ARGONAUT TECHNOLOGIES INC - 10-K Annual Report

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.

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.

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”.

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.

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^TM 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.

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.

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.


	•	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.

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:

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.

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.

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.

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

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.

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

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.

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:

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.

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.

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.

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

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.

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 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:

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.

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.

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 Series^TM, 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 FlashMaster^TM 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.

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.

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.

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.

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 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).

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.

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.

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 products comprise approximately 41% of 2003 net sales. Our Advantage Series^TM 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 Flashmaster^TM 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.

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.

The Advantage Series^TM 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.

During 2003, we launched the Advantage Series^TM 3400 process chemistry workstation, a new product from the Pfizer and ICI consortium. The Advantage Series^TM 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.

The Advantage Series^TM 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 Series^TM 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.

Our Flashmaster^TM family of products is used for a variety of purification applications and fully utilizes the advantages of our Flashmaster^TM 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.

FlashMaster^TM 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.

FlashMaster^TM 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.

FlashMaster^TM 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.

FlashMaster^TM 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.

FlashMaster^TM 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.

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 Series^TM 4100 process scale-up reactor.

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 Series^TM 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 Endeavor^TM 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

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.

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:

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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,

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.

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.

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.

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.

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

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.

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”.

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.

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

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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”.

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

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, 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 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 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

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.

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.

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.

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

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

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 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 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 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.

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

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.

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.

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.

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

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.

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.

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):

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.

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.

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 Series^TM 3400 process chemistry workstation.

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

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.

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

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 Series^TM 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 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.

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 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.

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.

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.

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.

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.

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

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.

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.

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

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.

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

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.

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.

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.

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

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):

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.

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.

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”.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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):

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 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.

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.

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 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 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”).

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.

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.

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:

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:

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

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.

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 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):

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.

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.

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):

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.

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.

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 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:

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

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

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

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

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

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.

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.

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):

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

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

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.

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.

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.

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.

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.

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.

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.

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:

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:

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.

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

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.

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

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 Apex^TM 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):

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.

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.

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):

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):

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.

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.

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):

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.

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.

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.

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) 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.

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.

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.

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.

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.

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

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.

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.


(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.

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.

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.


	By:	/s/ LISSA A. GOLDENSTEIN



	Lissa A. Goldenstein
	President and Chief Executive Officer

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.


(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.


(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


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)


		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



	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



			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


	*Traditional Chemistry Methods for Chemical Development*


	*Limitations of Existing Chemical Development Technologies*


	*Increase Probability of Success Early in the Development Process*


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


	*Continue to Invest in Product Development Collaborations*


	*Build Global Customer Relationships Through Direct Sales*


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


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*


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


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


Item 1.	*Business*


	*Background*


	1. Set-up and Execution of Reaction


	2. Product Work-up


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


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



	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


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


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


	*We face risks associated with past and future acquisitions.*


	*Our product development efforts may not produce commercially viable products.*


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


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


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


	*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 instrument component, chemical intermediates and product manufacturing, our ability to produce and supply our products could be impaired.*


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


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


	*Our business is subject to risks from international operations.*


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


	*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.*


	*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.*


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