SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

 (Mark One)

For the quarterly period ended June 30, 2004

OR

For the transition period from           to          

Commission file number 000-31019

ARGONAUT TECHNOLOGIES, INC.

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [   ] No [X]

There were 20,607,039 shares of the registrant’s common stock outstanding on July 31, 2004.

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Argonaut Technologies, Inc.
Form 10-Q
Quarterly Period Ended June 30, 2004

TABLE OF CONTENTS

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARGONAUT TECHNOLOGIES, INC.

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

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ARGONAUT TECHNOLOGIES, INC.

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

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ARGONAUT TECHNOLOGIES, INC.

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

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ARGONAUT TECHNOLOGIES, INC.

NOTE 1 — BASIS OF PRESENTATION AND NEW ACCOUNTING STANDARDS

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals and adjustments, which Argonaut Technologies, Inc. (“Argonaut” or “the Company”) considers necessary to present fairly the financial information included herein. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K, for the year ended December 31, 2003 as filed with the Securities and Exchange Commission. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2004, or any other future period.

Product Warranty

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

Changes in the Company’s product warranty accrual for the six months ended June 30, 2004 and 2003 are as follows (in thousands):

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New Accounting Standards

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 believe that it currently has any investments in variable interest entities, therefore the adoption of FIN 46 did not have a material impact on the Company’s financial condition or results of operations.

In March 2004, the FASB issued an exposure draft of a proposed standard that, if adopted, will significantly change the accounting for employee stock options and other equity-based compensation. The proposed standard would require companies to expense the fair value of stock options on the grant date and would be effective at the beginning of the Company’s 2005 fiscal year. The Company will evaluate the requirements of the final standard, which is expected to be finalized in late 2004, to determine its impact on the Company’s results of operations.

NOTE 2 — STOCK-BASED COMPENSATION

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

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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.

NOTE 3 — INVENTORIES

Inventories consist of the following (in thousands):

NOTE 4 — NET LOSS PER SHARE

Net loss per share has been computed according to Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” which requires disclosure of basic and diluted earnings per share. Basic and diluted net loss per share was computed using the weighted-average number of common shares outstanding during the period. Due to the net loss position of the Company, diluted earnings per share is calculated using the weighted average number of common shares outstanding and excludes the effects of potential common shares that are antidilutive. Options to purchase 3,387,198 and 4,061,596 shares of common stock were outstanding at June 30, 2004 and June 30, 2003, respectively. Warrants to purchase 63,065 and 80,665 shares of common stock were outstanding at June 30, 2004 and June 30, 2003, respectively. Options and warrants were not included in the computation of diluted net loss per share, since the effect would be antidilutive.

NOTE 5 — COMPREHENSIVE LOSS

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

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For the three- and six month periods ended June 30, 2004 and 2003, comprehensive loss is as follows (in thousands):

NOTE 6 — GOODWILL AND OTHER PURCHASED INTANGIBLES

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

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

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

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

The amortization expense relating to the intangible assets for the three- and six-month periods ended June 30, 2004 was $155,000 and $310,000, respectively. The following represents the gross carrying amounts and accumulated amortization of amortized intangible assets at June 30, 2004:

NOTE 7 — RESTRUCTURING CHARGES

On August 8, 2002, the Company announced its intention to execute a restructuring program focused on improving productivity, reducing operational expenses in remote offices, and implementing a workforce reduction of approximately 20% of its existing worldwide employees. As a result, the Company recognized a charge of $1.8 million in the third quarter

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ended September 30, 2002. The charge included termination benefits and related expenses of approximately $630,000 related to the reduction of the workforce by 44 employees, expenses of approximately $683,000 related to the abandonment of excess equipment, expenses of approximately $356,000 for the abandonment of excess leased facilities, and expenses of approximately $133,000 for various other related charges. At June 2004, 43 of the 44 employees had been terminated.

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

NOTE 8 — PREFERRED STOCK RIGHTS AGREEMENT

On May 24, 2004, the Company’s Board of Directors adopted a Preferred Stock Rights Agreement and declared a dividend of one right (a “Right”) to purchase one one-thousandth of a share of the Company’s Series A Participating Preferred Stock (“Series A Preferred”) for each outstanding share of Common Stock, par value of $0.0001, of the Company. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred at an exercise price of $12.00, subject to adjustment (the “Purchase Price”).

The Rights are not exercisable until the earlier of (i) 10 days after a person or a group of associated persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the Company’s Common Stock then outstanding (an “Acquiring Person”), or (ii) 10 days after the person or group announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 10% or more of the Common Stock outstanding. A person or group that already had beneficial ownership of 10% or more of the Company’s Common Stock outstanding at the time the agreement was adopted shall not be an Acquiring Person unless and until such time as such person or group becomes the beneficial owner of additional Common Stock (other than pursuant to a dividend or distribution paid or made by the Company pro rata on the outstanding Common Stock in Common Stock or pursuant to a split or subdivision of the outstanding Common Stock).

If the Company is acquired in a merger or other business combination transaction, each exercisable Right entitles the holder to purchase common stock of the acquiring company having a value equal to two times the Purchase Price.

The Board of Directors may exchange the Rights for $0.001 per Right at any time on or prior the close of business on the earlier of (i) the fifth day following the attainment of 10% or more of the Company’s Common Stock then outstanding by an Acquiring Person (or such later date as may be determined by action of the Company’s Board of Directors and publicly announced by the Company), or (ii) June 4, 2014. The Rights will expire on June 4, 2014.

NOTE 9 — DEBT REPAYMENT

The restricted cash of approximately $12.2 million that served to secure the notes payable as purchase consideration of the Jones Group was used during the second quarter of 2004 to repay those notes in full.

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

This quarterly report contains forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995, and it is the Company’s intention that such statements be protected by the safe harbor created thereby. Examples of such forward-looking statements include statements 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

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building our core consumables business, possible future acquisitions, our plans to discontinue non-performing consumable products and certain legacy instrument products, the anticipated effects of our recent restructuring program and related accruals, values of our assets and liabilities over their remaining useful lives and our testing for impairment of goodwill, and our expectations as to the duration of our negative cash flows from operations and the sufficiency of existing cash reserves for the next 12 months. Actual results may differ materially from those projected in such forward-looking statements due to various known and unknown risks and uncertainties, including the risk that a decline in the economy generally or the market for our products will adversely affect our business, the risk that the market for our products and services does not develop as anticipated, the risk that we are unable to successfully integrate the product and service offerings of the companies we recently acquired and successfully capitalize on anticipated synergies and growth opportunities, and the risk that our restructuring programs do not proceed as planned and that we incur unexpected expenses in connection with the implementation thereof. For a further discussion of these and other risks and uncertainties related to our business see the discussion set forth herein under “Factors That May Affect Our Future Results.”

Overview

Argonaut develops innovative products designed to help pharmaceutical and other chemists engaged in the discovery and development of new chemical entities increase their productivity and reduce their operating costs without compromising the scientific integrity of their research. Our products are designed to enable chemists to increase their productivity, reduce their operating costs through automation and process simplification, and cost effectively explore the increasing number of drug targets available for drug development. We derive revenues primarily from the sale of our chemistry consumable products, instrumentation products and services. We also derive revenues from the sale of reagents, and other instrument-related consumables 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 June 30, 2004, we had an accumulated deficit of $81.8 million.

Recent Developments

New product introduction

In the first quarter of 2004, we launched the FlashMaster Personal+ system and the Advantage Series 2410 personal screening synthesizer. Both of these products are important to our ability to increase revenues in 2004 and beyond. Designed for use with pre-packed, disposable ISOLUTE^® flash chromatography columns, the FlashMaster Personal+ system features a second column position for on-line solid sample loading and a liquid injection port for soluble samples. The 2410 personal screening synthesizer is designed to help process chemists who work with small amounts of material, simulate and replicate the thermal and mixing conditions seen in larger production reactors.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies that are included/described in our Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004.

RESULTS OF OPERATIONS FOR THE THREE- AND SIX- MONTH PERIODS ENDED JUNE 30, 2004

Net Sales

Net sales in the three-month period ended June 30, 2004 were $5.3 million compared to $6.9 million for the same period in 2003, a decrease of 23%. The decrease in net sales is primarily due to the discontinuation of certain non-strategic product lines during 2003, the winding down of a contract research and development (“R&D”) project, and decreased integration services sales. For the second quarter of 2004, instrument sales comprised approximately 34% of net sales, chemistry consumables sales comprised approximately 50% of net sales, and service, integration services and contract R&D together comprised approximately 16% of net sales. Instrument sales were $1.8 million in the second quarter of 2004 versus $2.8 million for the same period in 2003, primarily due to the discontinuation of certain product lines during 2003. Chemistry consumables sales were $2.6 million in the second quarter of 2004 versus $3.0 million in the same period of 2003, a decrease of 12%. Service, integration services and contract R&D sales were $847,000 in the second quarter of 2004 versus $1.1

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million in the same period of 2003, a decrease of about 25%. The decline is primarily due to the winding down of a contract R&D project and decreased integration services sales. For the six-month period ended June 30, 2004, instrument sales were $3.2 million or 32% of total net sales, versus $4.6 million, or 35% of total net sales for the same period in 2003 due primarily to the effects of product transitions. Chemistry consumable sales for the six-month period ended June 30, 2004 were $5.4 million versus $6.3 million in the same period in 2003, a decrease of 15%. The decline in chemistry consumables products for both the three- and six-months periods ended June 30, 2004 is primarily attributable to the sale of certain product lines to a third party.

Cost of sales

Gross margin as a percent of sales was 43.1% for the second quarter of 2004 compared to 43.8% for the second quarter of 2003. For the six-month period ended June 30, 2004, gross margin as a percent of sales was 36.6% as compared to 43.9% for the same period in 2003. Lower margin performance was primarily attributable to our performance in the first quarter in which lower revenue did not support the relatively fixed manufacturing costs. In addition, during the first quarter of 2004, we incurred costs of approximately $211,000 due to the transfer of the manufacturing of our flash chromatography instrument business from Cardiff, Wales to Foster City, California and the transfer of a chemistry resins business from Foster City to Cardiff. There was also an additional inventory write-off of approximately $120,000 due to a product line that was discontinued in 2003. No provision was made in 2003, thus the full write-off was taken in 2004.

Research and development expenses

Research and development expenses decreased to $0.9 million for the three-month period ended June 30, 2004 compared to $1.1 million for the same period in 2003, a decrease of 12%. 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 and fewer outside service providers resulting from the effects of the restructuring program initiated in the third quarter of 2002 and fewer ongoing R&D projects. For the six-month period ended June 30, 2004, research and development expenses decreased to $1.9 million from $2.4 million, a decrease of 20%, primarily due to lower personnel costs resulting from the third quarter 2002 restructuring program, along with lower engineering supplies expense.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased to $3.2 million in the three-month period ended June 30, 2004 from $3.7 million for the same period in 2003, a decrease of 13%. 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, lower personnel costs, and lower costs associated with promotional expenses, offset by higher legal and outside service expense. Selling, general and administrative expenses decreased to $6.3 million for the six-month period ended June 30, 2004 from $7.5 million, a decrease of 16%. The decrease was due primarily to the same factors driving the second quarter results.

Restructuring charges

On August 8, 2002, the Company announced its intention to execute a restructuring program focused on improving productivity, reducing operational expenses in remote offices, and implementing a workforce reduction of approximately 20% of the existing worldwide employees. As a result, the Company recognized a charge of $1.8 million in the third quarter ended September 30, 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. The restructuring program is estimated to result in annualized savings of approximately $3.0 million beginning in fiscal 2003, realized primarily in reduced operating costs as a result of reduced employee-related costs. As of June 30, 2004, 43 of the 44 employees had been terminated. The remaining accrued restructuring liability was $27,000 at June 30, 2004, which relates to excess leased facilities and workforce reduction and other related charges. For the quarterly period ended June 31, 2004, there were $98,000 of cash payments related to the restructuring program. For the six months ended June 30, 2004, cash payments related to the restructuring program were $131,000. Amounts related to the abandonment of excess leased facilities will be paid as the lease payments become due over the remainder of the lease terms through 2004.

Amortization of purchased intangible assets

For the quarter ended June 30, 2004, as part of operating expenses, the Company recorded amortization of purchased intangibles of $120,000 compared to $214,000 in the same period in 2003. For the six-month period ended June 30, 2004,

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the Company recorded amortization of purchased intangibles of $241,000 compared to $425,000 for the same period in 2003. The decrease in amortization expense for both periods is due to the lower carrying value of the purchased intangible assets.

Interest and Other Income (Expense), net

Interest and other income decreased to $1,000 for the three-month period ended June 30, 2004 as compared to $289,000 for the same period in 2003, primarily because of lower interest income due to lower cash balances invested and the effects of foreign currency transaction differences. Interest and other expense was $23,000 for the second quarter of 2004 compared to $148,000 in the same period in 2003, primarily due to lower interest expense as the notes payable for the Jones Group acquisition were repaid in full during the quarter ended June 30, 2004. For the six-month period ended June 30, 2004, interest and other income decreased to $331,000 as compared to $532,000 for the same period in 2003 due to the same factors driving the second quarter results. Interest and other expense was $160,000 for the first half of 2004 as compared to $326,000 in the first half of 2003.

Provision for Income Taxes

The Company recorded a provision for income taxes of approximately $8,000 for the UK corporate tax liability of Jones Group for the three-month period ended June 30, 2004 as compared to approximately $53,000 for the same period in 2003. The Company recorded a tax benefit of approximately $19,000 due to the loss before taxes of Jones Group in the UK for the six-month period ended June 30, 2004 as compared to provision for income taxes of approximately $111,000 to record the UK corporate tax liability of Jones Group for the same period in 2003.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2004, the Company had cash, cash equivalents, investments and restricted cash of $15.0 million compared to $31.2 million at December 31, 2003. The decrease was primarily due to the use of $3.3 million in general operating activities, repayment of the notes payable, using restricted cash of approximately $12.2 million related to the acquisition of the Jones Group and $0.7 million used for capital expenditures.

Restricted cash of $0.3 million at June 30 2004 represents deposits against operating leases. The restricted cash of approximately $12.2 million that served to secure the notes payable as purchase consideration of the Jones Group was used during the second quarter of 2004 to repay those notes in full.

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

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. During the six months ended June 30, 2004, the Company repurchased 50,000 shares of its common stock on the open market for approximately $81,000 at an average price of $1.62 per share. Through June 30, 2004, the Company had repurchased 100,000 shares of its outstanding common stock at an average price of $1.28, pursuant to our stock repurchase program.

The Company expects to have negative cash flows from operations through at least the fourth quarter of 2004. We may also use cash resources to fund additional collaborative or strategic relationships, acquisitions or investments in other businesses, technologies or product lines. Based on our current expectations, we believe that our current cash balances will be sufficient to fund our operations through at least the next 12 months.

At June 30, 2004, there have not been any substantial changes to the Company’s contractual cash obligations from those reported at December 31, 2003.

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New Accounting Standards

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 believe that it currently has any investments in variable interest entities, therefore the adoption of FIN 46 did not have a material impact on the Company’s financial condition or results of operations.

In March 2004, the FASB issued an exposure draft of a proposed standard that, if adopted, will significantly change the accounting for employee stock options and other equity-based compensation. The proposed standard would require companies to expense the fair value of stock options on the grant date and would be effective at the beginning of the Company’s 2005 fiscal year. The Company will evaluate the requirements of the final standard, which is expected to be finalized in late 2004, to determine its impact on the Company’s results of operations.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

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

We have incurred operating losses and negative cash flows from operations since our inception. As of June 30, 2004, we had an accumulated deficit of $81.8 million and we recorded a net loss of $4.6 million for the six-month period ended June 30, 2004. We expect to continue to incur operating and net losses during 2004 and we may never generate positive cash flows.

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. 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. 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. 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.

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

Pharmaceutical, biotechnology, life sciences and chemical organizations have historically performed chemistry development using traditional laboratory methods. To date, our products have not been as widely adopted by these industries as we had expected. 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™ 3400 process chemistry workstation.

•

Convince prospective customers that our products and our ability to supply and support our products are equivalent or better as compared to competitor companies.

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

Our product development efforts may not produce commercially viable products.

We continue to devote significant personnel and financial resources to research and development activities to develop new products. We may not be successful in developing new products, and we may never realize any benefits from such research and development activities, which may not produce commercially viable products. Our ability to increase our revenues and achieve and sustain profitability is dependent upon our ability to successfully develop new and commercially viable products. During the first half of 2003, we launched a new product, the Advantage Series™ 3400 workstation and in the first half of 2004, we launched the FlashMaster Personal+ system and the Advantage Series 2410 personal screening synthesizer. Our ability to increase revenues in 2004 and beyond is dependent on the success of these products.

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

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

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

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

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

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

We face risks associated with past and future acquisitions.

Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing

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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. During the second quarter of 2004, we completed the integration activities and projects, which included the transition of the manufacturing and R&D operations of the flash chromatography business to Foster City, California. Because these operations have only recently been transferred to our Foster City facility, there can be no assurance that these operations will be successfully continued. The failure to operate the manufacturing and R&D operations successfully may materially affect our business going forward.

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

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

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

•

pharmaceutical companies developing their own instruments;

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

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

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

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

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

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

•

the possibility that one or more of our vendors could terminate their services at any time without notice;

•

reduced control over pricing, quality and timely delivery, due to the difficulties in switching to alternative vendors; and

•

the potential delays and expenses of seeking alternative sources of manufacturing services.

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

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

We have received correspondence from a stockholder claiming that our Board of Directors wasted corporate funds, breached their fiduciary duty and otherwise took actions contrary to Delaware law. Such claims may result in our being involved in litigation. Although we believe that these claims are without merit, we cannot assure you that these or additional claims will not result in litigation in the future or that any lawsuits will not be successful. We could incur substantial costs and diversion of management resources to defend any lawsuit, which could harm our business. In addition, we may be obligated under our charter documents and written indemnification agreements to indemnify our management and directors for legal fees and other costs incurred in defending any such lawsuits. Legal fees and costs in connection with any litigation are likely to be substantial.

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

As a global concern, we face exposure to adverse movements in foreign currency and US dollar exchange rates. During the first half of 2004, approximately 55% of our net sales were exposed to foreign currency risk. During the same period, approximately 25% 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.

Our business is subject to risks from international operations.

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

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

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

We may be sued for infringing on the intellectual property rights of others. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation could affect our profitability. In addition, litigation is time consuming and could divert management attention and resources away from our business. If we do not prevail in any litigation, in addition to any

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

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

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

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

The trading price of our common stock has been highly volatile and ranged in 2004 from a per-share high of $2.68 to a low of $0.91 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;

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announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

•

additions or departures of key personnel, including any directors;

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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

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transferable without restriction or further registration under the Securities Act, except for any shares purchased by our affiliates, as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are restricted securities as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act, to the extent permitted by Rule 144 or other exemptions under the Securities Act.

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

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

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

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

Our certificate of incorporation, bylaws and Stockholder Rights Plan contain 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 rights issued pursuant to our Preferred Stock Rights Agreement will become exercisable the tenth day after a person or group announces acquisition of 10 % or more of our common stock or announces commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 10 % or more of our common stock. If the rights become exercisable, the holders of the rights (other than the person acquiring 10 % or more of our common stock) will be entitled to acquire, in exchange for the rights’ exercise price, shares of our common stock or shares of any company in which we are merged, with a value equal to twice the rights’ exercise price.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the second quarter of 2004, we repaid in full, the notes payable that were denominated in British Pound Sterling in the amount of £7,650,000 related to the acquisition of the Jones Group. With the exception of this event, our market risk disclosures have not changed significantly from those set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as defined in Rules 13(a)-14(c) under the Securities Exchange Act of 1934 (“Exchange Act”) are effective to ensure that information required to be disclosed by the Company in this report and other reports that it files under the Exchange Act is recorded, processed, summarized and reported within the periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in

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achieving its stated goals under all potential future conditions, regardless of how remote.

There have been no significant changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

Company Purchases of Common Stock

The following table provides information about purchases by the Company for the six months ended June 30, 2004 of our common stock:

1.		All purchases were made pursuant to our publicly announced repurchase program.
2.		On August 8, 2002, we announced the approval by our Board of Directors of a stock repurchase program under which we may repurchase up to $500,000 of our outstanding common stock through open market transactions. The duration of our stock repurchase program is open-ended and 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.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

At the Annual Meeting of Stockholders held on June 9, 2004 the following proposals were adopted by the margins indicated:

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1)

To elect the following Class I director to hold office for a term of three years until the annual meeting of stockholders in the year 2007.

		Mr. Brook H. Byers and Mr. Peter M. Macintyre continue to serve as Class II directors until the annual meeting of stockholders in the year 2005. Mr. David G. Ludvigson and Dr. Brian W. Metcalf continue to serve as Class III directors until the annual meeting of stockholders in the year 2006.
2)		Ratification of appointment of Ernst & Young LLP as independent auditors of Argonaut Technologies, Inc. for the fiscal year ending December 31, 2004.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits.
		The following exhibits have been file with this report.

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(b)		Reports on Form 8-K.
		On April 29, 2004, 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 March 30, 2004.
		On May 25, 2004, the Company filed a report on Form 8-K describing the action taken by the board of directors of the Company, in which they declared a dividend of one preferred share purchase right for each outstanding share of common stock, par value $0.0001 per share.
		The Company filed no other reports on Form 8-K during the period ended June 30, 2004.

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SIGNATURES

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

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ARGONAUT TECHNOLOGIES, INC.
FORM 10-K
Quarterly Period Ended June 30, 2004

EXHIBIT INDEX

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