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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission file number 000-31019

ARGONAUT TECHNOLOGIES, INC.

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

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

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

As of October 31, 2002, 19,945,452 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.

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Argonaut Technologies, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2002

INDEX

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PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

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

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

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

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ARGONAUT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

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

NOTE 2 — INVENTORIES

Inventories consist of the following (in thousands):

In the third quarter of fiscal year 2002, the Company recorded a charge to cost of sales of $765,000 for inventories determined to be excess and obsolete based on the decision to discontinue active selling of those products as a component of a broader restructuring plan. Management does not believe that this inventory can be sold or be used in the future. Final disposition of this inventory is expected to occur by the end of the first quarter of 2003.

NOTE 3 — NET LOSS PER SHARE

Net loss per share has been computed according to Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” which requires disclosure of basic and diluted earnings per share. Basic and diluted net loss per share was computed using the weighted-average number of common shares outstanding during the period. Because the Company is in a net loss position, diluted earnings per share is calculated using the weighted average number of common shares outstanding and excludes the effects of potential common shares that are antidilutive. Options to purchase 4,203,616 and 2,548,569 shares of common stock were outstanding at September 30, 2002 and September 30, 2001, respectively, and warrants to purchase 80,665 shares of common stock were outstanding at September 30, 2002 and September 30, 2001, but were not included in the computation of diluted net loss per share, since the effect would be antidilutive.

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NOTE 4 — COMPREHENSIVE LOSS

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

For the three and nine month periods ended September 30, 2002 and 2001, comprehensive loss is as follows (in thousands):

NOTE 5 — BUSINESS COMBINATION

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

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

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

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

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

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

The Condensed Consolidated Statements of Operations include the results of Jones Group for the period from February 21,

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2002 to September 30, 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):

Approximately $8.6 million of the total purchase price has been allocated to goodwill and intangible assets with indefinite lives. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. In accordance with the SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives resulting from business combinations completed subsequent to June 30, 2001 will not be amortized, but instead will be tested for impairment at least annually (more frequently if certain indicators are present).

The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of Jones Group had occurred at the beginning of 2001 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.

NOTE 6 — RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. These new rules on asset impairment supersede SFAS 121 and provide a single accounting model for disposal of long-lived assets. SFAS 144 removes goodwill from its scope, describes a profitability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a “primary-asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. The adoption of SFAS 144 on January 1, 2002 did not have a material adverse effect on the Company’s results of operations, financial position, or cash flows.

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

The Company adopted SFAS 142 on January 1, 2002. The Company reclassified identifiable intangible assets with indefinite lives, as defined by SFAS 142, to goodwill at the date of adoption. The Company tested for goodwill and indefinite lived

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intangible assets impairment using the two-step process prescribed by SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of impairment by reporting unit, if any. The Company performed the first step of the required impairment test of goodwill and indefinite lived intangible assets in the second quarter of fiscal 2002, determining that no potential impairment was indicated.

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:

The amortization expense relating to the intangible assets for the three- and nine-month periods ended September 30, 2002 was $209,000 and $524,000, respectively. The following represents the gross carrying amounts and accumulated amortization of amortized intangible assets at September 30, 2002 (in thousands):

The estimated amortization expense over the expected life of the amortized intangible assets is as follows (in thousands):

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The carrying amount of indefinite lived intangible assets at September 30, 2002 is as follows (in thousands):

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), effective for exit or disposal activities that are initiated after December 31, 2002. Under SFAS 146, a liability for the cost associated with an exit or disposal activity is recognized when the liability is incurred. Under prior guidance, a liability for such costs could be recognized at the date of commitment to an exit plan. The effect of adoption of SFAS 146 is dependent on the Company’s related activities subsequent to the date of adoption.

NOTE 7 — RESTRUCTURING CHARGES

In the fourth quarter of fiscal 2001, the Company announced a restructuring program to downsize its organizational structure in order to reduce its operating expenses and improve workforce processes and efficiencies. As a result, the Company recorded a charge of $384,000, which includes termination benefits and related expenses of $362,000 related to a reduction of the workforce by 22 employees, and termination benefits and related expenses, and expenses of $22,000 for abandonment of excess equipment. At September 30, 2002, all 22 employees had been terminated, and the accrued restructuring liability was zero. For the nine-month period ended September 30, 2002, cash payments related to the restructuring program were $342,000.

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 ending 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 September 30, 2002, 11 of the 44 employees had been terminated and the accrued restructuring liability was $1.0 million. For the quarterly period ended September 30, 2002, cash payments related to the restructuring program were $105,000. A summary of the accrued restructuring charges is as follows (in thousands):

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Remaining cash expenditures relating to workforce reduction and other related charges will be paid through the first quarter of fiscal 2003. 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.

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

This quarterly report contains forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995, and it is the Company’s intention that such statements be protected by the safe harbor created thereby. Examples of such forward-looking statements include statements about future revenues, expenses, losses and cash flows, statements about research and development activities, statements about possible future acquisitions, statements about sales and marketing efforts, statements regarding the anticipated effects of the acquisition of Jones Group to our net sales performance and pre-tax operating results, statements about the anticipated effects of our recent restructuring program and related accruals, statements regarding values of our assets and liabilities over their remaining useful lives and our testing for impairment of goodwill, and statements about our expectations as to the duration of our negative cash flows from operations and the sufficiency of existing cash reserves for the next 12 months. Actual results may differ materially from these projected in such forward-looking statements due to various known and unknown risks and uncertainties, including the risk that a decline in the economy generally or the market for our products will adversely affect our business, the risk that the market for our products and services does not develop as anticipated, the risk that we are unable to successfully integrate the product and service offerings of the company we recently acquired and successfully capitalize 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 related to our business see the discussion set forth herein under “Additional Factors That May Affect Future Results,” as well as the discussion of similar factors and risks set forth in our Form 10-K for the fiscal year ended December 31, 2001 filed on April 1, 2002, and our other filings with the Securities Exchange Commission.

Overview

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

Since our inception, we have incurred significant losses and, as of September 30, 2002, we had an accumulated deficit of $66.8 million. We anticipate incurring additional losses, which may increase, for the foreseeable future.

Recent Developments

Acquisition of Jones Group

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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). Including transactions costs of approximately $0.9 million, the aggregate purchase price was approximately $19.0 million, valued as of the closing of the transaction. The notes payable, which are redeemable for cash over a two year period following the closing date, are guaranteed by Barclays Bank PLC. Under the terms of the Share Purchase Agreement, notes payable in the aggregate principal amount of £2,550,000 ($3.6 million) will be held in escrow until February 20, 2004, the second anniversary of the closing date, and may be used to satisfy certain indemnification obligations, if any, of the principal JCL shareholders. In addition, certain employees of the Jones Group remaining as employees after the transaction have received stock options to purchase an aggregate 349,800 shares of Argonaut’s Common Stock at an exercise price of $3.916 per share.

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

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

Restructuring charges

In the fourth quarter of 2001, the Company announced a restructuring program to downsize our organizational structure in order to reduce operating expenses and improve workforce processes and efficiencies. As a result, the Company recorded a charge of $384,000, which includes termination benefits and related expenses of $362,000 related to a reduction of our workforce by 22 employees and expenses of $22,000 for abandonment of excess equipment. The restructuring program is expected to yield cash savings of approximately $3.4 million annually, beginning in fiscal 2002. These savings largely relate to reduced employee related costs and are expected to be realized primarily in operating expenses. At September 30, 2002, all 22 employees had been terminated and the accrued restructuring liability was zero. For the nine-month period ended September 30, 2002, cash payments related to the restructuring program were $342,000.

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 ending September 30, 2002. The charge includes 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. The restructuring program is estimated to result in annualized savings of approximately $3.0 million beginning in fiscal 2003, realized primarily in reduced operating costs as a result of reduced employee-related costs. At September 30, 2002, 11 of the 44 employees had been terminated and the accrued restructuring liability was $1.0 million. For the quarterly period ended September 30, 2002, cash payments related to the restructuring program were $105,000. Remaining cash expenditures relating to workforce reduction and other related charges will be paid through the first quarter of fiscal 2003. 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.

Critical Accounting Policies

These critical accounting policies are in addition to the critical accounting policies included/described in our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on April 1, 2002.

Restructuring

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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. Actual charges have not differed significantly from these estimates.

Purchase Accounting

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

Amortization of Goodwill and Other Purchased Intangibles

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

The Company adopted SFAS 142 on January 1, 2002. The Company reclassified identifiable intangible assets with indefinite lives, as defined by SFAS 142, to goodwill at the date of adoption. The Company tested for goodwill and indefinite lived intangible assets impairment using a two-step process prescribed by SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of impairment by reporting unit, if any. The Company performed the first step of the required impairment test of goodwill and indefinite lived intangible assets in the second quarter of fiscal 2002, determining that no potential impairment was indicated.

RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002

Operating results for the three- and nine-month periods ended September 30, 2002 include Jones Group since February 21, 2002.

Net Sales

Net sales for the three-month period ended September 30, 2002 increased by 103% versus the same period in 2001. Net sales totaled $7.3 million for the quarter ended September 30, 2002 compared to $3.6 million for the quarter ended September 30, 2001. Sales growth versus the year ago was due primarily to the impact of the acquisition of the Jones Group. For the third quarter of 2002, instrument sales comprised approximately 39% of net sales, chemistry consumables sales comprised approximately 47% of net sales, and service, integration services and contract Research and Development (“R&D”) together comprised approximately 14% of net sales. For the nine-month period ended September 30, 2002, net sales totaled $18.8 million compared to $11.4 million for the same period in 2001. Instrument sales comprised approximately 46% of net sales, chemistry consumables comprised approximately 44% of net sales, and service, integration services and contract R&D together comprised the remaining 10% of net sales for the nine-month period ended September 30, 2002. The year over year increase in net sales is primarily attributable to growth in the sales of chemistry consumables products due to the acquisition of the Jones Group.

Cost of sales

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the quarter, gross margin as a percent of sales was 45% compared to 45% for the third quarter of 2001. For the nine-month period ended September 30, 2002, cost of sales increased to $10.9 million from $6.1 million in the same period for 2001 due to higher sales volume and the impact of the special charge related to the write-off of excess and obsolete inventory. Again, excluding the special charge, gross margin as a percent of sales for the nine-month period ended September 30, 2002 was 46%, versus 46% for the same period in 2001.

Research and development expenses

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

Interest and Other Income (Expense), net

Provision for Income Taxes

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The Company recorded a provision for income taxes of approximately $0 and $200,000 to record the UK corporate tax liability of Jones Group for the three and nine months ended September 30, 2002, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2002, the Company had cash, cash equivalents, short-term investments and restricted cash of $40.8 million compared to $57.6 million at December 31, 2001. The decrease was primarily due to the use of $6.3 million in connection with the purchase of the Jones Group and related expenses, approximately $342,000 in cash payments related to the restructuring initiated in the fourth quarter of 2001, approximately $105,000 in cash payments related to the restructuring activities initiated in the third quarter of 2002, and approximately $10.0 million used in other general operating activities. The restricted cash amount is denominated in British Pounds Sterling and represents the cash used to secure the notes payable of £7,650,000 ($10.9 million) as purchase consideration in the acquisition of Jones Group. The notes are payable over two years carrying an initial interest rate of 3.9% per annum for the twelve month period commencing on the date of note issuance, payable quarterly.

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

The acquisition of Jones Group was completed on February 20, 2002 for purchase consideration of approximately 572,000 shares of unregistered Argonaut common stock, £3,825,000 ($5.4 million) cash due at closing, and notes payable aggregating £7,650,000 ($10.9 million) payable over two years, plus acquisition-related legal, accounting, and other transaction expenses of approximately $875,000. We expect Jones Group to provide approximately $10 million to our 2002 net sales performance and to be accretive to pre-tax operating results.

Net cash provided by investing activities totaled $3.5 million and $6.4 million for the nine months ended September 30, 2002 and 2001, respectively. The change in 2002 was primarily attributable to the use of $6.3 million in connection with the purchase of the Jones Group, the use of $10.9 million as collateral for the notes payable portion of the Jones Group acquisition, offset by the proceeds generated from the sale and maturity of short-term investments which provide cash to fund the Company’s ongoing operating activities.

The Company expects to have negative cash flows from operations through at least the first half of 2003. We may also use cash resources 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 or 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.

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 September 30, 2002, the Company had repurchased 50,000 shares of outstanding common stock at an average price of $0.93 per share.

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The following summarizes the Company’s contractual cash obligations at September 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

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.

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 more widely used in the life sciences and chemical industries, it is unlikely that we will ever become profitable.

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

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

We face risks associated with past and future acquisitions.

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to earnings and dilution to our stockholders. Due to volatile market conditions, the value of long live assets maybe negatively impacted, which may result in future, additional impairment charges. Moreover, if we buy a company, we may have to incur or assume that company’s liabilities, including liabilities that are unknown at the time of acquisition.

Our product development efforts may not produce commercially viable products.

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

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

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

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

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

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

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research collaborators. It may take significant time to locate, retain and integrate qualified management personal.

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

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

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

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

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

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

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

We are exposed to general global economic and market conditions.

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Our business is subject to risks from international operations.

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

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

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

Risks Related to Our Common Stock

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

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

•		actual or anticipated variations in quarterly operating results;
•		failure to achieve, or changes in, financial estimates by securities analysts;
•		announcements of new products or services or technological innovations by us or our competitors;
•		conditions or trends in the pharmaceutical, biotechnology, life sciences and chemical industries;
•		announcements by us of significant acquisitions, strategic partnerships, joint ventures, 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;
•		negotiating changes;
•		purchase 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.

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

Our principal stockholders, directors and executive officers own approximately 43% of our common stock, which may prevent new investors from influencing corporate decisions.

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

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief

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Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

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PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

On 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 September 30, 2002, the Company had repurchased 50,000 shares of outstanding common stock at an average price of $0.93 per share.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits.
		The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report on Form 10-Q.
(b)		Reports on Form 8-K.
		The Company filed no reports on Form 8-K during the quarter ended September 30, 2002.

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SIGNATURES

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

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Certifications

I, Lissa A. Goldenstein, President and Chief Executive Officer of Argonaut Technologies, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Argonaut Technologies, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002

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I, David J. Foster, Chief Financial Officer of Argonaut Technologies, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Argonaut Technologies, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002