sufficiently short so as to permit us to manufacture to fill
orders for most of our products, which helps to limit our
inventory costs. Due to the generally short time

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period between order and shipment and occasional
customer directed changes in delivery schedules, we do not
believe that our backlog, as of any particular date, is an
accurate indicator of actual net sales for any future period.
Backlog is therefore generally a function of requested customer
delivery dates and is typically no longer than one to
two months. The value of the backlog as of
December 31, 2003 was approximately $1.7 million.


Competition

Our competition comes primarily from companies
providing products based on traditional chemistry methods as
well as companies that offer competing products based on
alternative technologies. In order to compete effectively, we
will need to demonstrate the advantages of our products over
well-established traditional chemistry methods and alternative
technologies and products. We will also need to demonstrate the
potential economic value of our products relative to traditional
chemistry methods and alternative technologies and products.
Some of the companies that provide products that compete with
ours include Waters, Varian, Phenomenex, Biotage, Isco
Inc., Mettler-Toledo AG, HEL, Sigma-Aldrich, Nova Biochem,
Polymer Laboratories and several smaller instrument and reagent
companies.

Government Regulation

We are subject to various federal, state and
local laws and regulations relating to the protection of the
environment. In the course of our business, we are involved in
the handling, storage and disposal of chemicals. The laws and
regulations applicable to our operations include provisions that
regulate the discharge of materials into the environment.
Usually these environmental laws and regulations impose
strict liability, rendering a person liable without
regard to negligence or fault on the part of such person. Such
environmental laws and regulations may expose us to liability
for the conduct of, or conditions caused by, others, or for acts
that were in compliance with all applicable laws at the time the
checks were performed. We have not been required to make
material expenditures in connection with our efforts to comply
with environmental requirements. We do not believe that
compliance with such requirements will have a material adverse
effect upon our capital expenditures, results of operations or
competitive position. Because the requirements imposed by such
laws and regulations are frequently changed, we are unable to
predict the cost of compliance with such requirements in the
future, or the effect of such laws on our capital expenditures,
results of operations or competitive position.

Employees

As of December 31, 2003, we had
approximately 180 employees worldwide. None of our employees are
covered by a collective bargaining agreement. We believe that
our relations with our employees are good.

Available Information

Our principal executive offices are located at
1101 Chess Drive, Foster City, CA 94404, and our main telephone
number is (650) 655-4200. Investors can obtain access to
this annual report on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K, and all
other reports and documents we are required to file with the SEC
and all amendments to these reports, free of charge, on our
website at http://www.argotech.com as soon as reasonably
practicable after such filings are electronically filed with the
SEC. The public may read and copy any material we file with the
SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington D.C., 20549. The public may obtain
information on the operations of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site, http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers
that file electronically with the SEC.




Item 2.     Properties

Facilities

We occupy approximately 32,000 combined square
feet of leased office space and research facilities in Foster
City, California. These facilities serve as the base for our
marketing and product support operations,

13



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##### Table of Contents



research and development, manufacturing and
administration activities. We have leased substantially all of
our space through the second quarter of 2004. In addition, we
lease approximately 13,400 square feet of office space in
Indianapolis, Indiana, 1,880 square feet of research
and development space in Tucson, Arizona, 2,200 square feet
of office space in Midland, Michigan, and 125 square meters
of office space in Tokyo, Japan. These offices are the base
operations for our sales and support groups in the respective
regions. We also own approximately 50,000 combined square feet
in two facilities located near Cardiff, Wales, United Kingdom.
The facilities serve as the base of operations for marketing and
product support operations, research and development,
manufacturing and administration for our European based
activities. We believe that our existing facilities are suitable
for our current operations and that additional space will be
available and can be added as required in the future.







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

From time to time, we may be involved in
litigation that arises through the normal course of business. As
of the date of filing of this Form 10-K, we are not a party
to any litigation that we believe could reasonably be expected
to harm our business or results of operations in any material
respect.




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

None.




PART II






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

Price Range of Common Stock

|              |  |             |      |             |  |      |      |     |  |   |      |  |  |   |      | 
|------------- |  | ----------- | ---- | ----------- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|              |  |             |      |            
|              |  | 2003        |      | 2002       
|              |  | Sales Price |      | Sales Price
|              |  |             |      |            
|Quarter Ended |  | High        |      | Low         |  | High |      | Low
|              |  |             |      |             |  |      |      |    
|March 31      |  | $           | 0.99 |             |  | $    | 0.81 |     |  | $ | 4.22 |  |  | $ | 2.22 | 
|June 30       |  |             | 1.61 |             |  |      | 0.84 |     |  |   | 3.05 |  |  |   | 1.01 | 
|September 30  |  |             | 1.48 |             |  |      | 1.14 |     |  |   | 1.13 |  |  |   | 0.51 | 
|December 31   |  |             | 1.91 |             |  |      | 1.17 |     |  |   | 1.04 |  |  |   | 0.55 | 

Our common stock is quoted on the Nasdaq Stock
Markets National Market under the symbol AGNT.
The preceding table sets forth the high and low sales prices per
share of our common stock as reported on the Nasdaq Stock
Markets National Market for the periods indicated.

Dividend Policy

We have not paid any cash dividends to date and
do not anticipate paying any cash dividends in the foreseeable
future. We currently expect to retain future earnings, if any,
for use in the operation and expansion of our business.

14



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##### Table of Contents



Holders of Common Stock

As of March 12, 2004, there were 127
registered shareholders of our common stock.

Securities Authorized for Issuance Under
Equity Compensation Plans

|                                                               |  |                  |           |                   |  |                         |      |  |  |  |           | 
|-------------------------------------------------------------- |  | ---------------- | --------- | ----------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                               |  | Number of        |           |                   |  |                        
|                                                               |  | Securities       |           |                   |  | Number of Securities   
|                                                               |  | to Be Issued     |           | Weighted-Average  |  | Remaining Available for
|                                                               |  | upon Exercise of |           | Exercise Price of |  | Future Issuance under  
|                                                               |  | Outstanding      |           | Outstanding       |  | Equity Compensation    
|                                                               |  | Options,         |           | Options,          |  | Plans (Excluding       
|                                                               |  | Warrants and     |           | Warrants and      |  | Securities Reflected in
|Plan Category                                                  |  | Rights           |           | Rights            |  | Column (a))            
|                                                               |  |                  |           |                   |  |                        
|                                                               |  | (a)              |           | (b)               |  | (c)                    
|Equity compensation plans approved by security
    holders     |  |                  | 3,700,051 |                   |  | $                       | 2.69 |  |  |  | 1,510,803 | 
|Equity compensation plans not approved by
    security holders |  |                  |          |                   |  |                         |     |  |  |  |          | 
|Total                                                          |  |                  | 3,700,051 |                   |  | $                       | 2.69 |  |  |  | 1,510,803 | 
|                                                               |  |                  |           |                   |  |                         |      |  |  |  |           | 

15



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##### Table of Contents








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

The following selected financial data has been
derived from our audited financial statements and the following
table should be read in conjunction with the consolidated
financial statements and the notes to such statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Annual Report on Form 10-K. Historical results are not
necessarily indicative of the results to be expected in the
future.

The pro forma net loss per share and shares used
in computing pro forma net loss per share are calculated as if
all of our convertible preferred stock was converted into shares
of our common stock on the date of issuance. Each outstanding
share of preferred stock was converted to 0.88 shares of
common stock upon completion of our initial public offering on
July 19, 2000.

|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |       |        | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------ | ------ | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ----- | ------ | 
|                                                                                                     |                                                              |                                     
|                                                                                                     |                                                              | Year Ended December 31,             
|                                                                                                     |                                                              |                                     
|                                                                                                     |                                                              | 2003                                 |        | 2002   |        | 2001 |         | 2000   |        | 1999
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |     
|                                                                                                     |                                                              |                                     
|                                                                                                     |                                                              | (In thousands except per share data)
|Statements of Operations Data:                                                                       |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Net sales                                                                                            |                                                              | $                                    | 24,469 |        |        | $    | 26,317  |        |        | $    | 17,063  |        |        | $ | 17,449 |        |        | $ | 10,558 |      
|Costs and expenses:                                                                                  |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|                                                                                                     | Cost of sales                                                |                                      |        | 13,256 |        |      |         | 15,004 |        |      |         | 9,431  |        |   |        | 7,994  |        |   |        | 4,689 |       
|                                                                                                     | Research and development                                     |                                      |        | 4,368  |        |      |         | 5,627  |        |      |         | 7,089  |        |   |        | 5,057  |        |   |        | 4,180 |       
|                                                                                                     | Selling, general and administrative                          |                                      |        | 13,060 |        |      |         | 17,453 |        |      |         | 16,686 |        |   |        | 13,819 |        |   |        | 9,125 |       
|                                                                                                     | Amortization of goodwill and purchased intangible
    assets |                                      |        | 738    |        |      |         | 735    |        |      |         | 1,157  |        |   |        |       |        |   |        |      |       
|                                                                                                     | Acquired in-process research and development                 |                                      |        |       |        |      |         |       |        |      |         | 270    |        |   |        |       |        |   |        |      |       
|                                                                                                     | Restructuring charges (recoveries)                           |                                      |        | (184   | )      |      |         | 1,802  |        |      |         | 384    |        |   |        |       |        |   |        |      |       
|                                                                                                     | Impairment charge                                            |                                      |        | 1,612  |        |      |         |       |        |      |         | 5,520  |        |   |        |       |        |   |        |      |       
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|                                                                                                     |                                                              | Total costs and expenses             |        |        | 32,850 |      |         |        | 40,621 |      |         |        | 40,537 |   |        |        | 26,870 |   |        |       | 17,994 | 
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Loss from operations                                                                                 |                                                              |                                      | (8,381 | )      |        |      | (14,304 | )      |        |      | (23,474 | )      |        |   | (9,421 | )      |        |   | (7,436 | )    
|Realized gain from the sale of assets                                                                |                                                              |                                      | 460    |        |        |      |        |        |        |      |        |        |        |   |       |        |        |   |       |      
|Interest and other income (expenses), net                                                            |                                                              |                                      | 552    |        |        |      | 663     |        |        |      | 2,679   |        |        |   | 1,900  |        |        |   | (167   | )    
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Net loss before provision for income taxes                                                           |                                                              |                                      | (7,369 | )      |        |      | (13,641 | )      |        |      | (20,795 | )      |        |   | (7,521 | )      |        |   | (7,603 | )    
|Provision for income taxes                                                                           |                                                              |                                      | (783   | )      |        |      | (217    | )      |        |      |        |        |        |   |       |        |        |   |       |      
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Net loss                                                                                             |                                                              | $                                    | (8,152 | )      |        | $    | (13,858 | )      |        | $    | (20,795 | )      |        | $ | (7,521 | )      |        | $ | (7,603 | )    
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Net loss per common share, basic &
    diluted                                                       |                                                              | $                                    | (0.40  | )      |        | $    | (0.70   | )      |        | $    | (1.09   | )      |        | $ | (0.79  | )      |        | $ | (3.55  | )    
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Weighted-average shares used in computing net
    loss per common share, basic and diluted           |                                                              |                                      | 20,160 |        |        |      | 19,876  |        |        |      | 19,048  |        |        |   | 9,538  |        |        |   | 2,142  |      
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Pro forma net loss per common share, basic and
    diluted                                           |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        | $ | (0.50  | )      |        | $ | (0.68  | )    
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      
|Weighted-average shares used in computing pro
    forma net loss per common share, basic and diluted |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   | 15,009 |        |        |   | 11,263 |      
|                                                                                                     |                                                              |                                      |        |        |        |      |         |        |        |      |         |        |        |   |        |        |        |   |        |      

|                                                  |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|Balance Sheet Data:                               |  |   |         |   |  |   |         |   |  |  
|Cash, cash equivalents and short-term investments |  | $ | 13,470  |   |  | $ | 26,894  |   |  | $ | 57,632  |   |  | $ | 73,372  |   |  | $ | 11,073  |  
|Working capital                                   |  |   | 8,978   |   |  |   | 31,001  |   |  |   | 58,292  |   |  |   | 76,131  |   |  |   | 9,061   |  
|Total assets                                      |  |   | 63,315  |   |  |   | 72,373  |   |  |   | 71,772  |   |  |   | 83,032  |   |  |   | 19,080  |  
|Long-term obligations, less current portion       |  |   | 23      |   |  |   | 12,334  |   |  |   |        |   |  |   | 180     |   |  |   | 1,859   |  
|Accumulated deficit                               |  |   | (77,244 | ) |  |   | (69,092 | ) |  |   | (55,234 | ) |  |   | (34,439 | ) |  |   | (26,918 | )
|Total stockholders equity                        |  |   | 45,243  |   |  |   | 52,513  |   |  |   | 63,764  |   |  |   | 77,720  |   |  |   | 9,048   |  

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

This annual report contains forward-looking
statements for purposes of the Private Securities Litigation
Reform Act of 1995, and it is the Companys intention that
such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements
regarding future revenues, expenses, losses and cash flows,
research and development activities and sales and marketing
initiatives such as our plan to concentrate our efforts in those
areas such as building our core consumables business, possible
future acquisitions, our plans to discontinue non-performing
consumable products and certain legacy instrument products, the
anticipated effects of our recent restructuring program and
related accruals, values of our assets and liabilities over
their remaining useful lives and our testing for impairment of
goodwill, and our expectations as to the duration of our
negative cash flows from operations and the sufficiency of
existing cash reserves for the next 12 months. Actual
results may differ materially from those projected in such
forward-looking statements due to various known and unknown
risks and uncertainties, including the risk that a decline in
the economy generally or the market for our products will
adversely affect our business, the risk that the market for our
products and services does not develop as anticipated, the risk
that we are unable to successfully integrate the product and
service offerings of the companies we recently acquired and
successfully capitalize on anticipated synergies and growth
opportunities, and the risk that our restructuring programs do
not proceed as planned and that we incur unexpected expenses in
connection with the implementation thereof. For a further
discussion of these and other risks and uncertainties related to
our business see the discussion set forth herein under
Factors That May Affect Our Future Results.

Overview

Argonaut develops innovative products designed to
help pharmaceutical and other chemists engaged in the discovery
and development of new chemical entities increase their
productivity and reduce their operating costs without
compromising the scientific integrity of their research. Our
products are designed to enable chemists to increase their
productivity, reduce their operating costs through automation
and process simplification, and cost effectively explore the
increasing number of drug targets available for drug
development. We derive revenues primarily from the sale of our
chemistry consumable products, instrumentation products and
services. We commenced commercial shipment of our first
generation instrument in 1996, the Quest product line in 1997,
the Trident product line in 1998 and the Surveyor and the
Endeavor product lines in 2000. Revenue from sales of our
instrument products is recognized when delivery and installation
of the product is complete. We also derive revenues from the
sale of reagents and other instrument related consumables, as
well as revenues derived from products and integration services
and the sale of instruments and consumables products of Jones
Chromatography Limited (Jones Group), which we
acquired on February 20, 2002. Our expenses have consisted
primarily of costs incurred in research and development,
manufacturing and general and administrative costs associated
with our operations, and our sales and marketing organization.

On July 30, 2003, the Company announced the
sale of its HPLC product line to the Grace Vydac business unit
of W.R. Grace & Co. The sale principally included the
Genesis® and ApexTM brands of HPLC columns
inventory as well as HPLC-related capital assets and trademarks.
The sale of these assets enables the Company to focus R&D
and sales and marketing efforts on core product areas providing
consumable and instrument products to the critical areas of drug
development. The pretax gain on the sale of net assets was
approximately $460,000.

Since our inception, we have incurred significant
losses and, as of December 31, 2003, we had an accumulated
deficit of $77.2 million.

Critical Accounting Policies and
Managements Estimates

We consider certain accounting policies related
to revenue recognition, allowance for doubtful accounts,
impairment of investments, inventory adjustments, warranty
liabilities, restructuring charge, purchase accounting,
impairment of long-lived assets, income tax and stock
compensation to be critical policies due to the estimation
processes involved in each.

17



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

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires that we make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.



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

In May 2003, the Financial Accounting Standards
Boards Emerging Issues Task Force (EITF) finalized
criteria governing how to identify whether goods or services, or
both, that are to be delivered separately in a bundled sales
arrangement should be accounted for separately and issued
EITF 00-21 Revenue Arrangements with Multiple
Deliverables. The guidance in EITF 00-21 is effective
for revenue arrangements entered into beginning after
July 1, 2003. The effect of adopting EITF Issue
No. 00-21 did not and is not expected to have a material
impact on the Companys financial condition or results of
operations.

In an arrangement with multiple deliverables, the
delivered item(s) are considered a separate unit of accounting
if the delivered item(s) has value on a standalone basis; if
there is objective evidence of the fair value of the undelivered
item(s); and, if the arrangement includes a general right of
return relative to the delivered item, delivery or performance
of the undelivered item(s) is considered probable and
substantially in the control of the vendor.

There are standard products offered by Argonaut
where consideration of EITF 00-21 is applicable. Generally,
these standard situations are transacted as separate line items
in the sales order/purchase order and are priced separately. In
these normal situations, the multiple items are priced and sold
separately, clearly have standalone value to the customer as
evidenced by history of sales to other customers on a standalone
basis, and the revenue recognition is triggered upon shipment of
the line item to the customer.

For each arrangement, we determine whether
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, collectibility is
reasonably assured and fees are fixed or determinable. If any of
these criteria are not met, revenue recognition is deferred
until all of the criteria are met.



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

Revenue related to product sales with no future
obligation is recognized upon shipment when the recognition
criteria have been met. For those products where we have
obligations to provide installation services, revenue is
recognized upon installation when all other recognition criteria
have been met. Sales that require customer acceptance are not
recognized as revenue until the acceptance and all other revenue
recognition requirements have been met.



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

Maintenance contract revenue, including revenue
for extended warranties, is recognized ratably over the
contractual term; training, contract research and development
and other services revenue is recognized as the services are
rendered.



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

We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. We determine the adequacy
of this allowance by regularly reviewing the composition of our
accounts receivable aging and evaluating individual customer
receivables, considering our customers financial
condition, credit history and current economic conditions. If
the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.

18



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| |            
| | -----------
| | Investments

Investments are classified as available-for-sale
and recorded at fair value. Unrealized investment gains and
losses are reflected in stockholders equity. Investment
income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed
periodically to determine if they have suffered an impairment of
value that is considered other than temporary. If investments
are determined to be impaired, a capital loss is recognized at
the date of determination. Testing for impairment of investments
also requires significant management judgment. The
identification of potentially impaired investments, the
determination of their fair value and the assessment of whether
any decline in value is other than temporary are the key
judgment elements. The discovery of new information and the
passage of time can significantly change these judgments.
Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made
at that time. The current economic environment and recent
volatility of securities markets increase the difficulty of
determining fair value and assessing investment impairment. The
same influences tend to increase the risk of potentially
impaired assets.



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

Inventories are stated at the lower of cost (on a
first-in, first-out cost method) or market value. We record
adjustments to the value of inventory based upon a detailed
assessment at each balance sheet date which reviews, among other
factors, the forecasted demand and plans to sell our
inventories. The physical condition (e.g., age and quality) of
the inventory is also considered in establishing its valuation,
as well as product lifecycle and product development plans.
Based on this analysis, we reduce the cost of inventory that we
specifically identify and consider obsolete or excessive to
fulfill future sales estimates. These adjustments are estimates,
which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer
inventory levels or competitive conditions differ from our
expectations.



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

We provide for the estimated cost of product
warranties at the time revenue is recognized. We also sell
warranty extensions and the related revenue is recognized
ratably over the term of the extension. While the Company
engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its
component suppliers, our warranty obligation is affected by
product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ
from our estimates, revisions to the estimated warranty
liability would be required.



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

During fiscal years 2002 and 2001, we recorded
significant reserves in connection with our restructuring
program. These reserves include estimates pertaining to employee
separation costs, related abandonment of excess equipment, the
abandonment of excess leased facilities, and other related
charges. Although we do not anticipate significant changes, the
actual costs may differ from these estimates.



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

We accounted for the acquisitions of Camile
Products, LLC, now Argonaut Technologies Systems, Inc.
(ATSI) and the Jones Group under the purchase method
of accounting and accordingly, the acquired assets and
liabilities assumed were recorded at their respective fair
values. The recorded values of assets and liabilities were based
on third-party estimates and valuations. The remaining values
were based on our judgments and estimates, and accordingly, the
Companys consolidated financial position or results of
operations may be affected by changes in estimates and judgments.

19



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

Goodwill and other purchased intangible assets
have resulted from the acquisition of ATSI and the Jones Group.
Goodwill and other intangible assets with indefinite lives are
not amortized subsequent to the Companys adoption of
SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142).

All goodwill and intangible assets have been
assigned to one of two reporting units. The Argonaut
(AGNT)-Legacy reporting unit consists primarily of
goodwill and intangible assets related to the Companys
acquisition of ATSI. The Jones-Group reporting unit consists of
goodwill and intangible assets deriving from the Companys
acquisition of Jones Chromatography, Ltd.

The Company performs the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth fiscal quarter of
each year. The first step is a screen for potential impairment,
while the second step measures the amount of impairment by
reporting unit, if any.

During the third quarter ended September 30,
2003 the Company performed an interim test for goodwill
impairment in light of lower than expected third quarter
revenue. Based on the discounted cash flows of the AGNT-Legacy
reporting unit, the Company recognized an impairment charge of
$1.6 million relating to the goodwill and intangible assets
associated with ATSI. Approximately, $763,000 of the impairment
charge was related to goodwill associated with ATSI, and the
remainder was related to completed technology assets associated
with the acquisition of ATSI.

The Company performed the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth quarter of fiscal
2003, determining that no further impairment was indicated. The
Company determined the fair value of intangible assets with
indefinite lives based on a present value analysis of the
discounted future cash flows.



| |           
| | ----------
| | Income Tax

We recognize deferred tax assets and liabilities
based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We
regularly review our deferred tax assets for recoverability and
establish a valuation allowance based upon historical losses,
projected future taxable income and the expected timing of the
reversals of existing temporary differences. As a result of this
review, we have established a full valuation allowance against
our deferred tax assets.



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

Deferred stock compensation is the difference
between the exercise price of the options and the fair value of
the common stock at the date of grant. For these purposes the
fair value was determined based on the business factors
underlying the value of our common stock on the date of grant
viewed in light of our initial public offering in July 2000 and
the anticipated initial public offering price per share. The
deferred stock compensation was recorded as a component of
stockholders equity and is being amortized over the
vesting periods of the options, generally four years, using the
graded vesting method. We recorded deferred stock compensation
of approximately $2.8 million in the year ended
December 31, 2000 in connection with the grant of stock
options to employees. We have recorded amortization of deferred
stock compensation of approximately $65,000, $222,000, and
$1.6 million in the years ended December 31, 2003,
2002 and 2001, respectively. As of December 31, 2003, we
had a total of approximately $9,000 to be amortized over the
remaining vesting period of the options.

We also recorded stock compensation of $46,000,
$49,000 and $137,000 for the years ended December 31, 2003,
2002 and 2001, respectively, in connection with options granted
to consultants. These options are periodically re-measured as
they vest, in accordance with Emerging Issues Task Force
No. 96-18 Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.

20



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##### Table of Contents



Comparative Results of Operations



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

Operating results for the year ended
December 31, 2002 include Jones Group since
February 21, 2002.



| |          
| | ---------
| | Net Sales

Net sales in the year ended December 31,
2003 were $24.5 million compared to $26.3 million for
the same period in 2002, a decrease of 7%. For the year ended
December 31, 2003, instrument sales comprised approximately
41% of net sales, chemistry consumables sales comprised
approximately 48% of net sales, and service, integration
services and contract research and development
(R&D) together comprised approximately 11% of
net sales. Instrument sales were $10.1 million for 2003
versus $11.9 million for the same period in 2002, a
decrease of 15%. The decrease was caused by slower than
anticipated growth of new instrument product sales combined with
the transition away from discontinued legacy instrument
products, begun in the second half of 2002. Sales of
discontinued instrument products accounted for $1.5 million
of instrument sales in 2003 compared to $4.7 million for
the same period of 2002. Ongoing core instrument sales grew 21%
in 2003 versus 2002 ($8.7 million versus
$7.2 million). Chemistry consumables sales were
$11.7 million for the year ended December 31, 2003
versus $11.1 million in the same period in 2002, an
increase of 5%. Full year chemistry consumables growth was
negatively impacted by the decline in the HPLC business after
the sale of the HPLC assets in the third quarter and lower resin
product sales. The HPLC products contributed approximately
$1.2 million to chemistry consumables sales in 2003 versus
$2.1 million in the same period of 2002. The year over year
growth in ongoing chemistry consumables sales was 16%.



| |              
| | -------------
| | Cost of Sales

Cost of sales, comprised of cost of products and
cost of services was $13.3 million for the year ended
December 31, 2003 versus $15.0 million for the same
period in 2002, a decrease of 12%, due primarily to lower sales
volume and the inclusion of $0.8 million of special charges
in 2002 related to the write-off of excess and obsolete
inventory recorded based on the Companys decision to
discontinue active selling of those products as a component of a
broader restructuring plan. Gross margin as a percent of sales
was 46% for 2003 compared to 43% for 2002. Product gross margin
as a percent of sales increased to 48% for the year ended
December 31, 2003 as compared to 43% for the same period in
2002. The gross margin as a percent of sales for the year ended
December 31, 2003 includes the favorable impact of
approximately $480,000 related to the sale of discontinued
products previously charged to cost of sales as excess inventory
in the third quarter of 2002.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses were
$4.4 million for the year ended December 31, 2003
compared to $5.6 million for the same period in 2002, a
decrease of 22%. These expenses include salaries and related
costs of research and development personnel, fees paid to
consultants and outside service providers, the costs of
facilities and related expenses, non-recurring engineering
charges and prototype costs related to the design, development
testing, pre-manufacturing and significant improvement of our
products. The decrease was primarily attributable to lower
personnel costs resulting from the effects of the restructuring
program initiated in the third quarter of 2002 and reduced
stock-based compensation expenses. Stock-based compensation
expenses related to research and development decreased by
approximately $80,000 for the year ended December 31, 2003
as compared to the same period in 2002.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses
decreased to $13.1 million in the year ended
December 31, 2003 from $17.5 million for the same
period in 2002, a decrease of 25%. These expenses consist
primarily of salaries and related costs for executive, sales and
marketing, finance and other administrative personnel, the cost
of facilities and related spending, and the costs associated
with promotional and other marketing expenses. The decrease was
primarily attributable to the effects of the restructuring
efforts initiated in the third quarter of 2002 and reduced
stock-based compensation expenses. Stock-based compensation
expenses

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##### Table of Contents



related to selling, general and administrative
decreased by approximately $80,000 for the year ended
December 31, 2003 versus the same period in 2002.




| |                                                                                 
| | --------------------------------------------------------------------------------
| | Amortization and Write-off of Goodwill and
    Other Purchased Intangible Assets

For the year ended December 31, 2003, the
Company recorded amortization of purchased intangibles of
$738,000 as compared to $735,000 in the same period of 2002.
During the third quarter ended September 30, 2003 the
Company performed an interim test for goodwill impairment in
light of lower than expected third quarter revenue. Based on the
discounted cash flows of the AGNT-Legacy reporting unit, the
Company recognized an impairment charge of $1.6 million
relating to the goodwill and intangible assets associated with
ATSI. Approximately $763,000 of the impairment charge was
related to goodwill associated with ATSI, and the remainder was
related to completed technology assets associated with the
acquisition of ATSI.



| |                      
| | ---------------------
| | Restructuring Charges

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of the existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter of the year ended December 31, 2002. The charge
included termination benefits and related expenses of
approximately $630,000 related to the reduction of our workforce
by 44 employees, expenses of approximately $683,000 related
to the abandonment of excess equipment, expenses of
approximately $356,000 for the abandonment of excess leased
facilities, and expenses of approximately $133,000 for various
related charges. As of December 31, 2003, 40 of the
44 employees had been terminated and the accrued
restructuring liability was $158,000. For the year ended
December 31, 2003, cash payments related to the
restructuring program were approximately $535,000. Remaining
cash expenditures relating to workforce reduction and other
related charges will be paid during the first half of 2004.
Amounts related to the abandonment of excess leased facilities
will be paid as the lease payments are due over the remainder of
the lease terms through 2004. At December 31, 2003 the
Company revised certain estimates of outstanding restructuring
obligations. As a result, a recovery of approximately $184,000
was recorded as a credit to restructuring charges.



| |                        
| | -----------------------
| | Other Income (Expenses)

Interest and other income of $1.2 million
for the year ended December 31, 2003 was essentially flat
as compared to $1.2 million for the same period in 2002.
Interest and other expense was $688,000 for the period ended
December 31, 2003 compared to $528,000 in the same period
in 2002.

On July 30, 2003, the Company announced the
sale of its HPLC product line to the Grace Vydac business unit
of W.R. Grace & Co. The sale principally included the
Genesis® and Apex brands of HPLC columns inventory as
well as HPLC-related capital assets and trademarks. The sale of
these assets enables the Company to focus R&D and sales and
marketing efforts on core product areas providing consumable and
instrument products to the critical areas of drug development.
The pretax gain on the sale of net assets was approximately
$460,000 for the period ended December 31, 2003.



| |                           
| | --------------------------
| | Provision for Income Taxes

As of December 31, 2003, we had federal net
operating loss and research credit carryforwards of
approximately $61.0 million and $1.2 million,
respectively, which expire on various dates between 2010 and
2023. Utilization of our net operating loss may be subject to a
substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the
expiration of the net operating loss before utilization.

The Company recorded a provision for income taxes
of approximately $783,000 to record the UK corporate tax
liability of Jones Group for the year ended December 31,
2003 as compared to $217,000 recorded for the same period in
2002. The increase is due to the combination of higher UK net
income and tax

22



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##### Table of Contents



on the gain related to the sale of the HPLC
assets to the Grace Vydac business unit of W.R. Grace &
Co. completed in July.




| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2002 and
    2001

Operating results for the year ended
December 31, 2002 include Jones Group since
February 21, 2002.



| |          
| | ---------
| | Net Sales

Net sales in 2002 were $26.3 million
compared to $17.1 million in 2001, a growth of 54%. For
2002, instrument sales comprised approximately 45% of net sales,
chemistry consumables sales comprised approximately 42% of net
sales, and service, integration services and contract research
and development (R&D) together comprised
approximately 13% of net sales. Instrument sales were
$11.9 million in 2002 versus $11.2 million in 2001, a
growth of approximately 7%. Chemistry consumables sales were
$11.1 million in 2002 versus $4.1 million in 2001, a
growth of 169%. The substantial growth in chemistry consumables
products is primarily attributable to the acquisition of the
Jones Group.



| |              
| | -------------
| | Cost of Sales

Cost of sales was $15.0 million in 2002
versus $9.4 million in 2001. The increase in cost of sales
is primarily due to the higher sales volume and a special charge
related to the write-off of excess and obsolete inventory of
approximately $765,000 recorded based on the Companys
decision to discontinue active selling of certain products as a
component of a broader restructuring plan. Gross margin as a
percent of sales was 43% for 2002 compared to 45% in 2001. Year
over year improvement in gross margin percentage is primarily
attributable to the combined effects of reduced manufacturing
spending due to restructuring and shifts in product mix
resulting from the acquisition of the Jones Group.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses decreased to
$5.6 million in 2002 compared to $7.1 million in 2001,
a decrease of 21%. The decrease was primarily attributable to
lower personnel costs resulting from the effects of the
restructuring programs initiated in the third quarter of 2002
and the fourth quarter of 2001, and reduced stock-based
compensation expenses, offset by approximately $360,000 due to
the addition of the Jones Group. Stock-based compensation
expenses related to research and development decreased by
$458,000 for 2002 as compared to 2001. For the year ended
December 31, 2002, stock-based compensation expense was
$145,000 versus $603,000 for the same period in 2001.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses
increased to $17.5 million in 2002 from $16.7 million
in 2001. The increase was primarily attributable to
approximately $3.7 million of additional expenses for the
Jones Group, acquired on February 20, 2002, and therefore,
not reflected in the prior year, offset by the effect of the
restructuring efforts initiated in the third quarter of 2002 and
the fourth quarter of 2001, and reduced stock-based compensation
charges. Stock-based compensation expenses related to selling,
general and administration decreased by $961,000 for 2002, as
compared to 2001. For the year ended December 31, 2002,
stock-based compensation expense was $126,000 versus
$1.1 million in 2001.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Amortization of Purchased Intangible Assets
    and Acquired In-process Research &
    Development

On January 1, 2002, the Company adopted
SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite
useful lives and requires that these assets be reviewed for
impairment at least annually, more frequently if certain
indicators are present. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. As
of December 31, 2002, the Company had $10.2 million in
goodwill and intangible assets that have an indefinite useful
life, and thus, no amortization expense was recorded for these
assets during the year ended December 31, 2002.
Amortization of goodwill arising from acquisitions accounted for
$827,000 in the

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year ended December 31, 2001. For the year
ended December 31, 2002, the Company recorded amortization
of purchased intangibles of $735,000 related to the
March 1, 2001 acquisition of ATSI and the February 20,
2002 acquisition of Jones Group compared to $1.2 million in
the same period of 2001. The Company recorded in-process
research and development expense of $270,000 for the year ended
December 31, 2001, relating to ATSI, and no such charges
were incurred in 2002.




| |                      
| | ---------------------
| | Restructuring Charges

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of its existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter ended September 30, 2002. The charge included
termination benefits and related expenses of approximately
$630,000 related to the reduction of the workforce by 44
employees, expenses of approximately $683,000 related to the
abandonment of excess equipment, expenses of approximately
$356,000 for the abandonment of excess leased facilities, and
expenses of approximately $133,000 for various other related
charges. At December 31, 2002, 20 of the 44 employees had
been terminated and the accrued restructuring charge was
$877,000. For the year ended December 31, 2002, cash
payments related to the restructuring program were $242,000.



| |                       
| | ----------------------
| | Other Income (Expense)

Interest and other income decreased to
$1.2 million for the year ended December 31, 2002 as
compared to $2.9 million for the same period in 2001,
primarily because of lower average balances of invested cash,
cash equivalents, and short-term investments and reduced
interest rates consistent with the overall interest rate decline
of high quality short term investments. Interest and other
expenses was $528,000 for the year ended December 31, 2002
compared to $235,000 in the same period in 2001 primarily due to
the interest associated with the notes payable for the Jones
Group acquisition.



| |                           
| | --------------------------
| | Provision for Income Taxes

The Company recorded a provision for foreign
income taxes of approximately $217,000 to record primarily the
UK corporate tax liability of Jones Group for the year ended
December 31, 2002.

Liquidity and Capital Resources

As of December 31, 2003, the Company had
cash, cash equivalents, investments and restricted cash of
$31.2 million compared to $39.2 million at
December 31, 2002. The decrease was primarily due to the
use of $8.6 million in general operating activities,
including approximately $535,000 in cash payments related to
restructuring activities initiated in the third quarter of 2002,
approximately $1.2 million used for capital expenditures,
and approximately $1.3 million in cash used for principal
payments on notes payable and capital lease obligations. These
uses of cash were offset by approximately $1.2 million
received from the sale of the HPLC assets, approximately
$1.2 million from restricted cash, and approximately
$524,000 related to the effect of exchange rate changes on cash.

Of the restricted cash amount of
$12.3 million at December 31, 2003, $12.2 million
is denominated in British Pounds Sterling and represents the
cash used to secure the notes payable of £7,650,000
($12.2 million as of December 31, 2003) as purchase
consideration in the acquisition of the Jones Group. The notes
are payable over two years carrying an initial interest rate of
3.9% per annum for the twelve month period commencing on
the date of note issuance, payable quarterly. Following the
initial twelve-month period, the interest rate on the notes is
set to the Barclays Bank base rate on the business day
immediately preceding each quarterly interest period. At
December 31, 2003, approximately £822,000 of the note
principal had been paid, with the remainder payable at
April 30, 2004.

Net cash used to support operating activities has
historically fluctuated based on the timing of payments of
accounts payable balances, receipts of customer deposits,
receipt of payments of accounts receivable balances, changes in
inventory balances resulting from varying levels of
manufacturing activities, the timing of

24



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research and development projects, the timing and
scope of our sales and marketing initiatives and fluctuations in
the Companys net loss.


On August 8, 2002, the Company announced the
approval by its Board of Directors of a stock repurchase program
pursuant to which shares of its outstanding common stock having
an aggregate value of up to $500,000 may be repurchased through
open market transactions at prices deemed appropriate by the
Company. The duration of the stock repurchase program is
open-ended. The timing and amount of repurchase transactions
under this program will depend on market conditions, corporate
and regulatory considerations, and will be funded from available
working capital. Through December 31, 2003, the Company had
repurchased 50,000 shares of outstanding common stock at an
average purchase price per share of $0.93.

The Company expects to have negative cash flows
from operations through the fourth quarter of 2004. We may also
use cash resources and raise additional funds to fund additional
collaborative or strategic relationships, acquisitions or
investments in other businesses, technologies or product lines.
Our future capital requirements depend on a number of factors,
including market acceptance of our products, the resources we
devote to developing and supporting our products, continued
progress of our research and development of potential products,
the need to acquire licenses to new technology and the
availability of other financing on acceptable terms. We believe
that our current cash balances will be sufficient to fund our
operations through at least the next 12 months. To the
extent that our capital resources are insufficient to meet
future capital requirements, we will need to raise additional
capital or incur indebtedness to fund our operations. There can
be no assurance that additional debt or equity financing will be
available on acceptable terms, if at all. If adequate funds are
not available, we may be required to delay, reduce the scope of,
or eliminate, our operations. We may be required to obtain funds
through arrangements with collaborative or strategic partners or
others that may require us to relinquish rights to certain
technologies or products that we might otherwise seek to retain.



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

Other than contractual obligations incurred in
the normal course of business, we do not have any off-balance
sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred
assets or any obligation arising out of a material variable
interest in an unconsolidated entity. We do not have any
majority-owned subsidiaries that are not included in the
financial statements.



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

The following summarizes the Companys
contractual cash obligations at December 31, 2003, and the
effect such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):

|                                   |  |                         |        |        |  |         |        |         |  |   |     |  |  |   |    | 
|---------------------------------- |  | ----------------------- | ------ | ------ |  | ------- | ------ | ------- |  | - | --- |  |  | - | -- | 
|                                   |  |                        
|                                   |  | Payments Due by Period:
|                                   |  |                        
|                                   |  |                         |        | Less   |  |        
|                                   |  |                         |        | Than   |  | 1 to    |        | 4 to   
|Contractual Obligations            |  | Total                   |        | 1 Year |  | 3 Years |        | 5 Years
|                                   |  |                         |        |        |  |         |        |        
|Notes payable (Jones Group)        |  | $                       | 12,192 |        |  | $       | 12,192 |         |  | $ |    |  |  | $ |   | 
|Capital lease obligations          |  |                         | 33     |        |  |         | 9      |         |  |   | 18  |  |  |   | 6  | 
|Operating lease obligations        |  |                         | 660    |        |  |         | 610    |         |  |   | 50  |  |  |   |   | 
|Minimum royalty payments           |  |                         | 237    |        |  |         | 81     |         |  |   | 106 |  |  |   | 50 | 
|                                   |  |                         |        |        |  |         |        |         |  |   |     |  |  |   |    | 
|Total contractual cash obligations |  | $                       | 13,122 |        |  | $       | 12,892 |         |  | $ | 174 |  |  | $ | 56 | 
|                                   |  |                         |        |        |  |         |        |         |  |   |     |  |  |   |    | 

Factors that May Affect Our Future
Results



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

We have incurred operating losses and negative
cash flows from operations since our inception. As of
December 31, 2003, we had an accumulated deficit of
$77.2 million and we recorded net losses of
$8.2 million for the twelve-month period ended
December 31, 2003. We expect to continue to incur operating
and net losses through 2004 and we may never generate positive
cash flows.

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



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

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



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Convince prospective customers that our products
    are a cost-effective alternative to traditional methods and
    other technologies that may be introduced for chemistry
    development.        
|
| |  | Convince prospective customers that our products
    provide the same or enhanced quality and accuracy as compared
    with traditional methods and other new technologies 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.                                   

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



| |                                                                
| | ---------------------------------------------------------------
| | We face risks associated with past and
    future acquisitions.

Our success depends in part on our ability to
continually enhance and broaden our product offerings in
response to changing technologies, customer demands and
competitive pressures. To meet these challenges, we have
acquired complementary businesses and may choose to acquire
others in the future. We completed our acquisition of ATSI in
March 2001 and Jones Group in February 2002. During 2002 and
2003, we made significant progress integrating the Jones Group
business; however, we continue to have remaining integration
activities and projects. Our failure to completely and
successfully integrate this business may materially affect our
business going forward.

We do not know if we will be able to complete any
future acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain
its key employees. Integrating any business, product or
technology we acquire could be expensive and time consuming, and
may disrupt our ongoing business and distract our management. If
we are unable to effectively integrate any acquired entities,
products or technologies, our business may suffer. In addition,
any amortization of goodwill or other assets or charges
resulting from the costs of acquisitions could negatively impact
our operating results. Our available cash and securities may be
used to buy or invest in companies or products, possibly
resulting in significant acquisition-related charges to earnings
and dilution to our stockholders. Due to volatile market
conditions, the value of long lived assets maybe negatively
impacted, which may result in future, additional impairment
charges. Moreover, if we buy a company, we may have to incur or
assume that companys liabilities, including liabilities
that are unknown at the time of acquisition.



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

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

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our ability to successfully develop new and
commercially viable products. During the first half of 2003, we
launched a new product from the Pfizer and ICI consortium, the
Advantage SeriesTM 3400 workstation, and this product
is important to our ability to increase revenues in 2004 and
beyond. Our failure to achieve our anticipated levels of
revenues for this product will harm our ability to achieve our
financial goals during 2004.




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

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



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

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



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

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

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

We sell a major portion of our products through
our own sales force. We may not be able to build an efficient
and effective sales and marketing force and continue to expand
our network of distributors. Our failure to build an efficient
and effective sales and marketing force could negatively impact
sales of our products, thus reducing our revenues and
profitability.



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

We outsource most of the production of components
of our instruments to vendors. We also outsource significant
quantities of our high volume chemical intermediates for our
consumables products. Our reliance on our outside vendors
exposes us to risks including:



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

Consequently, in the event that components from
our suppliers or work performed by our vendors are delayed or
interrupted for any reason, our ability to produce and deliver
our products in sufficient quantities and at acceptable costs
would decline. Additionally, certain components are provided by
a single source. The effect of a disruption of delivery of those
single source components could impact our ability to deliver
product to our customers.



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

As a global concern, we face exposure to adverse
movements in foreign currency and US dollar exchange rates.
During 2003, approximately 52% of our net sales were exposed to
foreign currency risk. During the same period, approximately 24%
of our operating expenses were exposed to foreign currency risk.
These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial
results. We will monitor our exposure and may hedge against this
and any other emerging market currencies as necessary.



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

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



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

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

Our business is subject to the effects of general
global economic conditions, and particularly economic conditions
in the United States and the United Kingdom. Specifically, our
business is subject to the effects of market conditions in the
pharmaceutical, biotechnology, life sciences and chemical
industries. In recent quarters, our operating results have been
adversely affected as a result of unfavorable economic
conditions and

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reduced capital spending in the United States,
Europe, and Asia. If the economic conditions in the United
States and globally do not improve, or if we experience a
worsening in the global economic slowdown, we may continue to
experience material adverse impacts on our business, operating
results, and financial condition.




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

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



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

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

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



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

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

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

We try to protect our non-patented trade secrets
by requiring our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that
these agreements will provide us with adequate protection
against improper use or disclosure of our trade secrets.
Further, others may independently develop substantially
equivalent proprietary information and techniques. If we are
unable to protect our

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proprietary information and techniques, our
ability to exclude certain competitors from the market will be
limited.




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

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



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

The trading price of our common stock has been
highly volatile and ranged in 2003 from a per-share high of
$1.91 to a low of $0.81 and could continue to be subject to wide
fluctuations in price in response to various factors, many of
which are beyond our control, including;



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

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

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

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

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shares may be sold in the future without
registration under the Securities Act, to the extent permitted
by Rule 144 or other exemptions under the Securities Act.


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

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

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



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

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



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

The Sarbanes-Oxley Act of 2002 that became law in
July 2002 requires changes in some of our corporate governance
and securities disclosure or compliance practices. That Act also
requires the SEC to promulgate new rules on a variety of
subjects, in addition to rule proposals already made, and Nasdaq
has proposed revisions to its requirements for companies that
are Nasdaq-listed. We expect these developments to increase our
legal compliance costs, and to make some activities more
time-consuming. We are presently evaluating and monitoring
regulatory developments and cannot estimate the timing or
magnitude of additional costs we may incur as a result.

Recent Accounting Pronouncements

In January of 2003, the FASB issued FIN
No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 requires a variable
interest entity (VIE) to be consolidated by a
company if that company is considered to be the primary
beneficiary in a VIE. Primary beneficiary is the party subject
to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. The requirements of
FIN No. 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending
after March 15, 2004. The Company does not currently
believe it has any investments in variable interest entities,
therefore the adoption of FIN 46 did not and is not
expected to have a material impact on the Companys
financial condition or results of operations.

In May of 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and
Equity which requires freestanding financial instruments
such as mandatory redeemable shares, forward purchase contracts
and written put options to be reported as liabilities by their
issuers as well as related new disclosure requirements. The
provisions of SFAS No. 150 are effective for
instruments entered into or modified after May 31, 2003 and
pre-existing instruments as of the beginning

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of the first interim period that commences after
June 15, 2003. The effect of adopting
SFAS No. 150 did not have a material impact on the
Companys financial condition or results of operations.







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

Interest Rate Risk

Our exposure to interest rate risk is related
principally to our investment portfolio. Fixed rate investments
may have their fair market value adversely impacted from changes
in interest rates and floating rate investments may produce less
income than expected if interest rates fall. Due in part to
these factors, our future investment income may fall short of
expectations. Further, we may suffer losses in investment
principal if we are forced to sell securities that have declined
in market value due to changes in interest rates. We invest our
excess cash in debt instruments of the U.S. government and
its agencies, and in debt instruments of high quality corporate
issuers. The principal notional amount with an expected maturity
in the following year, weighted average interest rate, and
average contractual maturity were as follows ($ in millions):

|                                                                          |  |              |     |              |  |   |      |  
|------------------------------------------------------------------------- |  | ------------ | --- | ------------ |  | - | ---- | -
|                                                                          |  | December 31, |     | December 31,
|                                                                          |  | 2003         |     | 2002        
|                                                                          |  |              |     |             
|Principal notional amount with an expected
    maturity in following year |  | $            | 6.5 |              |  | $ | 23.8 |  
|Weighted average interest rate                                            |  |              | 3.4 | %            |  |   | 1.4  | %
|Average contractual maturity of investments (days)                        |  |              | 40  |              |  |   | 41   |  

The Company also has limited interest rate
exposure related to the notes payable issued in consideration
for the acquisition of the Jones Group. The notes payable are
denominated in British Pound Sterling in the amount of
£7,650,000 ($10.9 million at origination) and interest
is payable to the note holders at an initial rate of
3.9% per annum for the first twelve month period (ending
February 20, 2003), and subsequently at the rate equal to
the published base rate of Barclays Bank PLC on the date
immediately preceding each quarterly interest period, less any
fees and costs. The notes payable mature at April 30, 2004.
The Company has limited interest rate risk on the notes payable
due to the deposit of £7,650,000 ($10.9 million at
origination) in cash with Barclays Bank PLC as collateral for
the principal and interest on the notes payable. The cash
amounts held as collateral are represented as restricted cash in
the Companys consolidated balance sheet at
December 31, 2003 and is invested in money market
instruments to yield rates approximate to the interest rates due
on the notes payable.

Foreign Currency Risk

As we have operations and sales outside of the
United States, our financial results can be affected by changes
in foreign currency exchange rates or weak economic conditions
in the foreign markets in which we operate. Our foreign
operations and sales increased significantly in 2002 due
primarily to the acquisition of the Jones Group. With the Jones
Group acquisition, approximately 52% of our net sales are
exposed to foreign currency risk, predominantly in the British
Pound, the Euro, and the Japanese Yen. Approximately 24% of our
expenses are exposed to foreign currency risk.

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

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                   |  |      |    | 
|-------------------------------------------------- |  | ---- | -- | 
|                                                   |  | Page
|                                                   |  |     
|Report of Independent Auditors                     |  |      | 34 | 
|Consolidated Balance Sheets                        |  |      | 35 | 
|Consolidated Statements of Operations              |  |      | 36 | 
|Consolidated Statement of Shareholders
    Equity |  |      | 37 | 
|Consolidated Statements of Cash Flows              |  |      | 38 | 
|Notes to Consolidated Financial Statements         |  |      | 39 | 

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Argonaut Technologies, Inc.


We have audited the accompanying consolidated
balance sheets of Argonaut Technologies, Inc. as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. Our audits also include the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Argonaut
Technologies, Inc. at December 31, 2003 and 2002, and
the consolidated results of its operations and its cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.

As discussed in Note 1 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



| |                      
| | ---------------------
| | /S/ ERNST & YOUNG LLP

Palo Alto, California

February 3, 2004


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ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |         |        | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | December 31,              
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | 2003                       |        | 2002   
|                                         |                                                                                                                                                                                                               |                            |        |        
|                                         |                                                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                                                               | (In thousands, except     
|                                         |                                                                                                                                                                                                               | share data)               
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Cash and cash equivalents                                                                                                                                                                                     |                            | $      | 9,620   |        |   | $      | 20,895  |       
|                                         | Short-term investments                                                                                                                                                                                        |                            |        | 3,850   |        |   |        | 5,999   |       
|                                         | Accounts receivable, less allowance for doubtful
    accounts of $102 in 2003 and $110 in 2002                                                                                                                |                            |        | 5,993   |        |   |        | 4,389   |       
|                                         | Inventories                                                                                                                                                                                                   |                            |        | 6,946   |        |   |        | 6,280   |       
|                                         | Prepaid expenses and other current assets                                                                                                                                                                     |                            |        | 562     |        |   |        | 727     |       
|                                         | Note receivable                                                                                                                                                                                               |                            |        | 56      |        |   |        | 237     |       
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total current assets       |        |         | 27,027 |   |        |         | 38,527 | 
|Restricted cash                          |                                                                                                                                                                                                               |                            | 12,317 |         |        |   | 12,327 |        
|Property and equipment, net              |                                                                                                                                                                                                               |                            | 4,454  |         |        |   | 4,921  |        
|Goodwill                                 |                                                                                                                                                                                                               |                            | 9,410  |         |        |   | 10,173 |        
|Other intangible assets, net             |                                                                                                                                                                                                               |                            | 4,471  |         |        |   | 6,425  |        
|Long-term investments                    |                                                                                                                                                                                                               |                            | 5,432  |         |        |   |       |        
|Other assets                             |                                                                                                                                                                                                               |                            | 204    |         |        |   |       |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | $                          | 63,315 |         |        | $ | 72,373 |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Accounts payable                                                                                                                                                                                              |                            | $      | 1,494   |        |   | $      | 1,873   |       
|                                         | Accrued compensation                                                                                                                                                                                          |                            |        | 971     |        |   |        | 1,087   |       
|                                         | Other accrued liabilities                                                                                                                                                                                     |                            |        | 2,406   |        |   |        | 2,506   |       
|                                         | Deferred revenue                                                                                                                                                                                              |                            |        | 978     |        |   |        | 1,972   |       
|                                         | Current portion of notes payable and capital
    lease obligations                                                                                                                                            |                            |        | 12,200  |        |   |        | 88      |       
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total current liabilities  |        |         | 18,049 |   |        |         | 7,526  | 
|Long term debt                           |                                                                                                                                                                                                               |                            | 23     |         |        |   | 12,334 |        
|Commitments                              |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|Stockholders equity:                    |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         | Convertible preferred stock, $0.0001 par
    value; 10,000,000 shares authorized at December 31,
    2003 and 2002, issuable in series; no shares issued and
    outstanding at December 31, 2003 and 2002    |                            |        |        |        |   |        |        |       
|                                         | Common stock, $0.0001 par value;
    120,000,000 shares authorized at December 31, 2003 and
    2002; 20,376,918 and 20,015,708 shares issued and
    outstanding at December 31, 2003 and 2002, respectively |                            |        | 2       |        |   |        | 2       |       
|                                         | Additional paid-in capital                                                                                                                                                                                    |                            |        | 121,670 |        |   |        | 121,388 |       
|                                         | Deferred stock compensation                                                                                                                                                                                   |                            |        | (9      | )      |   |        | (74     | )     
|                                         | Accumulated deficit                                                                                                                                                                                           |                            |        | (77,244 | )      |   |        | (69,092 | )     
|                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                 |                            |        | 824     |        |   |        | 289     |       
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | Total stockholders equity |        |         | 45,243 |   |        |         | 52,513 | 
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        
|                                         |                                                                                                                                                                                                               | $                          | 63,315 |         |        | $ | 72,373 |        
|                                         |                                                                                                                                                                                                               |                            |        |         |        |   |        |        

See accompanying notes.

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ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                                                            |                                                    |                                      
|                                                                                                                                                            |                                                    | Years Ended December 31,             
|                                                                                                                                                            |                                                    |                                      
|                                                                                                                                                            |                                                    | 2003                                  |        | 2002   |        | 2001
|                                                                                                                                                            |                                                    |                                       |        |        |        |     
|                                                                                                                                                            |                                                    |                                      
|                                                                                                                                                            |                                                    | (In thousands, except per share data)
|Net sales:                                                                                                                                                  |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            | Products                                           |                                       | $      | 21,801 |        |      | $       | 22,994 |        |   | $       | 15,281 |       
|                                                                                                                                                            | Services                                           |                                       |        | 2,668  |        |      |         | 3,323  |        |   |         | 1,782  |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            |                                                    | Total net sales                       |        |        | 24,469 |      |         |        | 26,317 |   |         |        | 17,063 | 
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Costs and expenses:                                                                                                                                         |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            | Costs of products                                  |                                       |        | 11,492 |        |      |         | 13,202 |        |   |         | 9,108  |       
|                                                                                                                                                            | Costs of services                                  |                                       |        | 1,764  |        |      |         | 1,802  |        |   |         | 323    |       
|                                                                                                                                                            | Research and development (Note A)                  |                                       |        | 4,368  |        |      |         | 5,627  |        |   |         | 7,089  |       
|                                                                                                                                                            | Selling, general and administrative (Note A)       |                                       |        | 13,060 |        |      |         | 17,453 |        |   |         | 16,686 |       
|                                                                                                                                                            | Amortization of goodwill and purchased intangibles |                                       |        | 738    |        |      |         | 735    |        |   |         | 1,157  |       
|                                                                                                                                                            | Acquired in-process research and development       |                                       |        |       |        |      |         |       |        |   |         | 270    |       
|                                                                                                                                                            | Restructuring charges (recoveries)                 |                                       |        | (184   | )      |      |         | 1,802  |        |   |         | 384    |       
|                                                                                                                                                            | Goodwill and other purchased intangibles write-off |                                       |        | 1,612  |        |      |         |       |        |   |         | 5,520  |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            |                                                    | Total costs and expenses              |        |        | 32,850 |      |         |        | 40,621 |   |         |        | 40,537 | 
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Loss from operations                                                                                                                                        |                                                    |                                       | (8,381 | )      |        |      | (14,304 | )      |        |   | (23,474 | )     
|Other income (expenses):                                                                                                                                    |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            | Realized gain on the sale of assets                |                                       |        | 460    |        |      |         |       |        |   |         |       |       
|                                                                                                                                                            | Interest and other income                          |                                       |        | 1,240  |        |      |         | 1,191  |        |   |         | 2,914  |       
|                                                                                                                                                            | Interest and other expense                         |                                       |        | (688   | )      |      |         | (528   | )      |   |         | (235   | )     
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Net loss before provision for income taxes                                                                                                                  |                                                    |                                       | (7,369 | )      |        |      | (13,641 | )      |        |   | (20,795 | )     
|Provision for income tax                                                                                                                                    |                                                    |                                       | (783   | )      |        |      | (217    | )      |        |   |        |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Net loss                                                                                                                                                    |                                                    | $                                     | (8,152 | )      |        | $    | (13,858 | )      |        | $ | (20,795 | )     
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Net loss per common share, basic and diluted                                                                                                                |                                                    | $                                     | (0.40  | )      |        | $    | (0.70   | )      |        | $ | (1.09   | )     
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Weighted-average shares used in computing net
    loss per common share, basic and diluted                                                                  |                                                    |                                       | 20,160 |        |        |      | 19,876  |        |        |   | 19,048  |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|Note A: Research and development expenses
    and selling, general and administrative expenses include charges
    for stock-based compensation as follows:
|Research and development                                                                                                                                    |                                                    | $                                     | 65     |        |        | $    | 145     |        |        | $ | 603     |       
|Selling, general and administrative                                                                                                                         |                                                    |                                       | 46     |        |        |      | 126     |        |        |   | 1,087   |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       
|                                                                                                                                                            |                                                    | $                                     | 111    |        |        | $    | 271     |        |        | $ | 1,690   |       
|                                                                                                                                                            |                                                    |                                       |        |        |        |      |         |        |        |   |         |       

See accompanying notes.

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ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                              |                                                                                       |                                          |                          |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |         |      |         |  
|----------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ---------- | - | -------- | - | ------------ | - | ------------- | ------- | ------------- | - | ------ | ------ | ----- | - | - | ------- | ------- | - | - | --- | - | ---- | - | ------ | ------- | ---- | ------- | -
|                              |                                                                                       |                                          |                          |            |   |          |   |              |   | Accumulated   |         |              
|                              |                                                                                       | Common Stock                             |                          | Additional |   | Deferred |   |              |   | Other         |         | Total        
|                              |                                                                                       |                                          |                          | Paid-In    |   | Stock    |   | Accumulated  |   | Comprehensive |         | Stockholders
|                              |                                                                                       | Shares                                   |                          | Amount     |   | Capital  |   | Compensation |   | Deficit       |         | Income (Loss) |   | Equity
|                              |                                                                                       |                                          |                          |            |   |          |   |              |   |               |         |               |   |       
|                              |                                                                                       |                                         
|                              |                                                                                       | (In thousands, except share data)       
|BALANCES AT DECEMBER 31, 2000 |                                                                                       |                                          | 18,270,019               |            |   | $        | 2 |              |   | $             | 115,283 |               |   | $      | (3,055 | )     |   | $ | (34,439 | )       |   | $ | (71 | ) |      | $ | 77,720 |        
|                              | Net loss                                                                              |                                          |                          |           |   |          |   |             |   |               |         |              |   |        |        |      |   |   |         | (20,795 | ) |   |     |  |      |   |        | (20,795 | )   
|                              | Other comprehensive income (loss):                                                    |                                          |                          |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |         |     
|                              |                                                                                       | Unrealized loss on investments           |                          |            |  |          |   |              |  |               |         |               |  |        |        |       |  |   |         |         |  |   |     |   | 173  |   |        |         | 173  |        
|                              |                                                                                       | Foreign currency translation adjustments |                          |            |  |          |   |              |  |               |         |               |  |        |        |       |  |   |         |         |  |   |     |   | (134 | ) |        |         | (134 | )      
|                              |                                                                                       |                                          |                          |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |        
|                              |                                                                                       |                                          | Total comprehensive loss |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |         |      | (20,756 | )
|                              | Issuance of common stock upon exercise of stock
    options, net of repurchase        |                                          |                          | 209,030    |   |          |   |             |   |               |         | 190           |   |        |        |      |   |   |         |        |   |   |     |  |      |   |        | 190     |     
|                              | Issuance of common stock related to the
    acquisition of Camile Products, LLC       |                                          |                          | 666,667    |   |          |   |             |   |               |         | 4,667         |   |        |        |      |   |   |         |        |   |   |     |  |      |   |        | 4,667   |     
|                              | Issuance of common stock related to employee
    stock purchase plan                  |                                          |                          | 95,495     |   |          |   |             |   |               |         | 323           |   |        |        |      |   |   |         |        |   |   |     |  |      |   |        | 323     |     
|                              | Issuance of shares of common stock upon exercise
    of warrants                      |                                          |                          | 40,480     |   |          |   |             |   |               |         |              |   |        |        |      |   |   |         |        |   |   |     |  |      |   |        |        |     
|                              | Compensation expense related to issuance of
    options to consultants                |                                          |                          |           |   |          |   |             |   |               |         | 137           |   |        |        |      |   |   |         |        |   |   |     |  |      |   |        | 137     |     
|                              | Deferred stock compensation associated with stock
    options cancelled               |                                          |                          |           |   |          |   |             |   |               |         | (564          | ) |        |        | 494   |   |   |         |        |   |   |     |  |      |   |        | (70     | )   
|                              | Amortization of deferred stock compensation                                           |                                          |                          |           |   |          |   |             |   |               |         |              |   |        |        | 1,553 |   |   |         |        |   |   |     |  |      |   |        | 1,553   |     
|                              |                                                                                       |                                          |                          |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |        
|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 loss 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 |        
|                              |                                                                                       |                                          |                          |            |   |          |   |              |   |               |         |               |   |        |        |       |   |   |         |         |   |   |     |   |      |   |        |        

37



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |         |       |       |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | ------- | ----- | ----- | ------- | -
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | Years Ended December 31,                                          
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | 2003                                                               |                                           | 2002                                                    |       | 2001  
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |       
|                                                         |                                                                                 |                                                                   
|                                                         |                                                                                 | (In thousands)                                                    
|Cash flows from operating
    activities:                |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         | Net loss                                                                        |                                                                    | $                                         | (8,152                                                  | )     |        | $      | (13,858 | )     |        | $       | (20,795 | )    
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |         |      
|                                                         |                                                                                 | Depreciation and amortization                                      |                                           |                                                         | 1,363 |        |        |         | 1,467 |        |         |         | 518   |      
|                                                         |                                                                                 | Amortization of goodwill and other purchased
    intangible assets |                                           |                                                         | 850   |        |        |         | 785   |        |         |         | 1,157 |      
|                                                         |                                                                                 | Disposal of fixed assets                                           |                                           |                                                         | 229   |        |        |         |      |        |         |         |      |      
|                                                         |                                                                                 | Stock-based compensation                                           |                                           |                                                         | 65    |        |        |         | 222   |        |         |         | 1,483 |      
|                                                         |                                                                                 | Issuance of equity for noncash benefits                            |                                           |                                                         | 46    |        |        |         | 49    |        |         |         | 137   |      
|                                                         |                                                                                 | Impairment charges                                                 |                                           |                                                         | 1,612 |        |        |         |      |        |         |         | 5,520 |      
|                                                         |                                                                                 | Acquired in-process research and development                       |                                           |                                                         |      |        |        |         |      |        |         |         | 270   |      
|                                                         |                                                                                 | Non-cash portion of restructuring charges                          |                                           |                                                         | (184  | )      |        |         | 683   |        |         |         | 22    |      
|                                                         |                                                                                 | Foreign currency translation                                       |                                           |                                                         | (16   | )      |        |         | (39   | )      |         |         | 113   |      
|                                                         |                                                                                 | Changes in assets and liabilities:                                 |                                           |                                                         |       |        |        |         |       |        |         |         |       |      
|                                                         |                                                                                 |                                                                    | Accounts receivable                       |                                                         |       | (1,818 | )      |         |       | 2,271  |         |         |       | 357   |        
|                                                         |                                                                                 |                                                                    | Inventories                               |                                                         |       | (1,269 | )      |         |       | 197    |         |         |       | (739  | )      
|                                                         |                                                                                 |                                                                    | Note receivable from officer              |                                                         |       |       |        |         |       |       |         |         |       | 200   |        
|                                                         |                                                                                 |                                                                    | Prepaid expenses and other current assets |                                                         |       | 116    |        |         |       | 154    |         |         |       | 221   |        
|                                                         |                                                                                 |                                                                    | Accounts payable                          |                                                         |       | (387   | )      |         |       | (1,304 | )       |         |       | 331   |        
|                                                         |                                                                                 |                                                                    | Accrued compensation                      |                                                         |       | (116   | )      |         |       | (365   | )       |         |       | 284   |        
|                                                         |                                                                                 |                                                                    | Other accrued liabilities                 |                                                         |       | 26     |        |         |       | (106   | )       |         |       | 225   |        
|                                                         |                                                                                 |                                                                    | Deferred revenue                          |                                                         |       | (994   | )      |         |       | (1,255 | )       |         |       | 1,486 |        
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                 |                                                                    |                                           | Net cash used in operating activities                   |       |        | (8,629 | )       |       |        | (11,099 | )       |       |       | (9,210  | )
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Cash flows from investing
    activities:                |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         | Capital expenditures                                                            |                                                                    |                                           | (1,263                                                  | )     |        |        | (781    | )     |        |         | (1,779  | )    
|                                                         | Business acquisition (net of cash received)                                     |                                                                    |                                           |                                                        |       |        |        | (6,464  | )     |        |         | (4,255  | )    
|                                                         | Proceeds from the sale of the HPLC assets                                       |                                                                    |                                           | 1,228                                                   |       |        |        |        |       |        |         |        |      
|                                                         | Purchase of short-term investments                                              |                                                                    |                                           | (14,941                                                 | )     |        |        | (10,749 | )     |        |         | (49,498 | )    
|                                                         | Purchase of long-term investments                                               |                                                                    |                                           | (5,432                                                  | )     |        |        |        |       |        |         |        |      
|                                                         | Proceeds from the sales of short-term investments                               |                                                                    |                                           | 3,902                                                   |       |        |        | 4,910   |       |        |         |        |      
|                                                         | Proceeds from the maturities of short-term
    investments                      |                                                                    |                                           | 13,195                                                  |       |        |        | 39,309  |       |        |         | 44,260  |      
|                                                         | Purchases of licenses                                                           |                                                                    |                                           | (35                                                     | )     |        |        | (1,400  | )     |        |         |        |      
|                                                         | Restricted cash                                                                 |                                                                    |                                           | 1,167                                                   |       |        |        | (10,863 | )     |        |         |        |      
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                 |                                                                    |                                           | Net cash provided (used) in investing
    activities    |       |        | (2,176 | )       |       |        | 13,962  |         |       |       | (11,272 | )
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Cash flows from financing
    activities:                |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         | Principal payments on capital lease obligations                                 |                                                                    |                                           | (94                                                     | )     |        |        | (187    | )     |        |         | (281    | )    
|                                                         | Proceeds from capital lease obligations                                         |                                                                    |                                           | 31                                                      |       |        |        | 94      |       |        |         |        |      
|                                                         | Repayment of long-term debt                                                     |                                                                    |                                           | (1,167                                                  | )     |        |        | (200    | )     |        |         | (654    | )    
|                                                         | Repurchase of common stock                                                      |                                                                    |                                           |                                                        |       |        |        | (47     | )     |        |         |        |      
|                                                         | Net proceeds from issuances of common stock                                     |                                                                    |                                           | 236                                                     |       |        |        | 233     |       |        |         | 513     |      
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|                                                         |                                                                                 |                                                                    |                                           | Net cash provided by (used in) financing
    activities |       |        | (994   | )       |       |        | (107    | )       |       |       | (422    | )
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Effect of exchange rate changes on cash                  |                                                                                 |                                                                    | 524                                       |                                                         |       |        | 143    |         |       |        | (247    | )      
|Net increase (decrease) in cash and cash
    equivalents |                                                                                 |                                                                    | (11,275                                   | )                                                       |       |        | 2,899  |         |       |        | (21,151 | )      
|Cash and cash equivalents at beginning of year           |                                                                                 |                                                                    | 20,895                                    |                                                         |       |        | 17,996 |         |       |        | 39,147  |        
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Cash and cash equivalents at end of year                 |                                                                                 | $                                                                  | 9,620                                     |                                                         |       | $      | 20,895 |         |       | $      | 17,996  |        
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Supplemental Disclosure of Cash Flow
    Information     |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Interest paid                                            |                                                                                 | $                                                                  | 394                                       |                                                         |       | $      | 426    |         |       | $      | 42      |        
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Taxes paid                                               |                                                                                 | $                                                                  | 247                                       |                                                         |       | $      | 524    |         |       | $      | 22      |        
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Supplemental Disclosure of Cash Flow
    Information     |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        
|Deferred stock compensation (cancellations)              |                                                                                 | $                                                                  | 111                                       |                                                         |       | $      | (712   | )       |       | $      | (494    | )      
|                                                         |                                                                                 |                                                                    |                                           |                                                         |       |        |        |         |       |        |         |        

See accompanying notes.

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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|         |                                               
|-------- | ----------------------------------------------
|Note 1  | Summary of Significant Accounting
    Policies

Nature of Operations and Basis of
Presentation

Argonaut Technologies, Inc. (the
Company) was incorporated in the state of Delaware
on November 10, 1994. The Company is a leader in the
development, manufacturing and marketing of innovative products
designed to help chemists engaged in the discovery and
development of new molecules increase their productivity and
reduce their operating costs without compromising the scientific
integrity of their research. Pharmaceutical, biotechnology and
chemical industry organizations worldwide have implemented the
Companys solutions to achieve faster time to market for
new products. The Companys products include a variety of
instruments and chemistry consumables that enable chemists to
increase their productivity, accelerate the drug development
process and reduce costs. Its principal markets are in the
United States, Western Europe, and the Far East.

The Company has five wholly owned subsidiaries,
Argonaut Technologies Systems, Inc. (formerly Camile
Products, LLC.) in Indiana, Argonaut Technologies KK in
Japan, Argonaut Technologies AG in Switzerland, Argonaut
Technologies, Ltd. (formerly Jones Chromatography, Ltd.) in
Cardiff, Wales, United Kingdom and Jones
Chromatography, Inc. in Foster City, California.

Principles of Consolidation

The consolidated financial statements include the
accounts and results of operations of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated on consolidation.

Reclassification

Certain reclassifications have been made to the
prior years financial statements to conform to the current
year presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings.

Foreign Currency Translation

The Company translates the assets and liabilities
of its foreign subsidiaries stated in local functional
currencies to U.S. dollars at the rates of exchange in
effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period.
Gains and losses from translation of financial statements
denominated in foreign currencies, if material, are included as
a separate component of other comprehensive income (loss) in the
Consolidated Statements of Stockholders Equity.

The Company records foreign currency transactions
at the exchange rate prevailing at the date of the transaction.
Monetary assets and liabilities denominated in foreign currency
are retranslated at the exchange rates in effect at the balance
sheet date. All translation differences arising from foreign
currency transactions are recorded through profit and loss. The
Company recorded foreign currency translation gains (losses) of
approximately ($16,000), ($39,000), and $113,000 for 2003, 2002,
and 2001 respectively.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from these estimates.

39



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Cash, Cash Equivalents and Short-Term
Investments

The Company invests its excess cash in deposits,
money market accounts, and high quality marketable debt
securities. The Company considers all highly liquid investments
with a maximum original maturity of 90 days or less at the
time of purchase to be cash equivalents.

The Company accounts for its investments in
marketable securities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). Management
determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each
balance sheet date. The Companys investments are
classified as available-for-sale and are carried at fair market
value. The fair market value is based upon market prices quoted
on the last day of the fiscal year, with unrealized gains and
losses reported as a separate component of other comprehensive
income (loss) in the statement of stockholders equity, if
material. Realized gains and losses and declines in value judged
to be other-than-temporary, if any, on short-term investments
are included in other income. The cost of securities sold is
based on the specific identification method. Interest on
securities classified as available-for-sale is included in
interest income.

Restricted Cash

In connection with the acquisition of Jones
Chromatography, Ltd. (Jones Group), the Company
deposited $10.9 million (£7,650,000) denominated in
British Pounds Sterling as collateral for the notes payable
issued in the same amount and recorded the deposit as restricted
cash. The restricted cash serves as collateral for the guarantee
by Barclays Bank PLC of the notes payable principal and
interest. At December 31, 2003, the US dollar
equivalent of the notes payable was $12.2 million.
Additionally, the Company has deposited approximately $125,000
as collateral in accordance with the provisions of a sublease
agreement for its Foster City facility. The restricted cash
is invested in money market instruments to yield rates
approximate to the interest rates due on the notes payable.

Revenue Recognition

In May 2003, the Financial Accounting Standards
Boards Emerging Issues Task
Force (EITF) finalized criteria governing how to
identify whether goods or services, or both, that are to be
delivered separately in a bundled sales arrangement should be
accounted for separately and issued EITF 00-21
Revenue Arrangements with Multiple Deliverables. The
guidance in EITF 00-21 is effective for revenue
arrangements entered into after July 1, 2003. The effect of
adopting EITF Issue No. 00-21 did not and is not
expected to have a material impact on the Companys
financial condition or results of operations.

In an arrangement with multiple deliverables, the
delivered item(s) are considered a separate unit of accounting
if the delivered item(s) has value on a standalone basis; if
there is objective evidence of the fair value of the undelivered
item(s); and, if the arrangement includes a general right of
return relative to the delivered item, delivery or performance
of the undelivered item(s) is considered probable and
substantially in the control of the vendor.

There are standard products offered by Argonaut
where consideration of EITF 00-21 is applicable. Generally,
these standard situations are transacted as separate line items
in the sales order/ purchase order and are priced separately. In
these normal situations, the multiple items are priced and sold
separately, clearly have standalone value to the customer as
evidenced by history of sales to other customers on a standalone
basis, and the revenue recognition is triggered upon shipment of
the line item to the customer.

For each arrangement, the Company determines
whether persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, collectibility is
reasonably assured and fees are fixed or determinable. If any of
these criteria are not met, revenue recognition is deferred
until all of the criteria are met.

40



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

Revenue related to product sales with no future
obligation is recognized upon shipment when the recognition
criteria have been met. For those products where we have
obligations to provide installation services, revenue is
recognized upon installation when all other recognition criteria
have been met. Sales that require customer acceptance are not
recognized as revenue until the acceptance and all other revenue
recognition requirements have been met.



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

Maintenance contract revenue, including revenue
for extended warranties, is recognized ratably over the
contractual term, training, contract research and development,
and other services revenue is recognized as the services are
rendered.

Shipping and Handling Costs

Shipping and handling costs are classified as a
component of cost of products.

Product Warranty

The Company generally warrants its equipment for
a period of one year and provides a reserve for estimated
warranty costs concurrent with the recognition of revenue. The
Company also sells warranty extensions and the related revenue
is recognized ratably over the term of the extension. Warranty
costs incurred during the extension period are expensed as
incurred.

Changes in the Companys product warranty
accrual for the years ended December 31, 2003 and 2002 are
as follows (in thousands):

|                             |  |        |      |  
|---------------------------- |  | ------ | ---- | -
|                             |  | Amount
|                             |  |       
|Balance at December 31, 2001 |  | $      | 392  |  
|Cost of warranty repair      |  |        | (161 | )
|Increase in warranty accrual |  |        | (20  | )
|                             |  |        |      |  
|Balance at December 31, 2002 |  |        | 211  |  
|Cost of warranty repair      |  |        | (336 | )
|Increase in warranty accrual |  |        | 324  |  
|                             |  |        |      |  
|Balance at December 31, 2003 |  | $      | 199  |  
|                             |  |        |      |  

Software Development Costs

Software development costs included in the
research and development of new products and enhancements to
existing products are expensed as incurred until technological
feasibility in the form of a working model has been established.
To date, software development costs subsequent to reaching
feasibility have not been significant and accordingly, no costs
have been capitalized.

Advertising Costs

Advertising costs are accounted for as expenses
in the period in which they are incurred. Advertising expense
for 2003, 2002, and 2001 was approximately $727,000,
$1.3 million, $696,000, respectively.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
its customers to make required payments. The Company evaluates
the collectibility of its trade accounts receivable based on a
number of factors. In circumstances where the Company is aware
of a specific customers inability to meet its financial
obligations to the Company, a specific allowance for bad debts
is estimated and recorded which reduces the recognized
receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are
recorded based on the Companys recent past loss history
and an overall assessment of past due trade accounts receivable
amounts outstanding. The expenses recorded for doubtful accounts
were approximately $10,000 in 2003, $58,000 in 2002, and
$104,000 in 2001.

Inventories

Inventories are stated at the lower of cost (on a
first-in, first-out cost method) or market value. We record
adjustments to the value of inventory based upon a detailed
assessment at each balance sheet date which reviews, among other
factors, the forecasted demand and plans to sell our
inventories. The physical condition (e.g., age and quality)
of the inventory is also considered in establishing its
valuation, as well as product lifecycle and product development
plans. Based on this analysis, we reduce the cost of inventory
that we specifically identify and consider obsolete or excessive
to fulfill future sales estimates. These adjustments are
estimates, which could vary significantly, either favorably or
unfavorably, from actual requirements if future economic
conditions, customer inventory levels or competitive conditions
differ from our expectations.

Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line method over
the estimated useful lives of the assets, which range from two
to five years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life.

Long-Lived Assets

Long-lived assets are reviewed for impairment
when events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values.

Goodwill and Other Purchased Intangible
Assets

Goodwill and other purchased intangible assets
have resulted from the acquisition of Camile Products, LLC, now
Argonaut Technologies Systems, Inc. (ATSI) and
the Jones Group. Goodwill and other intangible assets with
indefinite lives are not amortized subsequent to the
Companys adoption of SFAS 142, Goodwill and
Other Intangible Assets (SFAS 142).

All goodwill and intangible assets have been
assigned to one of two reporting units. The Argonaut
(AGNT)-Legacy reporting unit consists primarily of
goodwill and intangible assets related to the Companys
acquisition of ATSI. The Jones-Group reporting unit consists of
goodwill and intangible assets deriving from the Companys
acquisition of Jones Chromatography, Ltd.

During the third quarter ended September 30,
2003 the Company performed an interim test for goodwill
impairment in light of lower than expected third quarter
revenue. Based on the discounted cash flows of the AGNT-Legacy
reporting unit, the Company recognized an impairment charge of
$1.6 million relating to the

42



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

goodwill and intangible assets associated with
ATSI. Approximately $763,000 of the impairment charge was
related to goodwill associated with ATSI, and the remainder was
related to completed technology assets associated with the
acquisition of ATSI.

The Company performed the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth quarter of fiscal
2003, determining that no further impairment was indicated. The
Company determined the fair value of intangible assets with
indefinite lives based on a present value analysis of the
discounted future cash flows.

Concentrations of Risk

Financial instruments that potentially subject
the Company and its subsidiaries to concentrations of credit
risk consist primarily of cash, cash equivalents, investments
and accounts receivable. In addition, the Company outsources
part of its manufacturing process to third party contractors.
There are no other third party contractors who could readily
assume this manufacturing function on short notice. Any delay in
production could result in failure to meet customer demand.

Cash equivalents and investments are financial
instruments, which potentially subject the Company to
concentration of risk to the extent recorded on the balance
sheet. Management of the Company believes it has established
guidelines for investment of its excess cash relative to
diversification and maturities that maintain safety and
liquidity.

The majority of cash, cash equivalents and
investments are invested in major financial institutions in the
United States. Such deposits may be in excess of insured limits
and are not insured in other jurisdictions. Management believes
that the financial institutions that hold the Companys
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.

The accounts receivable of the Company and its
subsidiaries are derived from sales to customers located
primarily in the United States and Europe. The Company performs
ongoing credit evaluations of its customers.

An allowance for doubtful accounts is determined
with respect to those amounts that the Company has determined to
be doubtful of collection. At December 31, 2003 and 2002,
no customer accounted for 10% or more of the Companys
accounts receivable balance. At December 31, 2003 and 2002,
accounts receivable due from foreign customers as a percent of
total trade receivables were 57% and 48%, respectively. The
Company generally does not require collateral.

The Company has no off-balance-sheet
concentration of credit risk such as foreign exchange contracts,
option contracts, or other hedging arrangements.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Accounting for Stock-Based
Compensation

The Company accounts for its stock-based employee
compensation as permitted by Statement of Financial Accounting
Standard No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by
Statement of Financial Accounting Standard No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, whereby stock-based employee
compensation arrangements are accounted for under the intrinsic
value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25). Under APB 25,
when the exercise price of the Companys stock options is
less than the market price of the underlying shares on the date
of grant, compensation expense is recognized. Pro forma
information regarding net loss per share is required by
SFAS 123 as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. The
fair value of these options granted prior to the Companys
initial public offering in July 2000 was estimated at the date
of grant using the minimum value method. The fair value of stock
options granted subsequent to the initial public offering were
valued using the Black-Scholes valuation model based on the
actual stock closing price on the date of grant. The fair value
of these options was estimated at the date of grant using the
following weighted-average assumptions:

|                               |  |                          |          |      |  |      |          |   |  |  |          |  
|------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                               |  |                         
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 2003                     |          | 2002 |  | 2001
|                               |  |                          |          |      |  |     
|Risk-free interest rate        |  |                          | 2.36     | %    |  |      | 3.61     | % |  |  | 3.82     | %
|Dividend yield                 |  |                          |         |      |  |      |         |   |  |  |         |  
|Weighted-average expected life |  |                          | 4  years |      |  |      | 4  years |   |  |  | 4  years |  
|Volatility                     |  |                          | 1.06     |      |  |      | 0.94     |   |  |  | 0.87     |  

The fair value of shares purchased in the
Companys Employee Stock Purchase Plan (the Purchase
Plan) was estimated at the date of purchase using the
following weighted-average assumptions:

|                               |  |                          |            |      |  |      |            |   |  |  |            |  
|------------------------------ |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                               |  |                         
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 2003                     |            | 2002 |  | 2001
|                               |  |                          |            |      |  |     
|Risk-free interest rate        |  |                          | 1.68       | %    |  |      | 1.94       | % |  |  | 2.49       | %
|Dividend yield                 |  |                          |           |      |  |      |           |   |  |  |           |  
|Weighted-average expected life |  |                          | 0.5  years |      |  |      | 0.5  years |   |  |  | 0.5  years |  
|Volatility                     |  |                          | 0.81       |      |  |      | 0.94       |   |  |  | 0.81       |  

The pro forma disclosures required by
SFAS 123 are as follows (in thousands, except per share
amounts):

|                                                                                                             |  |                          |        |          |  |          |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | -------- |  | -------- | ------- | - |  | - | ------- | -
|                                                                                                             |  |                         
|                                                                                                             |  | Years Ended December 31,
|                                                                                                             |  |                         
|                                                                                                             |  | 2003                     |        | 2002     |  | 2001    
|                                                                                                             |  |                          |        |          |  |         
|                                                                                                             |  |                          |        | restated |  | restated
|Net loss, as reported                                                                                        |  | $                        | (8,152 | )        |  | $        | (13,858 | ) |  | $ | (20,795 | )
|Stock-based employee compensation expense
    included in reported net loss                                  |  |                          | 65     |          |  |          | 222     |   |  |   | 1,690   |  
|Total stock-based employee compensation expense
    determined under fair value based methods for all awards |  |                          | (1,570 | )        |  |          | (1,383  | ) |  |   | (2,647  | )
|                                                                                                             |  |                          |        |          |  |          |         |   |  |   |         |  
|Pro forma net loss                                                                                           |  | $                        | (9,657 | )        |  | $        | (15,019 | ) |  | $ | (21,752 | )
|                                                                                                             |  |                          |        |          |  |          |         |   |  |   |         |  
|Basic and diluted net loss per common share, as
    reported                                                 |  | $                        | (0.40  | )        |  | $        | (0.70   | ) |  | $ | (1.09   | )
|                                                                                                             |  |                          |        |          |  |          |         |   |  |   |         |  
|Pro forma basic and diluted net loss per common
    share                                                    |  | $                        | (0.48  | )        |  | $        | (0.76   | ) |  | $ | (1.14   | )
|                                                                                                             |  |                          |        |          |  |          |         |   |  |   |         |  

Prior year amounts have been restated to correct
a clerical error.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Equity instruments granted to non-employees are
accounted for using the Black-Scholes valuation model prescribed
by SFAS 123 and, in accordance with Emerging Issues Task
Force Consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or
Services. The equity instruments are subject to periodic
revaluations over their vesting terms. The expense is recognized
as the instruments vest.

Comprehensive Loss

SFAS No. 130, Reporting
Comprehensive Income (SFAS 130), requires
unrealized gains or losses on the Companys investments
designated as available-for-sale securities and foreign currency
translation adjustments to be included as part of total
comprehensive loss. Total comprehensive loss has been disclosed
in the consolidated statement of stockholders equity.

Net Loss Per Share

Net loss per share has been computed according to
the SFAS No. 128, Earnings Per Share,
which requires disclosure of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects of
options, shares subject to repurchase, warrants, and convertible
securities. Diluted earnings per share includes the impact of
potentially dilutive securities (calculated using the treasury
stock method).

During all periods presented, the Company had
securities outstanding that could potentially dilute basic
earnings per common share in the future, but were excluded from
the computation of diluted net loss per common share, as their
effect would have been antidilutive. These outstanding
securities consist of the following (in thousands):

|                     |  |              |       |      |  |      |       |  |  |  |       | 
|-------------------- |  | ------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2003         |       | 2002 |  | 2001
|                     |  |              |       |      |  |     
|Outstanding options  |  |              | 3,637 |      |  |      | 4,062 |  |  |  | 2,875 | 
|Outstanding warrants |  |              | 63    |      |  |      | 81    |  |  |  | 81    | 

Recent Accounting Pronouncements

In November of 2002, the EITF reached a consensus
on Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The
effect of adopting EITF Issue No. 00-21 did not and is not
expected to have a material impact on the Companys
financial condition or results of operations.

In January of 2003, the FASB issued
FIN No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 requires a variable interest
entity (VIE) to be consolidated by a company if that
company is considered to be the primary beneficiary in a VIE.
Primary beneficiary is the party subject to a majority of the
risk of loss from the variable interest entitys activities
or entitled to receive a majority of the entitys residual
returns or both. The requirements of FIN No. 46 apply
immediately to VIEs created after January 31, 2003.
The consolidation requirements apply to older entities in the
first fiscal year or interim period ending after March 15,
2004. The Company does not currently believe it has any
investments in variable interest entities, therefore the
adoption of FIN 46 did not and is not expected to have a
material impact on the Companys financial condition or
results of operations.

In May of 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and
Equity which requires freestanding financial instruments
such as mandatory redeemable shares, forward purchase contracts
and written put options to be reported as liabilities

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

by their issuers as well as related new
disclosure requirements. The provisions of
SFAS No. 150 are effective for instruments entered
into or modified after May 31, 2003 and pre-existing
instruments as of the beginning of the first interim period that
commences after June 15, 2003. The effect of adopting
SFAS No. 150 did not have a material impact on the
Companys financial condition or results of operations.



|         |                     
|-------- | --------------------
|Note 2  | Business Combination

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

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

In the transaction, the stockholders of JCL
exchanged all of their respective shares of JCLs stock for
(i) cash in an aggregate amount of £3,825,000
($5,431,500), (ii) 572,152 shares of unregistered
Argonaut Common Stock, and (iii) notes payable in the
aggregate principal amount of £7,650,000 ($10,863,000). The
aggregate purchase price, including transaction costs of
$875,000, was approximately $19.0 million. Barclays Bank
PLC guarantees the notes payable, which are redeemable for cash
over a two-year period following the closing date. In addition,
certain employees of the Jones Group that remained as employees
after the transaction received stock options to purchase an
aggregate 349,800 shares of Argonauts Common Stock at
an average price per share of $3.1967.

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

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

The Company allocated the purchase price based on
the estimated fair value of the net tangible and intangible
assets acquired. Based on the information obtained from an
independent valuation, the Company allocated the purchase price
as follows (in thousands):

|                                                |             |   |        |       | 
|----------------------------------------------- | ----------- | - | ------ | ----- | 
|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 |      
|                                                |             |   |        |      

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                   |  |                        |         |  
|------------------ |  | ---------------------- | ------- | -
|                   |  | 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

On August 8, 2002, the Company announced its
intention to execute a restructuring program focused on
improving productivity, reducing operational expenses in remote
offices, and implementing a workforce reduction of approximately
20% of its existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third
quarter ended September 30, 2002. The charge includes
termination benefits and related expenses of approximately
$630,000 related to the reduction of the workforce by 44
employees, expenses of approximately $683,000 related to the
abandonment of excess equipment, expenses of approximately
$356,000 for the abandonment of excess leased facilities, and
expenses of approximately $133,000 for various other related
charges. At December 31, 2003, 40 of the 44 employees had
been terminated.

A summary of the restructuring charges is as
follows (in thousands):

|                                        |  |             |       |         |  |               |      |              |  |               |      |              |  |              |     |  |  |   |      |   |  |   |      |   |  |   |     | 
|--------------------------------------- |  | ----------- | ----- | ------- |  | ------------- | ---- | ------------ |  | ------------- | ---- | ------------ |  | ------------ | --- |  |  | - | ---- | - |  | - | ---- | - |  | - | --- | 
|                                        |  |             |       |         |  |              
|                                        |  |             |       | 2002    |  | 2003         
|                                        |  |             |       |         |  |              
|                                        |  |             |       |         |  | Accrued       |      |              |  | Accrued      
|                                        |  |             |       |         |  | Restructuring |      |              |  | Restructuring
|                                        |  |             |       |         |  | at            |      |              |  | Noncash       |      | at          
|                                        |  | Charge in   |       | Noncash |  | Cash          |      | December 31, |  | Cash          |      | Charges      |  | December 31,
|                                        |  | August 2002 |       | Charges |  | Payments      |      | 2002         |  | Payments      |      | (Recoveries) |  | 2003        
|                                        |  |             |       |         |  |               |      |              |  |               |      |              |  |             
|Workforce reductions                    |  | $           | 630   |         |  | $             |     |              |  | $             | (212 | )            |  | $            | 418 |  |  | $ | (348 | ) |  | $ |     |   |  | $ | 70  | 
|Abandonment of excess equipment         |  |             | 683   |         |  |               | (683 | )            |  |               |     |              |  |              |    |  |  |   |     |   |  |   |     |   |  |   |    | 
|Abandonment of excess leased facilities |  |             | 356   |         |  |               |     |              |  |               |     |              |  |              | 356 |  |  |   | (49  | ) |  |   | (219 | ) |  |   | 88  | 
|Other                                   |  |             | 133   |         |  |               |     |              |  |               | (30  | )            |  |              | 103 |  |  |   | (138 | ) |  |   | 35   |   |  |   |    | 
|                                        |  |             |       |         |  |               |      |              |  |               |      |              |  |              |     |  |  |   |      |   |  |   |      |   |  |   |     | 
|Total                                   |  | $           | 1,802 |         |  | $             | (683 | )            |  | $             | (242 | )            |  | $            | 877 |  |  | $ | (535 | ) |  | $ | (184 | ) |  | $ | 158 | 
|                                        |  |             |       |         |  |               |      |              |  |               |      |              |  |              |     |  |  |   |      |   |  |   |      |   |  |   |     | 

Remaining cash expenditures relating to workforce
reduction will be paid in the first half of 2004. Amounts
related to the abandonment of excess leased facilities will be
paid as the lease payments are due through the remainder of the
lease terms through 2004. At December 31, 2003 the Company
revised certain estimates of outstanding restructuring
obligations. As a result, a recovery of approximately $184,000
was recorded as a credit to restructuring charges.

Note 4  Goodwill and Other
Purchased Intangibles

Goodwill and other purchased intangible assets
have resulted from the acquisition of Camile Products, LLC, now
Argonaut Technologies Systems, Inc. (ATSI) and
the Jones Group. Goodwill and other intangible assets with
indefinite lives are not amortized subsequent to the
Companys adoption of SFAS 142, Goodwill and
Other Intangible Assets (SFAS 142).

47



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

All goodwill and intangible assets have been
assigned to one of two reporting units. The AGNT-Legacy
reporting unit consists primarily of goodwill and intangible
assets related to the Companys acquisition of ATSI. The
Jones-Group reporting unit consists of goodwill and intangible
assets deriving from the Companys acquisition of Jones
Chromatography, Ltd.

During the third quarter ended September 30,
2003 the Company performed an interim test for goodwill
impairment in the light of lower than expected third quarter
revenue. Based on the discounted cash flows of the AGNT-Legacy
reporting unit, the Company recognized an impairment charge of
$1.6 million relating to the goodwill and intangible assets
associated with ATSI. Approximately $763,000 of the impairment
charge was related to goodwill associated with ATSI, and the
remainder was related to completed technology assets associated
with the acquisition of ATSI.

The Company performed the annual test for
impairment of intangible assets with indefinite lives as
prescribed by SFAS 142 during the fourth quarter of fiscal
2003, determining that no further impairment was indicated. The
Company determined the fair value of intangible assets with
indefinite lives based on a present value analysis of the
discounted future cash flows.

The amortization expense relating to the
purchased intangible assets for the twelve-month periods ended
December 31, 2003 and 2002 was $850,000 and $785,000
respectively.

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

|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ----- | - | ----------- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          | Years Ended December 31,             
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          |                                       |        | 2001 
|                                                                                                       |                                                                                                          | 2003                                  |        | 2002  |   | (Pro forma)
|                                                                                                       |                                                                                                          |                                       |        |       |   |            
|                                                                                                       |                                                                                                          |                                      
|                                                                                                       |                                                                                                          | (In thousands, except per share data)
|Reported net loss                                                                                      |                                                                                                          | $                                     | (8,152 | )     |   | $           | (13,858 | )     |   | $ | (20,795 | )    
|Amortization of goodwill and identifiable
    intangible assets with indefinite lives                  |                                                                                                          |                                       |       |       |   |             |        |       |   |   | 827     |      
|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      
|Pro forma net loss                                                                                     |                                                                                                          | $                                     | (8,152 | )     |   | $           | (13,858 | )     |   | $ | (19,968 | )    
|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      
|Basic and diluted net loss per share:                                                                  |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      
|                                                                                                       | Reported net loss per share                                                                              |                                       | $      | (0.40 | ) |             | $       | (0.70 | ) |   | $       | (1.09 | )
|                                                                                                       | Adjustment related to goodwill and identifiable
    intangible assets with indefinite lives amortization |                                       |        |      |   |             |         |      |   |   |         | 0.04  |  
|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      
|                                                                                                       | Pro forma net loss per share                                                                             |                                       | $      | (0.40 | ) |             | $       | (0.70 | ) |   | $       | (1.05 | )
|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      
|Outstanding shares used in calculating reported
    and pro forma basic and diluted net loss per share |                                                                                                          |                                       | 20,160 |       |   |             | 19,876  |       |   |   | 19,048  |      
|                                                                                                       |                                                                                                          |                                       |        |       |   |             |         |       |   |   |         |      

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following represents the gross carrying
amounts and accumulated amortization of amortized intangible
assets at December 31, 2003 and 2002 (in thousands):

|                             |                      |          |   |              |       |          |   |              |        |   |   |       |       |  |   |      |      |  
|---------------------------- | -------------------- | -------- | - | ------------ | ----- | -------- | - | ------------ | ------ | - | - | ----- | ----- |  | - | ---- | ---- | -
|                             |                      |          |   |             
|                             |                      | 2003     |   | 2002        
|                             |                      |          |   |             
|                             |                      | Gross    |   |              |       | Gross    |   |             
|                             |                      | Carrying |   | Accumulated  |       | Carrying |   | Accumulated 
|                             |                      | Amount   |   | Amortization |       | Amount   |   | Amortization
|                             |                      |          |   |              |       |          |   |             
|Amortized intangible assets: |                      |          |   |              |       |          |   |              |        |   |   |       |       |  |   |     
|                             | Completed technology |          | $ | 5,539        |       |          | $ | (2,520       | )      |   | $ | 5,539 |       |  | $ | (691 | )   
|                             | Licenses             |          |   | 1,435        |       |          |   | (180         | )      |   |   | 1,400 |       |  |   | (50  | )   
|                             | Tradenames           |          |   | 250          |       |          |   | (53          | )      |   |   | 250   |       |  |   | (23  | )   
|                             |                      |          |   |              |       |          |   |              |        |   |   |       |       |  |   |     
|                             |                      | Total    |   | $            | 7,225 |          |   | $            | (2,753 | ) |   | $     | 7,189 |  |   | $    | (764 | )
|                             |                      |          |   |              |       |          |   |              |        |   |   |       |       |  |   |     

The estimated amortization expense for each of
the five succeeding fiscal years is as follows (in thousands):

|                                |                                |  |  |     | 
|------------------------------- | ------------------------------ |  |  | --- | 
|Estimated amortization expense: |                                |  |  |    
|                                | For the year ending 12/31/2004 |  |  | 760 | 
|                                | For the year ending 12/31/2005 |  |  | 758 | 
|                                | For the year ending 12/31/2006 |  |  | 696 | 
|                                | For the year ending 12/31/2007 |  |  | 633 | 
|                                | For the year ending 12/31/2008 |  |  | 590 | 

The weighted average amortization period
remaining of the amortized intangible assets at
December 31, 2003 is as follows (in thousands):

|                             |                      |       |  |     |     | 
|---------------------------- | -------------------- | ----- |  | --- | --- | 
|                             |                      | Years
|                             |                      |      
|Amortized intangible assets: |                      |       |  |    
|                             | Completed technology |       |  | 7.6 |    
|                             | Licenses             |       |  | 5.8 |    
|                             | Tradenames           |       |  | 7.7 |    
|                             |                      |       |  |    
|                             |                      | Total |  |     | 7.1 | 
|                             |                      |       |  |    

The carrying amount of indefinite lived
intangible assets at December 31, 2003 and 2002 is as
follows (in thousands):

|                               |                                                 |       |   |       |       |  |   |       |        | 
|------------------------------ | ----------------------------------------------- | ----- | - | ----- | ----- |  | - | ----- | ------ | 
|                               |                                                 | 2003  |   | 2002 
|                               |                                                 |       |   |      
|Unamortized intangible assets: |                                                 |       |   |       |       |  |   |      
|                               | Assembled workforce                             |       | $ | 1,460 |       |  | $ | 1,460 |       
|                               | Customer base                                   |       |   | 1,220 |       |  |   | 1,220 |       
|                               | Goodwill and indefinite lived intangible assets |       |   | 6,730 |       |  |   | 7,493 |       
|                               |                                                 |       |   |       |       |  |   |      
|                               |                                                 | Total |   | $     | 9,410 |  |   | $     | 10,173 | 
|                               |                                                 |       |   |       |       |  |   |      

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
for the year ended December 31, 2003 and 2002 are as
follows (in thousands):

|                              |  |      |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                              |  | 2003 |        | 2002
|                              |  |      |        |     
|Balance at January 1          |  | $    | 10,173 |      |  | $ | 763    | 
|Goodwill acquired during year |  |      |       |      |  |   | 9,410  | 
|Impairment losses             |  |      | (763   | )    |  |   |       | 
|                              |  |      |        |      |  |   |        | 
|Balance at December 31        |  | $    | 9,410  |      |  | $ | 10,173 | 
|                              |  |      |        |      |  |   |        | 



|         |            
|-------- | -----------
|Note 5  | Investments

Investments consist of the following (in
thousands):

At December 31, 2003 the maturity of
investments was between one and twenty months. At
December 31, 2002, the maturity of investments was between
one and twelve months.

|                            |                        |               |        |       |  |   |        |        | 
|--------------------------- | ---------------------- | ------------- | ------ | ----- |  | - | ------ | ------ | 
|                            |                        |              
|                            |                        | Fair Value at
|                            |                        | December 31, 
|                            |                        |              
|                            |                        | 2003          |        | 2002 
|                            |                        |               |        |      
|Money market funds          |                        | $             | 2,807  |       |  | $ | 23     |       
|U.S. government obligations |                        |               | 3,850  |       |  |   | 23,906 |       
|Corporate bonds             |                        |               | 5,432  |       |  |   |       |       
|                            |                        |               |        |       |  |   |        |       
|                            |                        | $             | 12,089 |       |  | $ | 23,929 |       
|                            |                        |               |        |       |  |   |        |       
|Reported as:                |                        |               |        |       |  |   |        |       
|                            | Cash equivalents       |               | $      | 2,807 |  |   | $      | 17,930 | 
|                            | Short term investments |               |        | 3,850 |  |   |        | 5,999  | 
|                            | Long term investments  |               |        | 5,432 |  |   |        |       | 
|                            |                        |               |        |       |  |   |        |       
|                            |                        | $             | 12,089 |       |  | $ | 23,929 |       
|                            |                        |               |        |       |  |   |        |       

There were no material gross realized gains or
losses from sales of securities in the periods presented.
Unrealized gains (losses) were ($7,000) and $4,000 at
December 31, 2003 and 2002, respectively.



|         |            
|-------- | -----------
|Note 6  | Inventories

Inventories consist of the following (in
thousands):

|                |  |              |       |              |  |   |       | 
|--------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                |  | December 31, |       | December 31,
|                |  | 2003         |       | 2002        
|                |  |              |       |             
|Raw materials   |  | $            | 5,063 |              |  | $ | 4,514 | 
|Work in process |  |              | 429   |              |  |   | 709   | 
|Finished goods  |  |              | 1,454 |              |  |   | 1,057 | 
|                |  |              |       |              |  |   |       | 
|                |  | $            | 6,946 |              |  | $ | 6,280 | 
|                |  |              |       |              |  |   |       | 

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 7  Property and
Equipment

Property and equipment consists of the following
(in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |        | 2002
|                                               |  |              |        |     
|Laboratory and office equipment                |  | $            | 6,994  |      |  | $ | 7,362  |  
|Property                                       |  |              | 2,095  |      |  |   | 2,088  |  
|Leasehold improvements                         |  |              | 1,217  |      |  |   | 1,243  |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 10,306 |      |  |   | 10,693 |  
|Less accumulated depreciation and amortization |  |              | (5,852 | )    |  |   | (5,772 | )
|                                               |  |              |        |      |  |   |        |  
|Property and equipment, net                    |  | $            | 4,454  |      |  | $ | 4,921  |  
|                                               |  |              |        |      |  |   |        |  

Equipment leased under capital leases is included
in laboratory and office equipment. At December 31, 2003
and 2002, equipment under capital leases was approximately
$38,000 and $252,000 with accumulated amortization of
approximately $6,000 and $92,000, respectively.

Note 8  Commitments



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

The Company leases its primary office and
research facilities in Foster City, California, an office
facility in Indianapolis, Indiana, an office facility in
Midland, Michigan and a research facility in Tucson, Arizona as
well as locations in Basel, Switzerland and Tokyo, Japan under
operating leases. The Company finances certain laboratory and
office equipment under capital leases. Future minimum annual
lease payments under all non-cancelable leases are as follows
(in thousands):

|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 
|------------------------------------------- |  | ------- | -- | ---------------- |  | ------------- | --- | ---------- |  | - | -- |  |  | - | --- | 
|                                            |  |         |    |                 
|                                            |  |         |    | Operating Leases
|                                            |  |         |    |                 
|                                            |  |         |    |                  |  | Amounts       |     |           
|                                            |  |         |    | Total            |  | Included in   |     |           
|                                            |  | Capital |    | Cash             |  | Restructuring |     | Remaining 
|Year Ending December 31,                    |  | Leases  |    | Obligation       |  | Liability     |     | Obligation
|                                            |  |         |    |                  |  |               |     |           
|2004                                        |  | $       | 9  |                  |  | $             | 610 |            |  | $ | 89 |  |  | $ | 521 | 
|2005                                        |  |         | 9  |                  |  |               | 37  |            |  |   |   |  |  |   | 37  | 
|2006                                        |  |         | 8  |                  |  |               | 13  |            |  |   |   |  |  |   | 13  | 
|2007                                        |  |         | 7  |                  |  |               |    |            |  |   |   |  |  |   |    | 
|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 
|Total                                       |  | $       | 33 |                  |  | $             | 660 |            |  | $ | 89 |  |  | $ | 571 | 
|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 
|Less amount representing interest           |  |         | (2 | )                |  |               |     |            |  |   |    |  |  |   |     | 
|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 
|Present value of future lease payments      |  |         | 31 |                  |  |               |     |            |  |   |    |  |  |   |     | 
|Less current portion                        |  |         | (8 | )                |  |               |     |            |  |   |    |  |  |   |     | 
|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 
|Noncurrent obligations under capital leases |  | $       | 23 |                  |  |               |     |            |  |   |    |  |  |   |     | 
|                                            |  |         |    |                  |  |               |     |            |  |   |    |  |  |   |     | 

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The Company has minimum royalty commitments
pursuant to a software development and license agreement. The
minimum royalties under this agreement are as follows:

|                         |  |           |     | 
|------------------------ |  | --------- | --- | 
|                         |  | Minimum  
|Year Ending December 31, |  | Royalties
|                         |  |          
|2004                     |  | $         | 81  | 
|2005                     |  |           | 81  | 
|2006                     |  |           | 25  | 
|2007                     |  |           | 25  | 
|2008                     |  |           | 25  | 
|                         |  |           |     | 
|Total                    |  | $         | 237 | 
|                         |  |           |     | 



| |              
| | -------------
| | Rent expense:

Rent expense under operating leases was
approximately $1.1 million, $1.1 million, and
$1.2 million, in 2003, 2002, and 2001, respectively.



| |       
| | ------
| | Other:

The Company from time to time enters into certain
types of contracts that contingently require the Company to
indemnify parties against third party claims. These contracts
primarily relate to: (i) certain real estate leases, under
which the Company may be required to indemnify property owners
for environmental and other liabilities, and other claims
arising from the Companys use of the applicable premises;
and (ii) certain agreements with the Companys
officers, directors and employees, under which the Company may
be required to indemnify such persons for liabilities arising
out of their employment relationship.

The terms of such obligations vary. Generally, a
maximum obligation is not explicitly stated. Because the
obligated amounts of these types of agreements often are not
explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has
not been obligated to make significant payments for these
obligations, and no liabilities have been recorded for these
obligations on its balance sheet as of December 31, 2003.

Note 9  Debt

In connection with the acquisition of Jones
Group, the Company issued notes payable of approximately
$10.9 million. The notes payable are denominated in British
Pound Sterling in the amount of £7,650,000
($12.2 million as of December 31, 2003) and interest
is payable to the note holders at an initial rate of
3.9% per annum for the first twelve month period (ending
February 20, 2003), and subsequently at the rate equal to
the published base rate of Barclays Bank PLC on the date
immediately preceding each quarterly interest period, less any
fees and costs. The Company deposited cash in the amount of
£7,650,000 ($10.9 million at origination) with
Barclays Bank PLC as collateral for the principal and interest
on the notes payable. The cash amounts held as collateral are
represented as restricted cash in the Companys balance
sheet and are invested in money market instruments to yield
rates approximate to the interest rates due on the notes
payable. The notes payable are due on April 30, 2004.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 10  Stockholders
Equity



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

Pursuant to our charter, our board of directors
has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote of action by our stockholders.
At December 31, 2003 and 2002, zero shares were issued and
outstanding.

Common Stock

In February 2002, the Company issued
572,152 shares of unregistered common stock in connection
with the acquisition of Jones Group.

In March 2001, the Company issued
666,667 shares of unregistered common stock in connection
with the acquisition of ATSI.



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

On August 8, 2002, the Company announced the
approval by its Board of Directors of a stock repurchase program
pursuant to which shares of its outstanding common stock having
an aggregate value of up to $500,000 may be repurchased through
open market transactions at prices deemed appropriate by the
Company. The duration of the stock repurchase program is
open-ended. The timing and amount of repurchase transactions
under this program will depend on market conditions, corporate
and regulatory considerations, and will be funded from available
working capital. At December 31, 2003, the Company had
repurchased 50,000 shares of outstanding common stock at an
average price of $0.93 per share.



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

In 1997, the Company issued a series of warrants
to purchase 30,799 shares of common stock at an exercise
price of $6.82 per share in connection with the execution
of a capital lease line and a loan and security agreement. These
warrants expire at various dates through December 2004. At
December 31, 2003, all of these warrants were still
outstanding.

In 1998, the Company issued two warrants to
purchase a total of 32,266 shares of common stock at an
exercise price of $6.82 per share in connection with two
loan agreements entered into in July 1998. These warrants expire
in July 2005. At December 31, 2003, all of these warrants
were still outstanding. The fair value of these warrants,
determined using a Black-Scholes valuation model, was $40,699
and has been recorded as interest expense over the term of the
respective loan.

In 1999, the Company issued a warrant to purchase
17,600 shares of common stock at an exercise price of
$6.82 per share in connection with a draw down on one of
its loans. The warrant expired in January 2003. At
December 31, 2003, this warrant was no longer outstanding.
The fair value of the warrant, determined using the
Black-Scholes valuation model, was $22,200 and has been recorded
as interest expense over the term of the loan.



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

The Companys 1995 Incentive Stock Plan (the
1995 Plan) provides for (i) the grant of
incentive stock options to employees, (ii) the grant of
non-statutory stock options to employees and consultants, and
(iii) the grant of stock purchase rights. A total of
3,464,179 shares of common stock have been authorized for
issuance under the 1995 Plan.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Under the terms of the 1995 Plan, the options and
purchase rights granted generally vest at a rate of 25% at the
end of the first year with the remaining balance vesting in
equal amounts over the next 36 months.



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

In April 2000, the Company adopted its 2000
Incentive Stock Plan (the 2000 Plan) and initially
reserved a total of 1,760,000 shares of common stock for
issuance. Under the terms of the 2000 Plan, the number of shares
reserved shall increase annually on the first day of the
Companys fiscal year beginning 2001 by the lesser of
(i) 1,320,000 shares, (ii) 5% of the outstanding
shares on such date or (iii) an amount determined by the
Board. The 2000 Plan provides for (i) the grant of
incentive stock options to employees, (ii) the grant of
non-statutory stock options to employees and consultants, and
(iii) the grant of stock purchase rights. The 2000 Plan
permits options and or purchase rights to be granted at an
exercise price of not less than 100% of the fair value on the
date of the grant. The vesting term of option and purchase
rights is determined by the Board of Directors and is generally
over four years. A summary of activity under the Plans is as
follows:

|                             |                              |           |           |            |   |                  |           |            |   |  |      |      | 
|---------------------------- | ---------------------------- | --------- | --------- | ---------- | - | ---------------- | --------- | ---------- | - |  | ---- | ---- | 
|                             |                              | Shares    |           |            |   |                 
|                             |                              | Available |           | Number of  |   | Weighted Average
|                             |                              | for Grant |           | Options    |   | Exercise Price  
|                             |                              |           |           |            |   |                 
|Balance at December 31, 2000 |                              |           | 2,194,875 |            |   |                  | 1,616,267 |            |   |  | 3.42 |     
|                             | Additional shares authorized |           |           | 913,466    |   |                  |           |           |   |  |      |     | 
|                             | Options granted              |           |           | (1,712,575 | ) |                  |           | 1,712,575  |   |  |      | 5.34 | 
|                             | Options exercised            |           |           |           |   |                  |           | (187,030   | ) |  |      | 0.88 | 
|                             | Options canceled             |           |           | 331,066    |   |                  |           | (331,066   | ) |  |      | 5.87 | 
|                             |                              |           |           |            |   |                  |           |            |   |  |      |     
|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 |     
|                             |                              |           |           |            |   |                  |           |            |   |  |      |     

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

All options and shares were granted with exercise
prices equal to the fair value of the Companys common
stock on the date of grant. As of December 31, 2003,
information about options outstanding and options exercisable
was as follows:

|               |  |                     |           |                  |  |                  |      |                     |  |                  |      |  |  |  |           |  |  |   |      | 
|-------------- |  | ------------------- | --------- | ---------------- |  | ---------------- | ---- | ------------------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|               |  |                     |           |                  |  |                 
|               |  | Options Outstanding |           |                  |  |                 
|               |  |                     |           |                 
|               |  |                     |           | Weighted Average |  |                  |      | Options Exercisable
|               |  |                     |           | Remaining        |  |                  |      |                    
|               |  | Number of           |           | Contractual      |  | Weighted Average |      | Number of           |  | Weighted Average
|Exercise Price |  | Options             |           | Life (Years)     |  | Exercise Price   |      | Options             |  | Exercise Price  
|               |  |                     |           |                  |  |                  |      |                     |  |                 
|$0.06 - $0.85  |  |                     | 1,048,934 |                  |  |                  | 8.37 |                     |  | $                | 0.73 |  |  |  | 510,299   |  |  | $ | 0.67 | 
|$0.89 - $2.33  |  |                     | 1,004,247 |                  |  |                  | 8.09 |                     |  | $                | 1.54 |  |  |  | 621,083   |  |  | $ | 1.40 | 
|$2.49 - $4.74  |  |                     | 959,757   |                  |  |                  | 8.00 |                     |  | $                | 3.15 |  |  |  | 546,943   |  |  | $ | 3.19 | 
|$5.68 - $20.13 |  |                     | 624,048   |                  |  |                  | 7.09 |                     |  | $                | 6.69 |  |  |  | 463,254   |  |  | $ | 6.76 | 
|               |  |                     |           |                  |  |                  |      |                     |  |                  |      |  |  |  |           |  |  |   |      | 
|               |  |                     | 3,636,986 |                  |  |                  | 7.98 |                     |  | $                | 2.62 |  |  |  | 2,141,579 |  |  | $ | 2.84 | 
|               |  |                     |           |                  |  |                  |      |                     |  |                  |      |  |  |  |           |  |  |   |      | 

There were 1,253,228 and 841,026 options
exercisable as of December 31, 2002 and 2001, respectively.

The weighted-average fair value of the stock
options granted were $0.96, $1.71, and $5.34 for the years ended
December 31, 2003, 2002 and 2001, respectively.

In 2000, the Company granted 86,592 options
outside of its options plans to certain employees and one
consultant at a weighted-average exercise price of $4.53. During
2001, 22,000 options were exercised with an exercise price of
$1.14 per share. As of December 31, 2002, all
remaining options outstanding had been cancelled.

Deferred stock compensation is the difference
between the exercise price of the options and the deemed fair
value of the common stock at the date of grant. Prior to the
Companys initial public offering, the fair value was
determined based on the business factors underlying the value of
the Companys common stock on the date of grant viewed in
light of our initial public offering and the anticipated initial
public offering price per share. Subsequently, fair value was
determined based on the share price of the Companys stock
at the date of grant. The deferred stock compensation was
recorded as a component of stockholders equity and is
being amortized over the vesting periods of the options,
generally four years, using the graded vesting method. The
Company recorded deferred stock compensation of approximately
$2.8 million in the year ended December 31, 2000 and
approximately $3.8 million in the year ended
December 31, 1999 in connection with the grant of stock
options to employees. The Company has recorded amortization of
deferred stock compensation of $65,000, $222,000, and
$1.6 million, in the years ended December 31, 2003,
2002 and 2001, respectively. As of December 31, 2003, the
Company had a total of $9,000 to be amortized over the remaining
vesting period of the options.

The Company has granted options to consultants in
exchange for services. Shares granted totaled 30,850 in 2003,
62,000, in 2002 and 22,000 in 2001, The Company recorded
compensation expense related to these options of $46,000,
$49,000, and $137,000, for the years ended December 31,
2003, 2002 and 2001 respectively. In accordance with
SFAS 123 and EITF 96-18, options granted to consultants are
periodically revalued until exercised, cancelled or forfeited.

2000 Employee Stock Purchase Plan

In April 2000, the Company adopted its 2000
Employee Stock Purchase Plan (the Purchase Plan) and
initially reserved a total of 176,000 shares for issuance.
Under the terms of the Purchase Plan, the number of shares
reserved shall increase annually on the first day of the
Companys fiscal year beginning in 2001 by the lesser of
(i) 440,000 shares, (ii) 2% of the outstanding
shares on such date or (iii) a lesser amount determined by
the board. The Purchase Plan permits eligible employees to
purchase common stock at a discount through

55



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

payroll during defined offering periods. The
price at which the stock is purchased is equal to the lower of
85% of the fair market value of the common stock on the first
day of the offering or 85% of the fair market value of the
Companys common stock on the purchase date. The initial
offering period commenced on November 1, 2000. During 2003,
111,513 shares were issued under the stock purchase plan.

Reserved Shares

As of December 31, 2003, the Company has
reserved shares of common stock for future issuance as follows:

|                             |  |  |           | 
|---------------------------- |  |  | --------- | 
|Warrants                     |  |  | 63,065    | 
|Incentive stock plans        |  |  | 5,159,196 | 
|Employee Stock Purchase Plan |  |  | 615,609   | 
|                             |  |  |           | 
|                             |  |  | 5,837,870 | 
|                             |  |  |           | 

Note 11  Realized Gain on the
Sale of Net Assets

On July 30, 2003, the Company announced the
sale of its HPLC business to the Grace Vydac business unit of
W.R. Grace & Co. The sale included the Genesis®
and ApexTM brands of HPLC columns and HPLC-related
capital assets and trademarks. The divestiture enables the
Company to focus R&D and sales and marketing efforts on core
product areas providing consumable and instrument products to
the critical areas of drug development. The pretax gain on the
sale of net assets was approximately $460,000 recorded as an
element of other income/(expense). The carrying amounts of the
major assets and liabilities included in the sale were as
follows (in thousands):

|                  |  |   |     |  
|----------------- |  | - | --- | -
|Inventories       |  | $ | 603 |  
|Intangible assets |  |   | 289 |  
|Fixed assets      |  |   | 38  |  
|Other liabilities |  |   | (58 | )
|                  |  |   |     |  
|Total             |  | $ | 872 |  
|                  |  |   |     |  

Note 12  401(k) Retirement
Savings Plan

The Company maintains a 401(k) retirement savings
plan for its full-time employees. Each participant in the Plan
may elect to contribute from 1% to 20% of annual compensation to
the Plan. The Company, at its discretion, may make contributions
to the Plan. The Companys expenses related to the Plan
have been immaterial. During 2002, in conjunction with the
acquisition of the Jones Group, the Company merged the 401(k)
plan of the Jones Group U.S. subsidiary, Jones
Chromatography U.S.A., Inc., into the Company plan. Plan
costs recognized as expenses were approximately $5,000 for the
year ended December 31, 2003 and approximately $10,000 for
the year ended December 31, 2002.

Note 13  Income
Taxes

The Company has a current provision for foreign
income taxes of $783,000, $217,000 and $0 for the years ended
December 31, 2003, 2002 and 2001, respectively, related to
its UK operations. There was no provision for U.S. income
taxes for any of the periods presented, due to the
Companys net operating losses. Foreign income from
continuing operations before income taxes was approximately
$1.9 million, $301,000, and $0 in the years ended
December 31, 2003, 2002 and 2001, respectively.

56



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of December 31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $59.0 million, which expire in the years 2010
through 2023 and federal research and development tax credits of
approximately $1.2 million, which expire in the years 2010
through 2023. As of December 31, 2003, the Company had net
operating loss carryforwards for state income tax purposes of
approximately $16.0 million which expire in the years 2005
through 2013 and state research and development tax credits of
approximately $1.1 million which do not expire.

Utilization of the Companys net operating
loss and credit carryforwards may be subject to substantial
annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state
provisions. Such an annual limitation could result in the
expiration of the net operating loss before utilization.

Income tax expense (benefit) related to
continuing operations differ from the amounts computed by
applying the statutory income tax rate of 34% to pretax loss as
follows (in thousands):

|                                           |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                           |  | 2003 |        | 2002 |  | 2001
|                                           |  |      |        |      |  |     
|U.S. federal taxes (benefit)               |  |      |        |      |  |      |        |   |  |   |        |  
|At statutory rate                          |  | $    | (2,772 | )    |  | $    | (4,712 | ) |  | $ | (7,070 | )
|State taxes                                |  |      |       |      |  |      |       |   |  |   |       |  
|Net operating losses not benefited         |  |      | 422    |      |  |      | 3,977  |   |  |   | 123    |  
|Impairment and non-deductible amortization |  |      | 2,350  |      |  |      | 735    |   |  |   | 6,677  |  
|Non-deductible in-process research charge  |  |      |       |      |  |      |       |   |  |   | 270    |  
|                                           |  |      |        |      |  |      |        |   |  |   |        |  
|Total                                      |  | $    |       |      |  | $    |       |   |  | $ |       |  
|                                           |  |      |        |      |  |      |        |   |  |   |        |  

Deferred income taxes reflect the net tax effects
of net operating losses and tax credit carryforwards and
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows (in thousands):

|                         |                                      |                           |         |        |        |   |         |        |        | 
|------------------------ | ------------------------------------ | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                         |                                      |                          
|                         |                                      | Years Ended              
|                         |                                      | December 31,             
|                         |                                      |                          
|                         |                                      | 2003                      |         | 2002  
|                         |                                      |                           |         |       
|Deferred tax assets:     |                                      |                           |         |        |        |   |         |       
|                         | Net operating loss carryforwards     |                           | $       | 20,880 |        |   | $       | 17,500 |       
|                         | Research credits                     |                           |         | 1,930  |        |   |         | 1,600  |       
|                         | Capitalized research and development |                           |         | 860    |        |   |         | 1,000  |       
|                         | Other                                |                           |         | 1,030  |        |   |         | 2,500  |       
|                         |                                      |                           |         |        |        |   |         |       
|                         |                                      | Total deferred tax assets |         |        | 24,700 |   |         |        | 22,600 | 
|                         |                                      |                           |         |        |        |   |         |       
|Valuation allowance      |                                      |                           | (24,700 | )      |        |   | (22,600 | )     
|                         |                                      |                           |         |        |        |   |         |       
|Net deferred tax assets: |                                      | $                         |        |        |        | $ |        |       
|                         |                                      |                           |         |        |        |   |         |       

Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
increased by $2.1 million and $5.3 million during 2003
and 2002, respectively.

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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 14  Market Sales, Export
Sales, and Significant Customers

The Company has determined that it operates in
only one segment in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) as it only reports
profit and loss information on an aggregate basis to its chief
operating decision maker.

The Company had net sales by market as follows
(in thousands):

|            |  |                          |        |      |  |      |        |  |  |   |        | 
|----------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|            |  |                         
|            |  | Years Ended December 31,
|            |  |                         
|            |  | 2003                     |        | 2002 |  | 2001
|            |  |                          |        |      |  |     
|Instruments |  | $                        | 10,148 |      |  | $    | 11,888 |  |  | $ | 11,151 | 
|Consumables |  |                          | 11,653 |      |  |      | 11,106 |  |  |   | 4,130  | 
|Services    |  |                          | 2,668  |      |  |      | 3,323  |  |  |   | 1,782  | 
|            |  |                          |        |      |  |      |        |  |  |   |        | 
|            |  | $                        | 24,469 |      |  | $    | 26,317 |  |  | $ | 17,063 | 
|            |  |                          |        |      |  |      |        |  |  |   |        | 

The Company had net sales by geographical region
as follows (in thousands):

|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |  |                         
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2003                     |        | 2002 |  | 2001
|                             |  |                          |        |      |  |     
|US                           |  | $                        | 11,235 |      |  | $    | 14,169 |  |  | $ | 11,739 | 
|Europe                       |  |                          | 11,438 |      |  |      | 10,282 |  |  |   | 2,842  | 
|Far East (principally Japan) |  |                          | 1,796  |      |  |      | 1,866  |  |  |   | 2,482  | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|                             |  | $                        | 24,469 |      |  | $    | 26,317 |  |  | $ | 17,063 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 

No single customer accounted for more than 10% of
total net sales during 2003, 2002 and 2001. Net sales are
attributed to countries based on the location of the customer.
During 2003, sales to customers in the United Kingdom accounted
for approximately 26% of net sales.

The Companys long-lived assets were
segmented by geography as follows (in thousands):

|         |  |              |        |      |  |      |        |  |  |   |       | 
|-------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2003         |        | 2002 |  | 2001
|         |  |              |        |      |  |     
|US       |  | $            | 20,489 |      |  | $    | 5,080  |  |  | $ | 5,058 | 
|Europe   |  |              | 3,378  |      |  |      | 16,371 |  |  |   | 287   | 
|Far East |  |              | 70     |      |  |      | 68     |  |  |   | 101   | 
|         |  |              |        |      |  |      |        |  |  |   |       | 
|         |  | $            | 23,937 |      |  | $    | 21,519 |  |  | $ | 5,446 | 
|         |  |              |        |      |  |      |        |  |  |   |       | 



|          |                         
|--------- | ------------------------
|Note 15  | Unaudited Quarterly Data

|                                    |  |                                       |       |               |  |          |        |           |  |              |        |               |  |          |        |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------------------------- | ----- | ------------- |  | -------- | ------ | --------- |  | ------------ | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                    |  | December 31,                          |       | September 30, |  | June 30, |        | March 31, |  | December 31, |        | September 30, |  | June 30, |        | March 31,
|                                    |  | 2003                                  |       | 2003          |  | 2003     |        | 2003      |  | 2002         |        | 2002          |  | 2002     |        | 2002     
|                                    |  |                                       |       |               |  |          |        |           |  |              |        |               |  |          |        |          
|                                    |  |                                      
|                                    |  | (In thousands, except per share data)
|Net sales                           |  | $                                     | 6,166 |               |  | $        | 5,166  |           |  | $            | 6,884  |               |  | $        | 6,253  |           |  | $ | 7,555  |   |  | $ | 7,282  |   |  | $ | 6,723  |   |  | $ | 4,757  |  
|Gross profit                        |  |                                       | 2,837 |               |  |          | 2,608  |           |  |              | 3,012  |               |  |          | 2,756  |           |  |   | 3,457  |   |  |   | 2,496  |   |  |   | 3,193  |   |  |   | 2,167  |  
|Loss from operations                |  |                                       | (745  | )             |  |          | (3,104 | )         |  |              | (1,994 | )             |  |          | (2,538 | )         |  |   | (2,337 | ) |  |   | (5,459 | ) |  |   | (3,263 | ) |  |   | (3,245 | )
|Net loss                            |  |                                       | (650  | )             |  |          | (3,065 | )         |  |              | (1,906 | )             |  |          | (2,531 | )         |  |   | (2,246 | ) |  |   | (5,338 | ) |  |   | (3,157 | ) |  |   | (3,117 | )
|Net loss per share, basic & diluted |  | $                                     | (0.03 | )             |  | $        | (0.15  | )         |  | $            | (0.09  | )             |  | $        | (0.13  | )         |  | $ | (0.11  | ) |  | $ | (0.27  | ) |  | $ | (0.16  | ) |  | $ | (0.16  | )

58



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ARGONAUT TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The first quarter fiscal 2001 net loss
includes a charge of $270,000 for the write-off of acquired
research and development related to the Companys
acquisition of ATSI.

The fourth quarter fiscal 2001 net loss
includes a charge of $5.5 million for the write-down of
purchased intangible assets related to the ATSI acquisition, and
restructuring and other charges of $384,000 composed primarily
of $362,000 of severance and benefits charges.

The third quarter of fiscal 2002 net loss
includes restructuring and other charges of $2.6 million
composed primarily of $630,000 in severance and benefits
charges, $683,000 in excess equipment charges, $765,000 in the
write-off of excess and obsolete inventory, and $356,000 in
facilities charges.

The third quarter fiscal 2003 net loss
includes a charge of $1.6 million for the write-down of
purchased intangible assets related to the ATSI acquisition and
a non-recurring pre-tax gain of $460,000 related to the sale of
the Companys HPLC product line.

The fourth quarter fiscal 2003 net loss
includes a benefit of $184,000 for the recovery of restructuring
charges originally recognized in the third quarter of fiscal
2002, resulting from a revision to the estimated remaining
liability associated with the restructuring actions.

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

None.






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

Evaluation of disclosure controls and
procedures.Our management evaluated,
with the participation of our Chief Executive Officer and our
Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.

Changes in internal control over financial
reporting.There was no change in our
internal control over financial reporting that occurred during
the period covered by this Annual Report on Form 10-K that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




PART III






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

The information required by this Item 10 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 9, 2004.

Code of Ethics

We have adopted a Code of Ethics that applies to
all of our directors, officers and employees. We publicize the
Code of Ethics through posting the policy on our website. We
will disclose on our website any waivers of, or amendments to,
our Code of Ethics.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended requires the Companys executive
officers and directors and persons who own more than ten percent
(10%) of a registered class of our equity securities to file
reports of ownership and changes in ownership with the
Securities and Exchange Commission, or SEC, and the National
Association of Securities Dealers, Inc. Executive officers,
directors and greater than ten percent (10%) stockholders are
required by Commission regulation to furnish us with copies of
all Section 16(a) forms they file. We believe all of our
executive officers and directors complied with all applicable
filing requirements during the fiscal year ended
December 31, 2003.






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

The information required by this Item 11 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 9, 2004.






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

The information required by this Item 12 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 9, 2004.






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

The information required by this Item 13 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 9, 2004.

60



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

The information required by this item 14 is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on June 9, 2004.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following documents are filed as
part of this Form 10-K:

(1) Financial Statements:

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



| |                                                   
| | --------------------------------------------------
| | Report of Independent Auditors                    
| | Consolidated Balance Sheets                       
| | Consolidated Statements of Operations             
| | Consolidated Statement of Shareholders
    Equity
| | Consolidated Statements of Cash Flows             
| | Notes to Consolidated Financial Statements        

(2) Financial Statement Schedules:

Schedule II  Valuation and
Qualifying Accounts for the three fiscal years in the period
ended December 31, 2003.

The following financial statement schedule of
Argonaut Technologies, Inc. for each of the past three
years in the period ended December 31, 2003 should be read
in conjunction with the Consolidated Financial Statements of
Argonaut Technologies, Inc.

Schedule II  Valuation and
Qualifying Accounts

Allowance for Doubtful Accounts


|                             |  |                |     |                  |  |            |     |            |  |  |     |  |  |   |     | 
|---------------------------- |  | -------------- | --- | ---------------- |  | ---------- | --- | ---------- |  |  | --- |  |  | - | --- | 
|                             |  | Balance at     |     | Additions        |  |            |     | Balance at
|                             |  | Beginning      |     | Charged to Costs |  | Deductions |     | End of    
|                             |  | of Period      |     | and Expenses     |  | Writeoffs  |     | Period    
|                             |  |                |     |                  |  |            |     |           
|                             |  |               
|                             |  | (In thousands)
|Year Ended December 31, 2001 |  | $              | 50  |                  |  |            | 104 |            |  |  |    |  |  | $ | 154 | 
|Year Ended December 31, 2002 |  | $              | 154 |                  |  |            | 58  |            |  |  | 102 |  |  | $ | 110 | 
|Year Ended December 31, 2003 |  | $              | 110 |                  |  |            | 10  |            |  |  | 18  |  |  | $ | 102 | 

All other schedules have been omitted since the
required information is not present in amounts sufficient to
require submission of the schedule or because the information
required is included in the financial statements or notes
thereto.

(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(g) |                         |  | Amended and Restated Bylaws of Registrant.                                                                                                                                                                       

61



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|       |          |                         |  |                                                                                                                                                                                           
|------ | -------- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |          | Description of Document
|       |          |                        
|       | 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.                                     
|       | 10.1(a)  |                         |  | Amended and Restated Stockholder Rights
    Agreement, dated May 21, 1999.                                                                                                                
|       | 10.2(a)  |                         |  | Offer Letter, dated October 29, 1996, from
    Registrant to David P. Binkley, Ph.D.                                                                                                      
|       | 10.3(a)  |                         |  | Promissory Note Secured by Deed of Trust between
    the Registrant and David P. Binkley, dated December 17,
    1996.                                                                    
|       | 10.4(a)  |                         |  | Lease Agreement between the Registrant and
    Tanklage Family Partnership, dated July 9, 1999.                                                                                           
|       | 10.5(a)  |                         |  | Lease Agreement between the Registrant and MK
    Kojimachi Building Co., Ltd., dated September 16, 1997, as
    amended.                                                                 
|       | 10.6(a)  |                         |  | Lease Agreement between the Registrant and
    Personalvorsorgestiftung Rapp AG, dated April 16, 1997.                                                                                    
|       | 10.7(a)  |                         |  | License and Supply Agreement between the
    Registrant and Symyx Technologies, Inc., dated
    August 6, 1999.                                                                           
|       | 10.9(a)  |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.                                                                                      
|       | 10.10(a) |                         |  | 1995 Stock Plan.                                                                                                                                                                          
|       | 10.11(a) |                         |  | 1995 Stock Plan Form of Stock Option Agreement.                                                                                                                                           
|       | 10.12(g) |                         |  | 2000 Incentive Stock Plan, as amended.                                                                                                                                                    
|       | 10.13(g) |                         |  | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                                            
|       | 10.14(b) |                         |  | Amendment to License and Supply Agreement between
    the Registrant and Symyx Technologies, Inc., dated
    January 1, 2002.                                                             
|       | 10.15(b) |                         |  | Agreement between the Registrant and David P.
    Binkley dated December 5, 2001.                                                                                                         
|       | 10.16(b) |                         |  | Agreement between the Registrant and John T.
    Supan dated January 10, 2002.                                                                                                            
|       | 10.17(e) |                         |  | License Agreement between Argonaut
    Technologies, Inc. and Symyx Technologies, Inc. dated
    August 21, 2002.                                                                         
|       | 10.18(f) |                         |  | Agreement between the Registrant and Jan K.
    Hughes dated December 9, 2002.                                                                                                            
|       | 23.1     |                         |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                   
|       | 31.1     |                         |  | Certification of Chief Executive Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                
|       | 31.2     |                         |  | Certification of Chief Financial Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                
|       | 32       |                         |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted 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

62



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##### Table of Contents



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

(b) Reports on Form 8-K

On October 30, 2003, the Company filed a
report on Form 8-K providing the contents of a press
release issued by the Company announcing its financial results
for the quarter ended September 30, 2003.

63



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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



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

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

Dated: March 30, 2004

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Lissa A. Goldenstein, his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                             |  |                                                                          |  |                |  |     
|-------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------- |  | ----
|                                             |  | Signature                                                                |  | Title          |  | Date
|                                             |  |                                                                          |  |                |  |     
|                                            
|/s/ LISSA A. GOLDENSTEINLissa A. Goldenstein |  | Chief Executive Officer, Director (Principal
    Executive Officer)      |  | March 30, 2004
|                                            
|/s/ DAVID J. FOSTERDavid J. Foster           |  | Chief Financial Officer (Principal Financial and
    Accounting Officer) |  | March 30, 2004
|                                            
|/s/ BROOK H. BYERSBrook H. Byers             |  | Director                                                                 |  | March 30, 2004
|                                            
|/s/ HINGGE HSU, M.D.Hingge Hsu, M.D.         |  | Director                                                                 |  | March 30, 2004
|                                            
|/s/ DAVID G. LUDVIGSONDavid G. Ludvigson     |  | Director                                                                 |  | March 30, 2004
|                                            
|/s/ PETER MACINTYREPeter Macintyre           |  | Director                                                                 |  | March 30, 2004
|                                            
|/s/ BRIAN METCALF, PH.D.Brian Metcalf, Ph.D. |  | Director                                                                 |  | March 30, 2004

64



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##### Table of Contents



ARGONAUT TECHNOLOGIES, INC.

Form 10-K


Annual Period Ended December 31,
2003


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(g)   |                         |  | Amended and Restated Bylaws of 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.                                                            
|       | 10.1(a)  |                         |  | Amended and Restated Stockholder Rights
    Agreement, dated May 21, 1999.                                                                                                                                       
|       | 10.2(a)  |                         |  | Offer Letter, dated October 29, 1996, from
    Registrant to David P. Binkley, Ph.D.                                                                                                                             
|       | 10.3(a)  |                         |  | Promissory Note Secured by Deed of Trust between
    the Registrant and David P. Binkley, dated December 17,
    1996.                                                                                           
|       | 10.4(a)  |                         |  | Lease Agreement between the Registrant and
    Tanklage Family Partnership, dated July 9, 1999.                                                                                                                  
|       | 10.5(a)  |                         |  | Lease Agreement between the Registrant and MK
    Kojimachi Building Co., Ltd., dated September 16, 1997, as
    amended.                                                                                        
|       | 10.6(a)  |                         |  | Lease Agreement between the Registrant and
    Personalvorsorgestiftung Rapp AG, dated April 16, 1997.                                                                                                           
|       | 10.7(a)  |                         |  | License and Supply Agreement between the
    Registrant and Symyx Technologies, Inc., dated
    August 6, 1999.                                                                                                  
|       | 10.9(a)  |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.                                                                                                             
|       | 10.10(a) |                         |  | 1995 Stock Plan.                                                                                                                                                                                                 
|       | 10.11(a) |                         |  | 1995 Stock Plan Form of Stock Option Agreement.                                                                                                                                                                  
|       | 10.12(g) |                         |  | 2000 Incentive Stock Plan, as amended.                                                                                                                                                                           
|       | 10.13(g) |                         |  | 2000 Employee Stock Purchase Plan, as amended.                                                                                                                                                                   
|       | 10.14(b) |                         |  | Amendment to License and Supply Agreement between
    the Registrant and Symyx Technologies, Inc., dated
    January 1, 2002.                                                                                    
|       | 10.15(b) |                         |  | Agreement between the Registrant and David P.
    Binkley dated December 5, 2001.                                                                                                                                
|       | 10.16(b) |                         |  | Agreement between the Registrant and John T.
    Supan dated January 10, 2002.                                                                                                                                   
|       | 10.17(e) |                         |  | License Agreement between Argonaut
    Technologies, Inc. and Symyx Technologies, Inc. dated
    August 21, 2002.                                                                                                
|       | 10.18(f) |                         |  | Agreement between the Registrant and Jan K.
    Hughes dated December 9, 2002.                                                                                                                                   
|       | 23.1     |                         |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                                          
|       | 31.1     |                         |  | Certification of Chief Executive Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                       
|       | 31.2     |                         |  | Certification of Chief Financial Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                       
|       | 32       |                         |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                       



---



##### Table of Contents





---



|    |                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.