SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2005

OR

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

For the transition period from                      to

Commission file number 000-31019

220 Saginaw Drive
Redwood City, CA 94063
(Address of principal executive offices, including zip code)

(650) 716-1600
(Registrant’s telephone number, including area code)

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

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

There were 20,773,762 shares of the registrant’s common stock outstanding on April 30, 2005.

Argonaut Technologies, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2005

TABLE OF CONTENTS

Page 2 of 22

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.

Page 3 of  22

ARGONAUT TECHNOLOGIES, INC.

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

Page 4 of  22

ARGONAUT TECHNOLOGIES, INC.

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

Page 5 of  22

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, 2004 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, 2004 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, 2005, 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 three months ended March 31, 2005 and 2004 are as follows (in thousands):

Recent Accounting Pronouncements

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, to clarify that, abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred for fiscal years beginning after June 5, 2005. We do not expect the adoption of SFAS 151 to have a significant impact on our financial condition or results of operations.

     In December 2004, the FASB issued SFAS No. 123R, “Shared-Based Benefits"(“SFAS 123R”). This statement is a revision to Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123R will require us to measure the cost of our employee stock-based compensation

Page 6 of  22

awards granted after the effective date based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award). SFAS 123R addresses all forms of share-based payments awards, including shares issued under employee stock purchase plans, stock option, restricted stock and stock appreciation rights. In addition, we will be required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123R was originally effective for fiscal periods beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission delayed the effective date, and as such the Company will be required to implement the provisions of SFAS 123R beginning January 1, 2006. The Company is still considering the total impact of SFAS 123R implementation on the financial statement.

NOTE 2 — STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation as permitted by 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 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 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.

Page 7 of  22

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 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 3,245,552 and 3,749,995 shares of common stock were outstanding at March 31, 2005 and March 31, 2004, respectively.

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.

For the three-month periods ended March 31, 2005 and 2004, 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.

Page 8 of  22

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.

See Note 7 regarding impairment charges recorded on intangible assets. The amortization expense relating to purchased intangible assets for the three months ended March 31, 2005 and 2004 was $111,000 and $121,000 respectively.The following represents the gross carrying amounts and accumulated amortization of amortized purchased intangible assets at March 31, 2005.

NOTE 7 — IMPAIRMENT OF LONG-LIVED ASSETS

In the fourth quarter of 2004, the Company was preparing to enter into an agreement to sell substantially all of the assets of the Company to Biotage AB. This became the indicator that there would be an impairment to our remaining long-lived assets.

Impairment charges of long-lived assets have been recognized in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. For the year ended December 31, 2004, the Company recognized asset impairment charges of approximately $2.2 million, of which $1.4 million relate to fixed assets and $833,000 relate to purchased intangible assets with finite lives. These impairments were measured after comparing the carrying value of such long-lived assets to the discounted cash flows from the related reporting unit, as defined by SFAS 142. This comparison indicated impairment, at which point the Company estimated the fair value of these assets using a discount cash flow methodology. The carrying value of these assets exceeded this estimated fair value by $2.2 million.

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 building our core consumables business, and related accruals, values of our assets and liabilities over their remaining useful lives and our testing for impairment of goodwill, 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 and the possibility of selling substantially all of our assets and winding up our business. 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. 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”.

Page 9 of  22

Overview

We develop 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, 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.

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.

Since our inception, we have incurred significant losses and, as of March 31, 2005, we had an accumulated deficit of $91.0 million.

Recent Developments

Proposed Asset Sale

On March 24, 2005 the Company filed a proxy statement asking stockholders of Argonaut Technologies, Inc. to approve the sale of the assets of Argonaut’s chemistry consumables business and certain assets related to the process research development business at a special meeting. On May 3, 2005, the Company mailed a definitive proxy to stockholders for a special meeting to be held on June 1, 2005, regarding the proposed asset sale. As the proposed asset sale has not yet been approved or closed, unless otherwise indicated, any forward-looking information disclosed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations assumes the continued operation of our current business.

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, 2004 filed with the Securities and Exchange Commission on April 21, 2005.

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2005

Net sales

Net sales in the three-month period ended March 31, 2005 were $4.8 million compared to $4.7 million for the same period in 2004, an increase of 3%. The increase in net sales is primarily due to an increase of 12% in sales of our core product lines offset by lower revenues from discontinued product lines and no revenues from our contract research and development (“R&D”) project. For the first quarter of 2005, instrument sales comprised approximately 32% of net sales, chemistry consumables sales comprised approximately 58% of net sales, and service, integration services and contract R&D together comprised approximately 10% of net sales. Instrument sales were $1.6 million in the first quarter of 2005 versus $1.4 million for the same period in 2004, primarily due to an increase in sales of our core product lines offset by lower revenues from the discontinuation of certain product lines. Chemistry consumables sales were $2.8 million in the first quarter of 2005 versus $2.7 million in the same period of 2004, an increase of 4%. Services and integration sales were $266,000 in the first quarter of 2005 versus $551,000 in the same period of 2004, a decrease of about 52%. The decline is primarily due to no contract R&D revenues in 2005.

Cost of sales

Gross margin as a percent of sales was 43% for the first quarter of 2005 compared to 29.2% for the first quarter of 2004. Higher margin performance in 2005 was due to higher revenues of products that yielded higher margins. The margin in first

Page 10 of  22

quarter of 2004 was impacted negatively by the costs incurred by the Company of approximately $211,000 due to the transfer of the manufacturing of our flash chromatography instruments from Cardiff, Wales to Foster City, California and the transfer of a chemistry resins manufacturing from Foster City to Cardiff.

Research and development expenses

Research and development expenses, which were $0.9 million for the three-month period ended March 31, 2005 remained about the same compared to the same period in 2004. 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.

Selling, general and administrative expenses

Selling, general and administrative expenses increased to $3.4 million in the three-month period ended March 31, 2005 from $3.0 million for the same period in 2004, an increase of 12%. 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 increase was primarily attributable to transaction related costs of $725,000 in connection with the proposed sale of the assets of Argonaut’s chemistry consumables business and certain assets related to the process research development business to Biotage AB. Without these transaction related costs, expenses would have been $2.7 million or 10% lower compared to the same period in 2004.

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 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. As of March 31, 2004, 40 of the 44 employees had been terminated. The remaining accrued restructuring liability was $158,000 at March 31, 2004. For the quarterly period ended March 31, 2004, there were $33,000 of cash payments related to the restructuring program. As of December 31, 2004, all amounts related to workforce reduction and other related charges and abandonment of excess leased facilities had been paid.

Amortization of purchased intangible assets

For the quarter ended March 31, 2005, as part of operating expenses, the Company recorded amortization of purchased intangibles of $111,000 compared to $121,000 in the same period in 2004. The decrease in amortization expense is due to the lower carrying value of the purchased intangible assets.

Interest and other income (expense), net

Interest and other income decreased to $137,000 for the three-month period ended March 31, 2005 as compared to $329,000 for the same period in 2004, primarily due to lower interest income from short-term investments. Interest and other expense was $78,000 for the first quarter of 2005 compared to $137,000 in the same period in 2004 primarily due to lower interest expense. The notes payable for the Jones Group acquisition was paid in full in 2004.

Provision for income taxes

The Company recorded a benefit for income taxes of approximately $63,000 in the UK subsidiary for the three-month period ended March 31, 2005 as compared to a benefit for income taxes of approximately $27,000 in the UK subsidiary for the same period in 2004. The benefit in 2005 is largely due to the recognition of R & D tax credits.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2005, the Company had cash, cash equivalents, investments and restricted cash of $9.8 million compared to $11.0 million at December 31, 2004. The decrease was primarily due to the use of $800,000 in general operating activities and $8,000 used for capital expenditures.

At March 31, 2005, restricted cash of $169,000 represents deposits against operating leases.

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

Page 11 of  22

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. Through March 31, 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 2005. On March 24, 2005 the Company filed a proxy statement asking stockholders of Argonaut Technologies, Inc. at a special meeting to approve a sale of the assets of Argonaut’s chemistry consumables business and certain assets related to the process chemistry business. If the asset sale is completed, Argonaut will be paid $21.2 million in cash by Biotage AB, plus the assumption of specified liabilities by Biotage AB. If the proposed sale to Biotage AB is completed as anticipated, the Company intends to make an initial distribution of a portion of the net proceeds following the close of the asset sale, the exact amount or timing of which has not been determined but is expected to be approximately $0.70 per share. The Company currently intends to make the initial distribution to its stockholders within 45 days after the closing of the asset sale. If the proposed asset sale to Biotage AB is not completed as anticipated, the Company may also use cash resources and/or raise additional funds to fund future strategic alternatives the Company may elect to pursue.

At March 31, 2005, there have not been any substantial changes to the Company’s contractual cash obligations from those reported at December 31, 2004.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

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

We have signed a definitive agreement with Biotage AB to purchase our chemistry consumables business and certain assets related to the process research development business, which represents substantially all of our assets. If our stockholders approve the sale and we sell the business, we may wind up our affairs and continue to explore alternatives for the use of our remaining assets, including a plan of liquidation and dissolution.

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 March 31, 2005, we had an accumulated deficit of $91.0 million and we recorded net losses of $2.3 million for the three-month period ended March 31, 2005. We expect to continue to incur operating and net losses during 2005 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.

Page 12 of  22

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.

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(TM) 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 2005 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.

Page 13 of  22

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.

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.

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

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

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

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

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

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.

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

Page 14 of  22

of our high volume chemical intermediates for our consumables products. Our reliance on our outside vendors exposes us to risks including:

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

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

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

As a global concern, we face exposure to adverse movements in foreign currency and US dollar exchange rates. During the first quarter of 2005, approximately 69% 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 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.

Page 15 of  22

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

We are currently 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. The Company has announced that it has filed an application to have its common stock traded on The NASDAQ SmallCap Market. The transfer is expected to be effective following NASDAQ’s review of the Company’s application. If we fail to comply with the continued listing requirements of the NASDAQ SmallCap 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 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 2005 from a per-share high of $0.96 to a low of $0.68 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.

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.

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

Future changes in financial accounting standards, including the requirement to measure all sock-based compensation awards using a fair value method and record such expense in the consolidated financial statements, may cause adverse, unexpected earnings fluctuations and affect our financial position and results of operations. New accounting pronouncements and varying interpretations of such pronouncements have occurred with frequency in the recent past and may occur in the future. In addition, we may make changes in our accounting policies in the future. Compliance with changing regulation of corporate governance and public disclosure will also result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq

Page 16 of  22

National Market listing requirements, are creating uncertainty for companies such as ours and compliance costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment will result in increased general and administrative expenses and may cause a diversion of management time and attention from revenue-generating activities to compliance activities.

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.

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

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

Although our board of directors has not established a firm timetable for distributions to stockholders, our board of directors intends, subject to contingencies inherent in winding up our business, to make distributions as promptly as practicable, including an initial distribution of a portion of the net proceeds of the asset sale to Biotage AB within 45 days after the closing of the asset sale. We intend that any distributions to the stockholders will be in the form of cash. Our board of directors is, however, currently unable to predict the precise nature, amount or timing of any distribution to stockholders. The actual nature, amount and timing of any distributions will be determined by our board of directors (or possibly in the case of a plan complete liquidation and dissolution, a trustee designated by our board of directors), in its sole discretion, and will depend in part on, among other things, the final amount of the purchase price we receive from Biotage AB in the asset sale, our ability to convert our remaining assets into cash and the amount of our liabilities and obligations, including any amounts we may owe to Biotage AB pursuant to our indemnification obligations under the purchase agreement.

In lieu of satisfying all of our liabilities and obligations prior to making distributions to our stockholders, we may instead reserve assets deemed by management and our board of directors to be adequate to provide for those liabilities and obligations.

Uncertainties as to the precise value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value ultimately distributable to stockholders. Claims, liabilities and expenses from operations (including operating costs, salaries, income taxes, payroll and local taxes, legal, accounting and miscellaneous office expenses), although declining, will continue to be incurred following stockholder approval of the asset sale to Biotage AB. These expenses will reduce the amount of assets available for ultimate distribution to stockholders, and, while a precise estimate of those expenses cannot currently be made, management and the board of directors believe that available cash amounts received from the sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims (including contingent liabilities) and to make cash distributions to stockholders. However, no assurances can be given that available cash and amounts received on the sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims and to make cash distributions to stockholders. If available cash and amounts received on the sale of assets are not adequate to provide for our obligations, liabilities, expenses and claims, distributions of cash and other assets to our stockholders will be reduced and could be eliminated.

Further, we are currently unable to predict the precise timing of any distributions pursuant to our wind up. The timing of any distribution will depend on and could be delayed by, among other things, the timing of sales of our non-cash assets and claim settlements with creditors. Additionally, a creditor could seek an injunction against the making of distributions to our stockholders on the ground that the amounts to be distributed were needed to provide for the payment of our liabilities and expenses. Any action of this type could delay or substantially diminish the amount available for distribution to our stockholders.

Page 17 of  22

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

The announcement of our intent to sell our chemistry consumables business to Biotage AB may result in adverse consequences to us, including causing our customers to stop purchasing from us or to purchase less of our products due to uncertainties regarding the transaction and our future operations. If this occurs, we would experience negative impacts on our revenues and cash flows, which may reduce the assets available for ultimate distribution to our stockholders in a liquidation and dissolution of our company.

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

Claims, liabilities and expenses from operations (such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes and legal and accounting fees), including operation of our process chemistry business, will continue to be incurred as we seek to close the asset to Biotage AB and wind up operations. These expenses will reduce the amounts of assets available for ultimate distribution to stockholders. Claims against the escrow account and any purchase price reduction could reduce the amount available to us from the sale of our chemistry consumables business. If available, cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.

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

We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though, compliance with the reporting requirements is economically burdensome.

If we pursue a plan of complete liquidation and dissolution, in order to curtail expenses, we currently intend to seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act after the filing of a certificate of dissolution. We anticipate that in that event, if relief were granted, we would continue to file current reports on Report 8-K to disclose material events relating to our liquidation and dissolution, along with any other reports that the Securities and Exchange Commission might require. However, the Securities and Exchange Commission may not grant relief.

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

The success of our winding up depends in large part on our ability to retain the services of certain of our key personnel. The retention of key personnel is particularly difficult under our current circumstances. Failure to retain these personnel could harm the implementation of our winding up. If we fail to retain these personnel, we will need to hire others to oversee our winding up, which could involve additional compensation expenses.

Under their change of control severance agreements, Ms. Goldenstein and Messrs. Foster, Tredger and Labadie have agreed to remain reasonably available to assist us in the transition for 90 days (180 days in the case of Ms. Goldenstein) after the asset sale to Biotage at the same base salary and level of benefits in effect before the asset sale. However, those executives will be entitled to their change of control benefits pursuant to their change of control severance agreements in any case.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk disclosures have not changed significantly from those set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on April 21, 2005.

Page 18 of  22

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), are responsible for evaluating and attesting as to the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15 under the Securities Exchange Act of 1934. In connection with the audit of our consolidated financial statements for the year ended December 31, 2004, our independent registered public accounting firm, Ernst & Young LLP, reported to our audit committee the identification of a “material weakness” (under the standards established by the Public Company Accounting Oversight Board) in our internal controls. Based in part on that evaluation, our management, including the CEO and CFO, concluded that as of March 31, 2005, our disclosure controls were not effective to ensure that that information about us required to be disclosed by us were recorded, processed, summarized and reported as required by applicable Securities and Exchange Commission rules and forms. In performing the assessment management believes that many of the items cited in connection with the material weakness determination were due to employee turnover in the US finance department and the need for resources to be used for the pending sale of substantially all of the Company’s assets to Biotage AB. In response to the material weakness, we are taking a number of corrective actions to insure that the financial information and other disclosures included in the Company future reports are complete and accurate in all material respects. Those actions include increasing internal review time and temporary staffing. Despite the deficiencies in our disclosure controls noted above, management does not believe that there are any material inaccuracies or omissions of material facts contained in this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting. Other than as noted above, there have been no significant changes in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the fiscal quarter ended March 31, 2005.

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

None.

Page 19 of  22

ITEM 6: EXHIBITS

(a) Exhibits.

      The following exhibits have been filed with this report.

Page 20 of  22

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.

Date: May 12, 2005	ARGONAUT TECHNOLOGIES, INC.
	By:	/s/ LISSA A. GOLDENSTEIN
		Lissa A. Goldenstein
		President and Chief Executive Officer

	By:	/s/ DAVID J. FOSTER
		David J. Foster
		Sr. Vice President and Chief Financial Officer

Page 21 of  22

ARGONAUT TECHNOLOGIES, INC.
FORM 10-Q
Quarterly Period Ended March 31, 2005

EXHIBIT INDEX