ARGONAUT TECHNOLOGIES INC, 424B4, 2000-07-19

ARGONAUT TECHNOLOGIES INC
424B4, 2000-07-19
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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PROSPECTUS
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4,600,000 Shares

[Agronanut Logo]
Common Stock
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This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock.

The Nasdaq National Market has approved our common stock for quotation under the
symbol "AGNT."

BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 8.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price $ 15.00 $69,000,000
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Underwriting discounts and commissions $ 1.05 $ 4,830,000
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Proceeds, before expenses, to Argonaut Technologies, Inc. $ 13.95 $64,170,000
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</TABLE>

The underwriters may also purchase up to 690,000 shares of common stock from us
at the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. The underwriters may exercise
this option only to cover over-allotments, if any. If the underwriters exercise
the option in full, the total underwriting discounts and commissions will be
$5,554,500, and the total proceeds, before expenses, to Argonaut Technologies,
Inc. will be $73,795,500.

The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about July 24, 2000.

UBS WARBURG LLC
ING BARINGS
SG COWEN

The date of this prospectus is July 19, 2000.
<PAGE> 2
Fold out - pages 2-3

Top of illustration:

Title: INNOVATIVE TECHNOLOGY THAT ENABLES CHEMISTS TO IMPROVE PRODUCTIVITY AND
ACCELERATE DRUG DEVELOPMENT

There are a series of nine images arranged across the two pages depicting
Argonaut's instruments and reagents. The products pictured are:

Under the "Argonaut Instruments" header:
- Trident Library Synthesizer
- Quest 210
- Trident Workstation
- Quest 205
- Trident Sample Processing Station
- FirstMate
- Endeavor
- Surveyor
-
Under the "Argonaut Reagents" header:
- ArgoGel, ArgoPore, PolyStyrene Resins
<PAGE> 3

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Through and including August 13, 2000 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling shares of our
common stock, whether or not participating in this offering, to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.

TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary.................... 3
The offering.......................... 6
Summary financial data................ 7
Risk factors.......................... 8
Forward-looking information........... 15
Use of proceeds....................... 16
Dividend policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected financial data............... 19
Management's discussion and analysis
of
financial condition and results of
operations.......................... 21
Business.............................. 27
Management............................ 42
Related party transactions............ 51
Principal stockholders................ 53
Description of capital stock.......... 55
Shares eligible for future sale....... 59
Underwriting.......................... 60
Legal matters......................... 62
Experts............................... 62
Where you can find more information... 62
Index to financial statements......... F-1
</TABLE>

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Prospectus summary

This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully including "Risk factors" and the financial statements and
related notes before making an investment decision.

OUR BUSINESS

We are a pioneer in the development, manufacturing and marketing of innovative
products that enable chemists to use high speed parallel synthesis for the
development of new drugs. The process of high speed parallel synthesis allows
chemists to rapidly create many compounds simultaneously. Our products include a
variety of parallel chemical synthesizers, which act as instruments that carry
out parallel synthesis, and reagents, or chemicals that are consumed in
synthesis. Our products enable chemists to increase their productivity,
accelerate the drug development process and reduce costs. Currently, chemists in
the pharmaceutical, biotechnology, life sciences and chemical research fields
worldwide use our products for chemistry development.

Advances in the drug discovery process have resulted in a significant increase
in the number of new tools and targets for the development of new drugs, or drug
targets. However, unlike drug discovery, drug development lacks the
technological advances and automation that would allow efficient utilization of
new targets. As a result, many companies are seeking innovative and
cost-effective tools and technologies for exploring the increasing number of
targets for the development of new drugs. Our instruments enable parallel
synthesis and automate many of the most labor-intensive steps of chemistry
development. Through automation, chemists are able to perform multiple
experiments under a variety of conditions in a fraction of the time it would
take to perform the same experiments using traditional chemistry development
methods. We believe that our products will enable companies to develop new drugs
in a faster and more productive and cost-effective manner than by using
traditional chemistry development methods. Companies may capitalize on the
wealth of potential new drug targets being generated by the drug discovery
process through the use of our products.

We began marketing our first product in 1996. We have a limited operating
history and have incurred significant losses since inception. Currently, we
market eight instruments and more than 40 reagents. Through March 31, 2000, we
have sold our products to more than 545 customers in the pharmaceutical,
biotechnology, life sciences and chemical research industries and have placed
more than 600 instruments worldwide. In addition, we have a track record of
quickly and effectively developing solutions to our customers' problems. In
order to ensure that our products meet the specific needs of chemists throughout
the research community, we have formed formal consortia and informal
relationships with teams of industry leaders and academic institutions for each
of our instruments released to date. Through this process we have developed
innovative products that have extensive customer input, validation and testing
prior to commercial introduction.

OUR MARKET OPPORTUNITY

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the human DNA sequence and the study of the role genes play in disease. Genomics
is creating an unprecedented wealth of information concerning potential drug
targets. Combinatorial chemistry is the rapid synthesis of large collections of
potential drug candidates. High throughput screening is the process whereby
large numbers of compounds are rapidly screened against a drug target. The
magazine Science estimated that sequencing of the human genome will provide an
estimated 5,000 to 10,000 relevant new drug targets over the next ten years,
compared to the approximately 500 targets that have been explored thus far.
Through combinatorial chemistry, chemists can generate chemical collections, or
libraries, consisting of millions of compounds. Researchers can screen such
compounds against drug targets through the use of high throughput screening
technologies. Chemists have been able to make these advances in drug discovery
by using new tools that simplify, automate and accelerate the drug discovery
process. Chemists are discovering a large number of new drug candidates that are
ready for the drug development process through widespread use of these tools.
However, the pharmaceutical industry does not have sufficient tools and
resources to fully exploit the opportunities presented by advances in drug
discovery due to the technological limitations of traditional drug development,
or chemistry development.

Traditional chemistry development methods have the following limitations:

+ traditional methods are time consuming and inefficient, due to the
labor-intensive nature of this process;

+ traditional methods require chemists to synthesize compounds one at a time.
This results in long drug development timelines, which delay product
commercialization and reduce the exclusivity period provided by patent
protection;

+ traditional methods are expensive due to the time and labor required of a
chemist to produce a single compound;

+ traditional methods limit the number of compounds synthesized, which can lead
to the selection of sub-optimal drug candidates, often resulting in drug
candidate failures;

+ chemists lack flexible tools and systems necessary to easily perform the wide
variety of complex experiments required for chemistry development; and

+ traditional methods are often difficult to employ and require skilled,
scientific personnel.

THE ARGONAUT SOLUTION

We design, manufacture and market instruments and reagents that increase the
productivity of chemists, thereby accelerating the drug development process. Our
products enable chemists to rapidly synthesize a wide range of compounds at a
reduced cost. We intend to promote our products as the laboratory standard for
chemists and the industry standard for companies seeking more efficient methods
of addressing their increasing drug development needs. We believe our technology
provides the following key benefits compared to traditional chemistry
development methods:

+ increased productivity;

+ reduced drug development timelines;

+ reduced cost;

+ improved intellectual property positions;

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+ flexibility; and

+ ease of use.

Our strategy is to become the leading provider of productivity and quality
enhancing tools for all stages of the drug development process. In order to
achieve this goal, we have implemented the following strategy:

+ focus initially on industry leaders within the pharmaceutical market;

+ expand our high-value reagent business;

+ continue to establish product development consortia and collaborations;

+ leverage global customer relationships through direct sales;

+ acquire complementary businesses; and

+ expand into new markets.

EXECUTIVE OFFICES

Our principal executive offices are located at 887 Industrial Road, Suite G, San
Carlos, California 94070, and our telephone number is (650) 598-1350. Our
corporate website is www.argotech.com. We do not intend the information
contained on our website to be part of this prospectus. We were incorporated in
Delaware in November 1994.

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The offering

The following information assumes that the underwriters do not exercise the
over-allotment option granted to them to purchase additional shares in the
offering.

Common stock we are offering........ 4,600,000 shares

Common stock to be outstanding after
the offering........................ 16,995,447 shares

Nasdaq National Market symbol....... AGNT

Use of proceeds..................... To fund our operations, including
continued development and manufacturing
of existing products and research and
development of additional products,
expanding our facilities to be able to
meet the needs of our growing business,
repayment of debt and for other working
capital and general corporate purposes.
See "Use of proceeds."

Unless otherwise indicated, all information in this prospectus has been adjusted
to reflect:

+ a 0.88-for-1 reverse stock split of our common stock completed in July 2000;
and

+ the conversion of all outstanding shares of our convertible preferred stock
into 9,978,538 shares of our common stock, which will become effective upon
the closing of this offering.

The number of shares of common stock to be outstanding after the offering in the
table above is based on the number of shares outstanding as of March 31, 2000,
excluding:

+ 1,765,416 shares issuable upon the exercise of options at a weighted-average
exercise price of $0.76 per share;

+ 124,665 shares issuable upon the exercise of warrants at a weighted-average
exercise price of $4.89 per share; and

+ a total of 2,806,447 shares available for future grant under our 1995
Incentive Stock Plan, 2000 Incentive Stock Plan and 2000 Employee Stock
Purchase Plan, of which options to purchase 350,329 shares of common stock
were granted in April and May 2000 under our 1995 Incentive Stock Plan.

In addition, we have agreed to issue an additional 690,000 shares if the
underwriters exercise their over-allotment option in full, which we describe in
"Underwriting." If the underwriters exercise this option in full, 17,685,447
shares of common stock will be outstanding after this offering.

ArgoGel(R), Argonaut Technologies(R), ArgoCaps(R), ArgoPore(R), Nautilus(R),
Trident(R), ArgoScoop(TM), Quest(TM), Reaction Cassette(TM), Surveyor(TM) and
Firstmate(TM) are trademarks of Argonaut Technologies, Inc. This prospectus also
refers to trademarks and trade names of other organizations.

Endeavor(TM) is a trademark of Symyx Technologies, Inc.

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Summary financial data

The pro forma net loss per share and shares used in computing pro forma net loss
per share are calculated as if all of our convertible preferred stock was
converted into shares of our common stock on the date of their issuance. The pro
forma as adjusted balance sheet below reflects the conversion of each
outstanding share of preferred stock into 0.88 of a share of common stock upon
the closing of this offering and the issuance and sale of 4,600,000 shares of
our common stock in this offering, after deducting the underwriting discounts
and commissions and estimated offering expenses, and our receipt of the net
proceeds from that sale.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
STATEMENT OF OPERATIONS DATA 1997 1998 1999 1999 2000
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(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 5,826 $12,076 $10,558 $ 2,981 $ 3,564
Costs and expenses:
Costs of sales................................ 3,155 5,608 4,689 1,241 1,399
Research and development...................... 4,292 4,922 4,180 975 1,261
Selling, general and administrative........... 4,795 7,108 9,125 1,990 2,931
------- ------- ------- -------- --------
Total costs and expenses.................... 12,242 17,638 17,994 4,206 5,591
------- ------- ------- -------- --------
Loss from operations............................ (6,416) (5,562) (7,436) (1,225) (2,027)
Interest and other income (expenses), net....... 216 (94) (167) (172) 10
------- ------- ------- -------- --------
Net loss........................................ $(6,200) $(5,656) $(7,603) $ (1,397) $ (2,017)
======= ======= ======= ======== ========
Net loss per share, basic and diluted........... $ (4.52) $ (3.31) $ (3.55) $ (0.68) $ (0.86)
======= ======= ======= ======== ========
Weighted-average shares used in computing net
loss per share, basic and diluted............. 1,372 1,710 2,142 2,047 2,350
Pro forma net loss per share, basic and
diluted....................................... $ (0.68) $ (0.16)
======= ========
Weighted-average shares used in computing pro
forma net loss per share, basic and diluted... 11,263 12,329
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
(UNAUDITED)
PRO FORMA
BALANCE SHEET DATA ACTUAL PRO FORMA AS ADJUSTED
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(In thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........... $ 9,137 $ 9,137 $ 72,107
Working capital............................................. 7,305 7,305 70,275
Total assets................................................ 16,510 16,510 79,480
Long term obligations, less current portion................. 1,652 1,652 1,652
Accumulated deficit......................................... (28,935) (28,935) (28,935)
Total stockholders' equity.................................. 7,652 7,652 70,622
</TABLE>

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Risk factors

You should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could be harmed. In such an event, the
trading price of our common stock could decline, and you may lose part or all of
your investment.

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY AND MAY BE REQUIRED TO RAISE ADDITIONAL FUNDS IF THE LOSSES
CONTINUE.

We have incurred operating losses and negative cash flow from operations since
our inception. As of March 31, 2000, we had an accumulated deficit of $28.9
million. We recorded net losses of $6.2 million in 1997, $5.7 million in 1998,
$7.6 million in 1999 and $2.0 million for the three months ended March 31, 2000.
We expect to continue to incur operating and net losses and negative cash flow
from operations, which may increase, for the foreseeable future due in part to
anticipated increases in expenses for research and development and expansion of
our sales and marketing capabilities. We may never become profitable.

We anticipate that our existing cash and cash equivalents, together with the net
proceeds of this offering, will be sufficient to fund our currently planned
operations through at least the next 24 months. However, this expectation is
based on our current operating plan, which could change as a result of many
factors, and we could require additional funding sooner than anticipated. To the
extent our capital resources are insufficient to meet our future capital
requirements, we will have to raise additional funds to continue the development
and commercialization of our products. Funds may not be available on favorable
terms, if at all. To the extent that we raise additional capital through the
sale of equity, the issuance of those securities could result in dilution to our
stockholders.

IF OUR PRODUCTS DO NOT BECOME WIDELY USED IN THE LIFE SCIENCES INDUSTRY, IT IS
UNLIKELY THAT WE WILL EVER BECOME PROFITABLE.

Pharmaceutical, biotechnology and life science companies have historically
performed chemistry development using traditional laboratory methods. To date,
our products have not been widely adopted by the life sciences industry. The
commercial success of our products will depend upon the adoption of these
products as a method to develop chemical compounds for the life sciences and
other industries. In order to be successful, our products must meet the
performance and pricing requirements for chemistry development within the life
sciences and other 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 quality and
accuracy as traditional methods and other new technologies which may be
developed;

+ manufacture products in sufficient quantities with acceptable quality and at
an acceptable cost; and

+ install and service sufficient quantities of our products.

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

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RISK FACTORS
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OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT PRODUCE COMMERCIALLY VIABLE PRODUCTS.

We intend 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. Our ability to increase our revenues and
achieve and sustain profitability is dependent upon our ability to successfully
develop new and commercially viable products.

BECAUSE WE RECEIVE REVENUES PRINCIPALLY FROM LIFE SCIENCE AND CHEMICAL
COMPANIES, THE CAPITAL SPENDING POLICIES OF THESE ENTITIES HAVE A SIGNIFICANT
EFFECT ON THE DEMAND FOR OUR PRODUCTS.

We market our products to pharmaceutical, biotechnology, life science and other
chemical research companies, and the capital spending policies of these entities
can have a significant effect on the demand for our products. 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
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 the pharmaceutical industry 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 science companies could cause our revenues to decline and harm our
profitability.

OUR 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 products depends in significant part
upon the perception that our products can help accelerate efforts in drug
development. The sale of many of our products typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
sales cycles of many of our products are lengthy and subject to a number of
significant 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. In particular, our operating results in the first and third
quarters have historically been depressed. 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.

OUR DIRECT SALES FORCE MAY NOT BE SUFFICIENTLY LARGE TO SUCCESSFULLY ADDRESS THE
MARKET FOR OUR PRODUCTS.

We sell a major portion of our products through our own sales force. We believe
that we will need to expand our direct sales and marketing force to successfully
address the market for our products. We may not be able to build an efficient
and effective sales and marketing force. 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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RISK FACTORS
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FAILURE TO EXPAND OUR INTERNATIONAL SALES AS WE INTEND WOULD REDUCE OUR ABILITY
TO BECOME PROFITABLE.

We will need to sell a significant number of our products outside of the United
States, to achieve our sales objectives. To be successful in our international
effort we will need to expand our direct sales force to conduct international
operations and develop relationships with international dealers and
distributors. We may not be able to expand our sales force or identify, attract
or retain suitable international dealers and distributors. As a result, we may
be unsuccessful in our international expansion efforts. We must continue to
establish and expand foreign operations and hire additional personnel to run
these operations, in order to expand our presence into international markets.

International operations involve a number of risks and burdens not typically
present in domestic operations, including:

+ preferences of certain customers to purchase goods manufactured in their own
country or geographic market;

+ difficulties in staffing and managing foreign operations;

+ licenses, tariffs and other trade barriers;

+ changes in regulatory requirements;

+ potentially adverse tax consequences; and

+ political and economic instability.

In addition, we conduct a portion of our business in Japanese yen and other
non-U.S. dollar currencies. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business will cause us to incur foreign
currency translation gains and losses. To date, our foreign currency translation
gains and losses have been immaterial. Our international operations will also be
subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of high technology products. We
cannot predict whether tariffs or restrictions upon the exportation or
importation of our products will be implemented by the United States or other
countries.

IF WE LOSE OUR EXCLUSIVE LICENSE TO PROPRIETARY TECHNOLOGY INCORPORATED INTO OUR
PRODUCTS WE MAY BE UNABLE TO CONTINUE SELLING THOSE PRODUCTS.

We have developed some of our products based on proprietary technology
originally developed by third parties. We currently have exclusive licenses to
use such technology in our products that are subject to termination in certain
events. In particular, our license to proprietary technology belonging to Symyx,
which is incorporated into our Endeavor product is subject to termination at
Symyx's or our option upon six months prior notice at any time after December
31, 2000. Our sales of this product do not currently constitute a material
portion of our revenue. We estimate that sales of this product will constitute
approximately 10 to 15% of our revenues this year. This estimate depends on a
variety of factors, including increased demand, and we cannot be certain that
this estimate will be accurate. If licensors terminate our licenses to any such
technology, our revenues would decline.

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RISK FACTORS
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IF WE HAVE DIFFICULTY MANAGING OUR GROWTH, OUR ABILITY TO INCREASE OUR REVENUES
AND BECOME PROFITABLE WOULD BE DAMAGED.

Our growth has placed significant demands on our management and other resources.
Our future success will depend on our ability to manage our growth, including:

+ continuing to train, motivate, manage and retain our existing employees and
to attract and assimilate new employees;

+ manufacturing on a timely basis increasing quantities of current products and
new products under development while maintaining product quality;

+ expanding and improving our domestic and international sales and marketing
capabilities; and

+ developing and improving our operational, financial, accounting and other
internal systems and controls consistent with our pace of growth.

If we are unable to manage our growth, our operations would suffer.

IF WE ARE UNABLE TO RETAIN THE PRINCIPAL MEMBERS OF OUR MANAGEMENT TEAM AND
OTHER KEY EMPLOYEES OR TO RECRUIT SALES, SUPPORT AND OTHER ADDITIONAL PERSONNEL,
OUR OPERATING RESULTS COULD SUFFER.

We are highly dependent on the principal members of our management team and
scientific staff. In particular, we are highly dependent on David Binkley, our
President and Chief Executive Officer, Lissa Goldenstein, our Vice President of
Marketing and Sales, and Jan Hughes, our Vice President of Product Development.
Our loss of the services of any of these persons could delay or reduce our
product development and commercialization efforts. None of the principal members
of our management team and scientific staff have entered into employment
agreements with us nor do we have any key person life insurance on such
individuals. We believe that we will need to recruit additional sales and
customer support personnel with the requisite backgrounds and expertise. Hiring
such personnel is very competitive in our industry. In addition, we will require
additional personnel in the areas of chemistry research, product development,
manufacturing and finance and administration. In particular, it is difficult to
attract and retain qualified individuals with the requisite experience in
chemistry. We may not be able to attract and retain the requisite personnel,
which could seriously harm our ability to manage our business.

BECAUSE WE HAVE LIMITED SOURCES OF PRODUCTION AND SUPPLIERS, OUR ABILITY TO
PRODUCE AND SUPPLY OUR PRODUCTS COULD BE IMPAIRED.

We outsource most of the assembly of our products to vendors. 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 would decline.

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RISK FACTORS
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RISKS RELATED TO OPERATING IN OUR INDUSTRY

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 in the United States and abroad that are engaged in
the development and production of similar products. We face competition
primarily from the following three sectors:

+ companies marketing conventional products based on traditional chemistry
methodologies;

+ pharmaceutical companies developing their own instruments; and

+ companies marketing products based upon parallel synthesis and other
innovative technologies, such as Mettler-Toledo AG and several smaller
instrument and reagent companies.

Many of our competitors have access to greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do. We face,
and will continue to face, intense competition from organizations serving the
life sciences industry that are developing or marketing competing products and
technologies. These organizations may develop products or technologies that are
superior to our products or technologies in terms of performance, cost or both.

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

IF WE INFRINGE ON OR MISAPPROPRIATE THE PROPRIETARY RIGHTS OF OTHERS OR WE ARE
UNABLE TO PROTECT OUR OWN INTELLECTUAL PROPERTY RIGHTS, OUR REVENUES COULD BE
HARMED.

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

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

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

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RISK FACTORS
--------------------------------------------------------------------------------

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE COULD BE VOLATILE, AND YOUR INVESTMENT COULD SUFFER A DECLINE IN
VALUE.

The trading price of our common stock is likely to be highly volatile and could
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 and life science
industries;

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

+ additions or departures of key personnel;

+ sales of our common stock; and

+ developments regarding our patents or other intellectual property or that of
our competitors.

In addition, the stock market in general, and the Nasdaq National 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 seriously harm the market
price of our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted. A securities class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management's attention and resources.

THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.

Prior to this offering, there has been no public market for our common stock. An
active trading market for our common stock may not develop following this
offering. You may not be able to sell your shares quickly or at the market price
if trading in our stock is not active. The initial public offering price will be
determined by negotiations between us and representatives of the underwriters
based upon a number of factors. The initial public offering price may not be
indicative of prices that will prevail in the trading market. See "Underwriting"
for more information regarding the factors considered in setting the initial
public offering price.

OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS WILL OWN
APPROXIMATELY 57% OF OUR COMMON STOCK, WHICH MAY PREVENT NEW INVESTORS FROM
INFLUENCING CORPORATE DECISIONS.

After this offering, our stockholders who currently own over 5% of our common
stock, our directors and executive officers will beneficially own approximately
57% of our outstanding common stock or approximately 55% if the underwriters
exercise their over-allotment option in full. These stockholders will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a change
in control of us even if beneficial to our other stockholders. See "Principal
stockholders" for additional information on the concentration of ownership of
our common stock.

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RISK FACTORS
--------------------------------------------------------------------------------

THE LARGE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AFTER
THIS OFFERING 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 after the closing
of this offering, 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. There will be 16,995,447 shares of common stock
outstanding immediately after this offering, or 17,685,447 shares if the
underwriters exercise their over-allotment option in full, based on the number
of shares outstanding at March 31, 2000. All of the shares sold in the offering
will be freely transferable without restriction or further registration under
the Securities Act, except for any shares purchased by our "affiliates," as
defined in Rule 144 of the Securities Act. The remaining shares of common stock
outstanding will be "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.

After this offering, we intend to register 5,400,179 shares of common stock that
are reserved for issuance upon exercise of options granted under our stock
option and employee stock purchase plans. Once we register these shares, they
can be sold in the public market upon issuance, subject to restrictions under
the securities laws applicable to resales by affiliates. See "Shares eligible
for future sale."

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.

The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value per share of our common
stock. Therefore, if you purchase shares of our common stock in this offering,
you will pay a price per share that substantially exceeds the value of our
tangible assets after subtracting our liabilities. You will incur immediate
dilution of approximately $10.84 in the pro forma net tangible book value per
share of our common stock from the price per share that you pay for our common
stock. If the holders of our outstanding options or warrants exercise those
options or warrants at prices below the initial public offering price, you will
incur further dilution. You will contribute 66.1% of the total amount we have
received in funding through the effective date of our initial public offering,
but will own only 27.1% of the shares outstanding on that date.

BECAUSE IT IS UNLIKELY THAT WE WILL EVER PAY DIVIDENDS, YOU WILL ONLY BE ABLE TO
BENEFIT FROM HOLDING OUR STOCK IF THE STOCK PRICE APPRECIATES.

We have never paid cash dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future. Additionally, under our
outstanding credit agreements we are prohibited from declaring or paying
dividends without the consent of our lender, Comdisco, Inc.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS AND UNDER DELAWARE LAW COULD
MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.

Our certificate of incorporation and bylaws 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. See "Description of capital
stock -- Anti-takeover effects of provisions of the certificate of
incorporation, bylaws and Delaware law."

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<PAGE> 16

--------------------------------------------------------------------------------

Forward-looking information

Some of the statements that we make under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from those
expressed or implied by any of our forward-looking statements. Some of these
factors are listed under "Risk factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "intends,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievement. Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason after the date of this
prospectus or to conform these statements to actual results or to changes in our
expectations.

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15
<PAGE> 17

--------------------------------------------------------------------------------

Use of proceeds

We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be approximately $63 million after deducting the underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that the net proceeds
will be approximately $72.6 million.

We currently intend to use the net proceeds of this offering to fund expansion
of our operations, including continued development and manufacturing of existing
products and research and development of additional products, expanding our
facilities to be able to meet the needs of our growing business, repayment of
debt and for other working capital and general corporate purposes. Although we
have no current plans, agreements or commitments with respect to any
acquisition, we may, if the opportunity arises, use a portion of the net
proceeds to acquire or invest in products, technologies or companies. The timing
and amount of our actual expenditures will be based on many factors, including
cash flows from operations and the growth of our business. Our management may
spend the proceeds from this offering in ways that the stockholders may not deem
desirable.

Until we use the net proceeds of this offering for the above purposes, we intend
to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.

Dividend policy

We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to finance
the growth and development of our business. Additionally, under our outstanding
credit agreements we are prohibited from declaring dividends without the consent
of our lender, Comdisco, Inc. Therefore, we do not expect to pay cash dividends
in the foreseeable future. Any future determination relating to our dividend
policy will be made in the discretion of our board of directors and will depend
on a number of factors, including future earnings, capital requirements,
financial conditions and future prospects and other factors the board of
directors may deem relevant.

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16
<PAGE> 18

--------------------------------------------------------------------------------

Capitalization

The following table sets forth our capitalization as of March 31, 2000:

+ on an actual basis;

+ on a pro forma basis to give effect to the automatic conversion of all of our
outstanding shares of preferred stock into 9,978,538 shares of common stock
upon the closing of this offering; and

+ on a pro forma as adjusted basis to give effect to the sale of the 4,600,000
shares of common stock offered by this prospectus and the receipt of the net
proceeds of the offering.

<TABLE>
<CAPTION>
MARCH 31, 2000
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-----------------------------------------------------------------------------------------------
(In thousands, except share and
per share amounts)
<S> <C> <C> <C>
Long-term obligations, less current portion.............. $ 1,652 $ 1,652 $ 1,652
-------- -------- ---------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value;
26,200,000 shares authorized, actual; 10,000,000
shares authorized, pro forma and pro forma as
adjusted; 11,339,268 shares issued and outstanding,
actual; none issued and outstanding, pro forma and
pro forma as adjusted............................... 1 -- --
Common stock, $0.0001 par value; 32,200,000 shares
authorized, actual; 120,000,000 shares authorized
pro forma and pro forma as adjusted; 2,416,909
shares issued and outstanding, actual; 12,395,447
shares issued and outstanding, pro forma, and
16,995,447 shares issued and outstanding, pro forma
as adjusted......................................... -- 1 2
Additional paid-in capital............................. 39,759 39,759 102,728
Deferred stock compensation............................ (3,147) (3,147) (3,147)
Accumulated deficit.................................... (28,935) (28,935) (28,935)
Accumulated other comprehensive income (loss).......... (26) (26) (26)
-------- -------- ---------
Total stockholders' equity..................... 7,652 7,652 70,622
-------- -------- ---------
Total capitalization........................... $ 9,304 $ 9,304 $ 72,274
======== ======== =========
</TABLE>

The table above does not include:

+ 1,765,416 shares issuable upon exercise of options outstanding at a
weighted-average exercise price of $0.76 per share at March 31, 2000.

+ 124,665 shares issuable upon exercise of warrants at a weighted-average
exercise price of $4.89 per share at March 31, 2000; and

+ a total of 2,806,447 shares available for future grant under our 1995
Incentive Stock Plan, 2000 Incentive Stock Plan and 2000 Employee Stock
Purchase Plan at March 31, 2000, of which options to purchase 350,329 shares
of common stock were granted in April and May 2000 under our 1995 Incentive
Stock Plan.

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<PAGE> 19

--------------------------------------------------------------------------------

Dilution

Our pro forma net tangible book value as of March 31, 2000, was approximately
$7.7 million, or $0.62 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the automatic conversion of our preferred stock outstanding as of March 31,
2000, into 9,978,538 shares of our common stock.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately afterwards, after giving effect to the
sale of 4,600,000 shares in this offering and after deducting underwriting
discounts and commissions and offering expenses. This represents an immediate
increase in pro forma net tangible book value of $3.54 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$10.84 per share to new investors. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.00
Pro forma net tangible book value per share as of March
31, 2000............................................... $0.62
Increase attributable to new investors.................... 3.54
Pro forma net tangible book value per share after the
offering.................................................. 4.16
------
Dilution per share to new investors......................... $10.84
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 2000, after
giving effect to this offering, the total number of shares of common stock
purchased from us and the total consideration and the average price per share
paid by existing stockholders and by new investors:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Existing stockholders......... 12,395,447 72.9% $ 35,349,000 33.9% $ 2.85
New investors................. 4,600,000 27.1 69,000,000 66.1 15.00
---------- ----- ------------ -----
Total.................... 16,995,447 100.0% $104,349,000 100.0%
========== ===== ============ =====
</TABLE>

After this offering and assuming the exercise in full of all options and
warrants outstanding and exercisable as of March 31, 2000, the average price per
share of existing stockholders would be reduced by $0.24 per share to be $2.61
per share.

After this offering and assuming the exercise in full of all options and
warrants outstanding and exercisable as of March 31, 2000, our pro forma net
tangible book value per share as of March 31, 2000 would be $3.84 per share,
representing an immediate increase in net tangible book value of $3.22 per share
to existing stockholders and an immediate dilution in net tangible book value of
$11.16 per share to new investors.

If the underwriters exercise their over-allotment option in full, the following
will occur:

+ the percentage of shares of our common stock held by existing stockholders
will decrease to approximately 70.1% of the total number of shares of our
common stock outstanding after this offering;

+ the number of shares of our common stock held by new public investors will
increase to 5,290,000, or approximately 29.9% of the total number of shares
of our common stock outstanding after this offering; and

+ our pro forma net tangible book value per share after the offering would be
$4.54 per share, the increase in net tangible book value per share to
existing stockholders would be $3.92 per share and the dilution in net
tangible book value to new investors would be $10.46.

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<PAGE> 20

--------------------------------------------------------------------------------

Selected financial data

The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes to such statements and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data as of December 31, 1998, and 1999, are derived from our consolidated
financial statements which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere in this prospectus. The statement of
operations data for the period from inception (November 10, 1994) to December
31, 1995 and the year ended December 31, 1996, and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited consolidated financial
statements not included in this prospectus. The statement of operations data for
the three months ended March 31, 1999 and 2000 and balance sheet data as of
March 31, 2000 are derived from unaudited consolidated financial statements
included elsewhere in this prospectus. Historical results are not necessarily
indicative of the results to be expected in the future.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 10, THREE MONTHS
1994) TO ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31,
------------- ------------------------------------- (UNAUDITED)
STATEMENT OF OPERATIONS DATA 1995 1996 1997 1998 1999 1999 2000
------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $ -- $ 2,305 $ 5,826 $12,076 $10,558 $ 2,981 $ 3,564
Costs and expenses:
Costs of sales................. -- 1,183 3,155 5,608 4,689 1,241 1,399
Research and development....... 1,987 4,056 4,292 4,922 4,180 975 1,261
Selling, general and
administrative............... 847 2,127 4,795 7,108 9,125 1,990 2,931
------- ------- ------- ------- ------- ------- -------
Total costs and expenses......... 2,834 7,366 12,242 17,638 17,994 4,206 5,591
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (2,834) (5,061) (6,416) (5,562) (7,436) (1,225) (2,027)
Interest and other income
(expenses), net................ 217 219 216 (94) (167) (172) 10
------- ------- ------- ------- ------- ------- -------
Net loss......................... $(2,617) $(4,842) $(6,200) $(5,656) $(7,603) $(1,397) $(2,017)
======= ======= ======= ======= ======= ======= =======
Net loss per share, basic and
diluted........................ $ (5.79) $ (4.20) $ (4.52) $ (3.31) $ (3.55) $ (0.68) $ (0.86)
======= ======= ======= ======= ======= ======= =======
Weighted-average shares used in
computing net loss per share,
basic and diluted.............. 452 1,154 1,372 1,710 2,142 2,047 2,350
Pro forma net loss per share,
basic and diluted.............. $ (0.68) $ (0.16)
======= =======
Weighted-average shares used in
computing pro forma net loss
per share, basic and diluted... 11,263 12,329
</TABLE>

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<PAGE> 21
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
BALANCE SHEET DATA (UNAUDITED)
-----------------------------------------------------------------------------------------------------------
(In thousands
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments............................ $ 3,213 $ 6,680 $ 7,664 $ 2,261 $ 11,073 $ 9,137
Working capital.......................... 1,767 5,910 6,559 3,115 9,061 7,305
Total assets............................. 3,999 9,831 11,948 9,363 19,080 16,510
Long-term obligations, less current
portion................................ 511 608 1,844 4,147 1,859 1,652
Accumulated deficit...................... (2,617) (7,459) (13,659) (19,315) (26,918) (28,935)
Total stockholders' equity............... 2,022 6,657 6,364 865 9,048 7,652
</TABLE>

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<PAGE> 22

--------------------------------------------------------------------------------

Management's discussion and analysis of financial condition
and results of operations

The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.

Since our inception, we have incurred significant losses and, as of March 31,
2000, we had an accumulated deficit of $28.9 million. We anticipate incurring
additional losses, which may increase, for the foreseeable future.

We derive revenues primarily from the sale of our instrument products. We
commenced commercial shipment of our first generation instrument, the Nautilus,
in 1996, the Quest product line in 1997, the Trident product line in 1998 and
the Surveyor and the Endeavor in 2000. Revenue from sales of our instrument
products is recognized when delivery and installation of the product is
complete. We also derive revenues from the sale of reagents and other instrument
related consumables.

Our expenses have consisted primarily of costs incurred in research and
development, manufacturing and general and administrative costs associated with
our operations, and the expansion of our sales and marketing organization. We
expect our research and development expenses to increase in the future as we
continue to develop our products. Our selling and marketing expenses are
expected to increase as we continue to expand the geographic coverage of our
direct sales and support organization. Our general and administrative expenses
are expected to increase as we expand our facilities and assume the obligations
of a public reporting company.

We have recorded deferred stock compensation in connection with the grant of
stock options to employees. Deferred stock compensation is the difference
between the exercise price of the options and the fair value of the common stock
at the date of grant. The fair value was determined based on the business
factors underlying the value of our common stock on the date of grant viewed in
light of our planned initial public offering and the expected initial public
offering price per share. We have also recorded stock compensation for options
granted to consultants in accordance with Statement of Financial Accounting
Standards No. 123. The options granted to consultants are periodically
remeasured as they vest, in accordance with Emerging Issues Task Force No.
96-18.

We recorded deferred stock compensation of approximately $3.8 million in the
year ended December 31, 1999 and approximately $540,000 in the three-month
period ended March 31, 2000. These amounts were recorded as a component of
stockholders' equity and are being amortized as charges to operations over the
vesting periods of the options, generally four years, using the graded vesting
method. We recorded amortization of deferred stock compensation of approximately
$653,000 in the year ended December 31, 1999 and approximately $499,000 in the
period ended March 31, 2000. In April and May 2000 we granted options to
purchase a total of 238,105 shares of common stock to our employees. We estimate
that additional deferred stock compensation of approximately $1.7 million will
be recorded as a result of these options. For options granted to employees
through May 31, 2000, we expect to record amortization of deferred stock
compensation as follows: approximately $1.8 million for the remainder of 2000;
approximately $1.5 million in 2001; approximately $893,000 in 2002;
approximately $475,000 in 2003; approximately $167,000 in 2004; and
approximately $14,000 in 2005. Also in April and May 2000, we granted options to
purchase 35,204 shares of common stock to consultants. Compensation expense
related to these options will be

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------

recorded as they vest in accordance with SFAS 123 and EITF 96-18. We also
granted performance-based options to purchase 77,020 shares to certain of our
employees. We will record compensation expense on these options when and if they
vest.

We have a limited history of operations. We anticipate that our quarterly
results of operations will fluctuate for the foreseeable future due to several
factors, including market evaluation and acceptance of our current and new
products, which may result in a lengthy sales cycle, patent conflicts, the
introduction of new products by our competitors, the timing and extent of our
research and development efforts, and the timing of significant orders. Our
limited history makes accurate predictions of future operations difficult.

RESULTS OF OPERATIONS

QUARTERS ENDED MARCH 31, 2000 AND 1999

NET SALES
Net sales in the first quarter of 2000 increased to $3.6 million from $3.0
million in the same period of 1999. The increase was due to slightly higher
sales in both instruments and chemistry products. The increase in instrument
sales was due to higher sales of the Quest product line, a full quarter's impact
of our FirstMate, offset by lower sales of Trident related products. Also in the
first quarter of 2000, we recognized revenue from the sale of our first unit of
our Surveyor product.

COST OF SALES
Cost of sales increased to $1.4 million in the first quarter of 2000 from $1.2
million in the first quarter of 1999. The increase was primarily due to higher
sales volume.

RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $1.3 million in the first quarter
of 2000 from $1.0 million in the same period of 1999. These expenses include
salaries and related costs of research and development personnel as well as the
cost of parts and supplies associated with research and development projects.
Personnel levels remained relatively constant in both periods and the increase
of $300,000 was primarily attributable to amortization of the deferred stock
compensation recorded in 1999 and the first quarter of 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $2.9 million in the
first quarter of 2000 from $2.0 million in the first quarter of 1999. These
expenses consist primarily of salaries and related costs for executive, sales
and marketing, finance and other administrative personnel and the cost of
facilities. The increase was attributable to the further expansion of our direct
sales force in the United States and Europe and also due to amortization of the
deferred stock compensation recorded in 1999 and the first quarter of 2000.

INTEREST AND OTHER INCOME (EXPENSES), NET
Interest and other income (expenses), net, increased to $10,000 in the first
quarter of 2000 from $(172,000) in the same period of 1999. The increase was
primarily due to interest income generated from the investment of proceeds of
our Series D preferred stock financing in May 1999.

YEARS ENDED DECEMBER 31, 1999 AND 1998

NET SALES
Net sales in 1999 were $10.6 million versus $12.1 million in 1998. The decrease
in our net sales is primarily the result of lower Quest sales, the
discontinuation of our first product, the Nautilus, in the

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------

first quarter of 1999, and a change in our product sales strategy to include
installation in the selling price of certain instrument products, resulting in a
delay in revenue recognition, partially offset by higher sales for the Trident
product line.

COST OF SALES
Cost of sales decreased to $4.7 million in 1999 from $5.6 million in 1998. This
decrease was primarily due to lower sales volume.

RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $4.2 million in 1999 from $4.9
million in 1998. These expenses include salaries and related costs of research
and development personnel as well as the costs of parts and supplies associated
with research and development projects. Personnel levels and related expenses
remained relatively constant during both periods. The $700,000 decrease in
research and development expenses is primarily attributable to the timing of the
cost of parts and components associated with specific research and development
projects. During 1998, the major focus of the research and development group was
on the Trident product line. During 1999, the research and development group
focused on several projects which were at earlier stages of development. This
resulted in a decrease in parts and supplies associated with the research.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $9.1 million in 1999
from $7.1 million in 1998. These expenses consist primarily of salaries and
related costs for executive, sales and marketing, finance and other
administrative personnel and the costs of facilities. The increase was
attributable to further expansion of our direct sales force in the United States
and Europe and the recruitment and placement of a general manager for our
Japanese subsidiary during 1999.

INTEREST AND OTHER INCOME (EXPENSES), NET
Net interest expense increased to $167,000 in 1999 from $94,000 in 1998. The
increase was primarily attributable to the interest expense for the additional
debt incurred on our equipment and accounts receivable financing loans.

INCOME TAXES
As of December 31, 1999, we had federal net operating loss and research credit
carryforwards of approximately $23.0 million and $600,000, respectively, which
expire on various dates between 2010 and 2019. We also had state net operating
loss carryforwards of approximately $7.4 million and research credit
carryforwards of approximately $500,000. The state net operating loss will
expire on various dates between 2003 and 2004. The state research credits will
not expire.

Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.

YEARS ENDED DECEMBER 31, 1998 AND 1997

NET SALES
Net sales increased to $12.1 million in 1998 from $5.8 million in 1997. The
increase in revenue is primarily attributable to increased U.S. sales of our
Quest product line, which was introduced in the last quarter of 1997.

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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------

COST OF SALES
Cost of sales increased to $5.6 million in 1998 from $3.2 million in 1997. The
increase is attributed to the increase in product sales over the period.

RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $4.9 million in 1998 from $4.3
million in 1997. These expenses include salaries and related costs of research
and development personnel as well as the costs of parts and supplies associated
with research and development projects. The increase in research and development
expense is attributable to the timing of the cost of parts and components
associated with specific research and development projects. During 1998 there
was an increase in the parts and supplies associated with the research and
development projects. Personnel levels and related expenses remained constant
during both periods.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $7.1 million in 1998
from $4.8 million in 1997. These expenses consist primarily of salaries and
related costs for executive, sales and marketing, finance and other
administrative personnel and the costs of facilities. The increase was
attributable to establishment of our wholly owned subsidiary in Japan, a
management change in our European office, and further expansion of our direct
sales force in the United States and Europe. Additionally, we introduced several
new products in 1998, which resulted in an increase in marketing activities such
as industry trade shows, advertising and collateral.

INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income and other income (expense), net, was $(94,000) in 1998 compared
to $216,000 in 1997. This decrease in interest income was primarily attributable
to the utilization of funds for operations in 1998, where previously the funds
were used for investment purposes, and the interest expense associated with the
debt incurred on our equipment and accounts receivable financing.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations principally with approximately $35 million of
private equity financings that came from a series of preferred stock offerings
from 1995 through 1999 as follows:

<TABLE>
<CAPTION>
NUMBER
ISSUE YEAR OF SHARES AMOUNT
(In thousands,
except share
amounts)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock, Series A................................... 1995 4,627,500 $ 4,628
Preferred Stock, Series B................................... 1996 2,923,073 9,500
Preferred Stock, Series C................................... 1997 1,180,000 5,900
Preferred Stock, Series D................................... 1999 2,608,695 15,000
-------
$35,028
=======
</TABLE>

Each share of Series A, B, C and D preferred stock is convertible into 0.88 of a
share of our common stock.

In addition, we have various loan agreements with Comdisco, Inc. for loan
facilities of up to $9.5 million. Through March 31, 2000, we have drawn down
approximately $5.5 million against these facilities and we had approximately
$4.0 million available for future draw downs. The loans are secured by our
assets, subordinated to institutional creditors and bear interest at rates
ranging from 10% to 12.5%. Under the terms of certain of the loan agreements, we
are required to issue to

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Comdisco, Inc. warrants to purchase shares of our Series C preferred stock upon
signing of the agreement and certain draw down limits. At March 31, 2000, we had
issued to Comdisco, Inc. warrants to purchase an aggregate of 91,665 shares of
our Series C preferred stock.

Net cash used in operating activities was $5.9 million in 1997, $7.3 million in
1998, $5.4 million in 1999 and $1.3 million in the three months ended March 31,
2000. Cash used in operating activities was attributable primarily to net
losses, after adjustments for non-cash items, and working capital requirements.

Net cash provided by (used in) investing activities was $(1.3 million) in 1997,
$567,000 in 1998, $(6.8 million) in 1999 and $655,000 in the three months ended
March 31, 2000. Our investing activities consisted principally of capital
expenditures and purchases and sales of our short-term investments.

Net cash provided by (used in) financing activities was $7.2 million in 1997,
$2.3 million in 1998, $14.9 million in 1999 and $(339,000) in the three months
ended March 31, 2000. Our financing activities consisted principally of
draw-downs on our loan facilities to finance our operations, repayments of our
loan and capital lease obligations and proceeds from the sale of our convertible
preferred stock.

We expect to have negative cash flow from operations through at least 2000.
However, we expect to incur increasing development expenses, as well as expenses
for additional personnel for production and commercialization efforts, 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. We
believe that our current cash balances, together with the net proceeds of this
offering and revenue to be derived from product sales and research and
development collaborations will be sufficient to fund our operations at least
through the next 24 months. To the extent our capital resources are insufficient
to meet future capital requirements, we will need to raise additional capital or
incur indebtedness to fund our operations. There can be no assurance that
additional debt or equity financing will be available on acceptable terms, if at
all. If adequate funds are not available, we may be required to delay, reduce
the scope of, or eliminate, our operations or obtain funds through arrangements
with collaborative partners or others that may require us to relinquish rights
to certain technologies or products that we might otherwise seek to retain.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK
Our exposure to interest rate risk is related to our investment portfolio and
our borrowings. Fixed rate investments and borrowings may have their fair market
value adversely impacted from changes in interest rates. Floating rate
investments may produce less income than expected if interest rates fall, and
floating rate borrowings will lead to additional interest expense if interest
rates increase. Due in part to these factors, our future investment income may
fall short of expectations, and our interest expense may be above our
expectations due to changes in U.S. interest rates. Further, we may suffer
losses in investment principal if we are forced to sell securities that have
declined in market value due to changes in interest rates.

We invest our excess cash in debt instruments of the U.S. government and its
agencies, and in debt instruments of high quality corporate issuers. Due to the
short term nature of these investments, we have assessed that there is no
material exposure to interest rate risk arising from our investments.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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We enter into loan arrangements with financial institutions when available on
favorable terms. At March 31, 2000, we had institutional borrowings of $4.1
million outstanding, which bear interest at rates ranging from 10% to 12.5%. We
have determined that there is no material exposure to interest rate risk arising
from these borrowings. Under the terms of these loan arrangements, the Company
is prohibited from declaring dividends without the consent of the financial
institution.

FOREIGN CURRENCY RISK
As we have operations and sales outside of the United States, our financial
results can be affected by changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which we operate. To date, our
foreign operations and sales have not been significant to our results of
operations and financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income. In June 1999, FASB issued Statement of
Financial Accounting Standards No. 137, which defers the effective date of SFAS
No. 133 to years beginning after June 15, 2000. We do not expect that the
adoption of SFAS No. 133 will have a material impact on results and operations
or financial condition.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
provides guidance on the revenue recognition. We have adopted this guidance in
our consolidated financial statements.

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Business

OVERVIEW

We are a pioneer in the development, manufacturing and marketing of innovative
products that enable chemists to use high speed parallel synthesis for the
development of new drugs. Currently, chemists in the pharmaceutical,
biotechnology, life sciences and chemical research fields worldwide use our
products for chemistry development.

Many companies are seeking innovative and cost-effective tools and technologies
for exploring the increasing number of targets for the development of new drugs.
Our instruments enable parallel synthesis and automate many of the most
labor-intensive steps of chemistry development. Through automation, chemists are
able to perform multiple experiments under a variety of conditions in a fraction
of the time it would take to perform the same experiments using traditional
chemistry development methods. We believe that our products enable companies to
develop new drugs in a faster and more productive and cost-effective manner than
traditional chemistry development methods, allowing companies to capitalize on
the wealth of potential new drug targets being generated by the drug discovery
process.

INDUSTRY

BACKGROUND

The life sciences research industry is undergoing fundamental change, resulting
principally from the explosive growth in gene discovery and the increasing
demand for greater efficiency in the drug discovery and development process.
Battelle Memorial Institute in Columbus, Ohio estimates that in the year 2000
the life sciences research industry will spend more than $47 billion in the
United States on drug discovery research and development. Advances in genomics,
combinatorial chemistry and high throughput screening have significantly
enhanced the discovery process. Science publication estimated that sequencing of
the human genome will provide an estimated 5,000 to 10,000 relevant new drug
targets over the next ten years, compared to the approximately 500 targets that
have been explored thus far. Chemists have been able to make these advances in
drug discovery by using new tools that simplify, automate and accelerate the
drug discovery process. Chemists are discovering a large number of new drug
candidates that are ready for the drug development process through widespread
use of these tools. However, the pharmaceutical industry does not have
sufficient tools and resources to fully exploit the opportunities presented by
advances in drug discovery due to the technological limitations of traditional
drug development, or chemistry development.

DRUG DISCOVERY AND DEVELOPMENT

Although the drug discovery and development process involves a number of steps,
it can best be understood in the context of two phases:

+ DISCOVERY PHASE. Discovery is the process by which chemists develop drug
targets identified through biology, including genomics and proteomics, the
study of protein function, into biological

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screens. Then, chemists test the millions of compounds produced by
combinatorial chemistry using high throughput biological screens to identify
possible drug candidates.

+ DEVELOPMENT PHASE. Chemists optimize the pharmacological, pharmacokinetic and
safety properties of a drug for human testing and approval during the
development phase. Pharmacological properties are the measure of a drug's
potency with respect to a specific drug target. The pharmacokinetic
properties of a drug are the extent to which the drug remains available in
the body for interaction with the target. Safety is a measure of a drug's
toxicity to humans. The development phase can be further broken down into
three stages:

+ LEAD OPTIMIZATION. Chemists evaluate the hundreds of drug candidates
that may emerge from the discovery phase using a process called lead
optimization. Chemists perform successive rounds of chemical syntheses
to create numerous variants of the drug candidates to find compounds
likely to have appropriate drug properties. Chemists then optimize the
compounds for their biological potency, thus creating lead compounds.

+ PRE-CLINICAL DEVELOPMENT. Chemists further refine a limited number of
lead compounds into clinical drug candidates by applying additional
chemistry methodologies in the pre-clinical development process. During
this process, chemists make relatively small changes to the compounds in
order to optimize their safety and pharmacokinetic properties.

+ CLINICAL DEVELOPMENT. Chemists test clinical candidates in humans to
demonstrate their safety and effectiveness, or efficacy during the
clinical development process. The successful outcome of clinical trials
may result in regulatory approval to commercialize the new drug product.
During this time period, chemists optimize the method of compound
synthesis prior to commencement of large scale manufacturing of the
drug.

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The following figure illustrates the drug discovery and development timeline:

[GRAPHIC]

TRADITIONAL CHEMISTRY METHODS FOR DRUG DEVELOPMENT

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

SET-UP AND EXECUTION OF REACTION
Chemists build a reaction apparatus as the first step in chemical synthesis is
building a reaction apparatus. Chemists often construct the apparatus using a
variety of traditional laboratory components depending on the type of chemistry
they are performing. Chemists use the apparatus to combine chemicals, reagents
and solutions, which the chemist will often heat or cool to specified
temperatures under air and moisture-free, or inert, conditions. The chemist then
monitors reactions over time to determine reaction progress. In chemistry
development, the assembly of a specific apparatus and the periodic addition of
chemicals can often be very complicated and time-consuming depending on the
complexity of the desired reaction. In addition, although some reactions occur
very quickly, others can take hours, or even days to complete, and involve
frequent monitoring.

PRODUCT WORK-UP
Chemists perform a product work-up as the second step in chemical synthesis.
Once the chemist determines that a reaction has proceeded to completion, the
chemist subjects the reaction mixture to an extensive reaction work-up. During
the work-up the chemist stops the reaction and carries out an initial cleanup of
the reaction mixture prior to purification. The chemist performs a series of
washes

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with a variety of solvents, a drying process and a filtration process during the
work-up. The chemist usually takes several hours to complete this
labor-intensive work-up process.

PRODUCT PURIFICATION
Chemists perform product purification as the third step in chemical synthesis.
During this step, the chemist isolates the desired product from its starting
materials and various byproducts. Product purification is an integral step in
chemical synthesis due to the fact that impurities may interfere in the next
chemical transformation or mask a drug's potency and toxicity. Chemists
typically utilize large volumes of different solvents during the purification
process. This step often takes the chemists days to complete.

PRODUCT ANALYSIS
Chemists perform product analysis as the final step in chemical synthesis. In
this step, the chemist confirms that the desired drug has been synthesized and
isolated before continuing on in the synthetic pathway or submitting the
compound for biological testing. Analysis requires a large amount of data
collection and is labor-intensive.

Chemists must repeat this laborious, four-step process until the desired
compound is obtained. The synthesis of a particular compound could take months
and even years to complete before researchers can determine whether the compound
has the desired drug properties.

LIMITATIONS OF EXISTING DRUG DEVELOPMENT TECHNOLOGIES

Traditional chemistry development methods have the following limitations:

+ LIMITED PRODUCTIVITY. Traditional methods are time consuming, inefficient and
labor-intensive. Stu Borman of Chemical and Engineering News estimates that
chemists currently synthesize an average of 100 compounds per year. Since it
is not economically feasible for pharmaceutical companies to increase
chemistry headcount to the extent necessary to take advantage of the
thousands of expected drug targets, we believe that throughput in the
development phase must increase dramatically.

+ LONG DRUG DEVELOPMENT TIMELINES. Traditional methods require chemists to
synthesize compounds one at a time in an inefficient, sequential process.
This results in long drug development timelines, which delay product
commercialization and reduce the commercial value of the exclusivity period
provided by patent protection.

+ HIGH COST. Traditional methods are expensive due to the time and labor
required of a chemist to produce a single compound. In addition, companies
utilizing the traditional methods incur the costs associated with the high
volumes of solvents and chemicals utilized and the expense associated with
their disposal.

+ HIGH DRUG CANDIDATE FAILURES. Traditional methods limit the number of
compounds synthesized, which can lead to companies or chemists selecting
sub-optimal drug candidates, often resulting in drug candidate failures.
These failures greatly increase the average length of time and cost required
to bring a specific drug to market. If a drug candidate fails during clinical
trials, a company must incur the time and expense of repeating all of the
development steps or face abandoning the project altogether. The cost of a
failed candidate increases significantly as it progresses to later stages of
the development process.

+ LACK OF FLEXIBILITY. To date, chemists have lacked flexible tools and systems
to easily perform the wide variety of complex experiments required for
chemistry development. Instead, chemists have had to repeatedly assemble
various components into complicated systems.

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+ DIFFICULT TO USE. The steps required for a chemist to put together an
apparatus and perform the reaction, work-up, purification and data analysis
are difficult to execute. Therefore, many of these complex chemistries
require skilled chemists with many years of training.

These limitations restrict the ability of pharmaceutical companies to fully
capitalize on the large number of new drug candidates resulting from the
significant technical advances in drug discovery. In order to take advantage of
these advances, we believe that pharmaceutical and life science companies will
need to increase productivity, shorten the drug development process and reduce
costs. We believe that these objectives will only be achieved through advances
and innovations in chemistry development technologies and tools.

THE ARGONAUT SOLUTION

We design, manufacture and market instruments and reagents that increase the
productivity of chemists, thereby accelerating the drug development process. Our
products enable chemists to rapidly synthesize a wide range of compounds at a
reduced cost. We design and develop products using extensive customer
assessment, validation and testing. We intend to promote our products as the
laboratory standard for chemists and the industry standard for companies seeking
more efficient methods of addressing their increasing drug development needs. We
believe our technology provides the following key benefits over current
chemistry development methods:

INCREASED PRODUCTIVITY
We design our systems to simultaneously synthesize many distinct compounds by
automating many of the labor-intensive aspects of the experiments. Using our
systems, chemists save significant time and effort while performing a greater
number of experiments. Chemists can create approximately 100 compounds per year
using the traditional approach of performing one reaction at a time. The same
chemist can create up to 192 compounds per day, using our products.

REDUCED DRUG DEVELOPMENT TIMELINES
Through parallel synthesis and automation, our products enable chemists to
optimize drug candidates faster by producing a significantly larger number of
compounds in less time than traditional methods. By simultaneously producing
numerous variants of drug candidates, our tools provide more comprehensive
information for the management by chemists of drug development projects. Our
customers can identify and accelerate the development of promising drug
candidates through the use of improved data, thus significantly reducing drug
development timelines.

REDUCED COSTS
Chemists are able to generate significant cost savings using our products by
reducing labor hours and solvent usage in the drug development process. We
believe that reactions performed in our systems versus those performed out using
traditional methods could result in significant cost savings per compound. In
addition, by synthesizing more drug candidates, our products provide greater
amounts of information and enable companies to abandon poor drug candidates
sooner, thereby eliminating the costs associated with later stage drug failures.

IMPROVED INTELLECTUAL PROPERTY POSITIONS
Chemists can significantly increase the number of chemical compounds synthesized
by using our tools. As a result, pharmaceutical companies may be able to improve
their patent and intellectual property positions by submitting more detailed
claims with their patent applications covering a wider variety of compounds.

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FLEXIBILITY
Our products are flexible and chemists can perform a wide range of chemical
reactions, from simple reactions to complex, multi-step reactions that require
inert environments using our tools. As a result, chemists are able to more
easily perform complex and difficult reactions, thereby encouraging innovation
on the part of chemists.

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

OUR STRATEGY

Our objective is to become the leading provider of productivity enhancing tools
for all stages of the chemistry development process. In order to achieve this
goal, we have implemented the following strategy:

FOCUS INITIALLY ON INDUSTRY LEADERS WITHIN THE PHARMACEUTICAL MARKET
We are initially focusing on the large and fast-growing sector of drug
development within the pharmaceutical market. We have targeted leading
pharmaceutical, biotechnology and life science companies as well as academic
institutions for our principal marketing efforts. We believe that these
customers provide the greatest opportunity for maximizing the use of our
products and that early adoption by these industry leaders and academic
institutions will promote wider market acceptance.

EXPAND OUR HIGH-VALUE REAGENT BUSINESS
In addition to our instruments, we develop, manufacture and market reagents and
other consumables for our products. We plan to continue to leverage our
installed base of instrument products through the sale of reagents and other
consumables to our existing customers as well as new customers. We intend to
expand our reagent business by offering additional reagent products.

CONTINUE TO ESTABLISH PRODUCT DEVELOPMENT COLLABORATIONS
We are continuing to pursue collaborations with pharmaceutical and biotechnology
companies in order to further develop and enhance our existing technology
platforms and products, as well as develop new products. For each of our
instruments released to date, we formed a consortium or collaboration with
industry leaders to define product requirements and to perform validation and
testing. We intend to follow this model in order to enhance market acceptance of
our current and future products. In addition, we intend to selectively
in-license and commercialize technology that can enhance our total product
portfolio.

BUILD GLOBAL CUSTOMER RELATIONSHIPS THROUGH DIRECT SALES
Our marketing approach is based on a thorough understanding of our customers'
specific chemistry needs, which we develop through the close interaction of our
direct sales and applications support personnel with our customers. We intend to
continue to expand our 41 person direct sales and applications support
organization to build long-term relationships with existing customers, gain
access to new accounts and expand into new geographic territories.

ACQUIRE COMPLEMENTARY BUSINESSES
We intend to pursue opportunities to expand our core business by acquiring
businesses that have technologies or capabilities complementary to ours. For
example, we may acquire software development expertise to capitalize on the
chemistry data flow generated by our products. In addition,

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we intend to explore acquiring distribution channels in specific geographic
regions to speed our market penetration.

EXPAND INTO NEW MARKETS
We believe that our existing technologies and products can be leveraged into
additional markets. Our capabilities enable us to address the needs of a wide
range of chemistries. As the use of productivity tools in drug development
becomes more visible, related industries are beginning to investigate these
tools. Other potential markets include cosmetics, catalysts, and high-margin
specialty chemicals.

PRODUCTS

Our products include instruments, reagents and instrument related consumables.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
INITIAL
PRIMARY DRUG COMMERCIAL
PRODUCT PRIMARY APPLICATION DEVELOPMENT PHASE SHIPMENT
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSTRUMENTS
------------------------------------------------------------------------------------------------------------
TRIDENT PRODUCT LINE
Trident Library Synthesizer Automated parallel library Lead optimization 1998
synthesis
Trident Workstation Semi-automated benchtop Lead optimization 1999
parallel synthesis
Trident Sample Processing Automated parallel work-up and Lead optimization 2000
Station purification
------------------------------------------------------------------------------------------------------------
QUEST PRODUCT LINE
Quest 210 Small scale, semi-automated Pre-clinical development 1997
parallel synthesis, work-up and
purification
Quest 205 Large scale, semi-automated Pre-clinical development 1998
parallel synthesis, work-up and
purification
FirstMate Entry-level, manual parallel Lead optimization, pre- 1999
synthesis clinical and clinical
development
------------------------------------------------------------------------------------------------------------
SURVEYOR Automated parallel chemistry Clinical development 2000
optimization, screening and
analysis
------------------------------------------------------------------------------------------------------------
ENDEAVOR Semi-automated parallel, high- Clinical development 2000
pressure reaction screening
------------------------------------------------------------------------------------------------------------
REAGENTS
------------------------------------------------------------------------------------------------------------
ArgoGel Compound synthesis Lead optimization 1996
ArgoPore Compound synthesis Lead optimization 1997
Polymer Reagents & Solution Compound synthesis, work-up and Pre-clinical development 1998
Phase Toolbox purification
------------------------------------------------------------------------------------------------------------
</TABLE>

INSTRUMENTS

We address the broad range of chemistries required in all three stages of the
drug development phase with our current instrument product offerings. We have
designed each of our instrument products for a specific stage of development,
although chemists often purchase our instruments to perform chemistry activities
in stages other than those for which they were initially designed.

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TRIDENT PRODUCT LINE

Chemistry groups performing lead optimization typically purchase our Trident
products. These chemists synthesize libraries of between one thousand and two
thousand compounds that are closely related to a drug candidate identified in
the discovery process. Chemists traditionally have had more difficulty
preforming chemistry methodologies in lead optimization, than in the drug
discovery phase, as they require more inert synthesis conditions. The
traditional automation tools developed for use in the drug discovery phase for
combinatorial synthesis are not capable of meeting the requirements of chemists
performing lead optimization. To enable the Trident to meet the specific needs
of lead optimization, we formed a product development consortium compromised of
eight pharmaceutical companies. As a result of this consortium, we developed
three instrument modules, the Trident Library Synthesizer, the Trident
Workstation and the Trident Sample Processing Station, the first of which we
initially commercialized in 1998. All Trident products utilize our proprietary
Reaction Cassette, which enables the automation and manual manipulation of
multi-step inert chemistry methodologies.

TRIDENT LIBRARY SYNTHESIZER

The Trident Library Synthesizer is a fully automated synthesizer that chemists
can use to produce up to 192 individual compounds simultaneously. The Trident
Library Synthesizer integrates up to four Reaction Cassettes with motors,
heaters and liquid dispensers, or fluidics, and software on a WindowsNT
computer. Since its initial commercial shipment in 1998, we have updated the
system periodically to broaden its range of chemistry capabilities. In our most
recent software update, we enhanced the system with the capability of performing
four independent chemistries, one in each of the four Reaction Cassettes, which
allows four chemists to use the instrument simultaneously.

TRIDENT WORKSTATION

The Trident Workstation is a scalable, semi-automated personal bench-top system
that utilizes a single Reaction Cassette. The Trident workstation is well suited
for the development by chemists of new chemistry methodologies, which is the
most critical path used by chemists in producing lead optimization libraries.
Using the Trident Workstation, our customers can develop and validate
methodologies in the Reaction Cassette prior to performing them on the Trident
Library Synthesizer.

TRIDENT SAMPLE PROCESSING STATION

The Trident Sample Processing Station is an automated robotic platform that
utilizes the Reaction Cassette to perform work-up and purification. Often these
methodologies do not require an inert or temperature controlled environment and
therefore are more efficiently performed by chemists on a different instrument.
Some of our customers have purchased the Trident Sample Processing Station and
the Trident Workstation as an entry-level system to provide their chemists with
a cost effective solution for lead optimization.

QUEST PRODUCT LINE

Our customers purchase Quests primarily for pre-clinical applications, where
their goal is to refine drug candidates identified during lead optimization.
Chemists refine lead compounds by synthesizing a small library, typically
consisting of between ten and 20 compounds, testing the compounds for drug
characteristics, and based upon the tests, synthesizing another library of
compounds to start the next iteration. The Quest product line provides a
personal synthesis tool that chemists can use to perform a broad range of
chemistry methodologies, reduces the amount of laboratory space required, and is
cost effective for use by most pre-clinical groups.

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The Quest product line is comprised of the Quest 210, Quest 205 and FirstMate,
all of which use our proprietary vertical mixing system. Chemists can use
vertical mixing to efficiently mix reaction solutions by moving a Teflon
encapsulated magnet vertically through a solution. This mixing method offers
chemists several benefits over the traditional means of spinning a magnet in
mixtures: it can mix a broader range of viscosities and more readily mix solid
reagents that must be suspended in order for the reactions to occur. To enable
the Quest 210 to meet the specific needs of pre-clinical development, we
developed it as part of a collaboration. We initially shipped the Quest 210 in
1997. In addition, we developed the Quest 205 as part of a consortium. We
initially shipped the Quest 205 in 1998.

QUEST 210 AND QUEST 205

The Quest 210 and Quest 205 are similar systems that utilize our unique Teflon
reactor, which provides an inert reactor environment that allows chemist to view
the reaction mixtures. Each system has automated heating, cooling, mixing and
fluidics. The two systems differ by the number and volume of the reactors; the
Quest 210 has 20 ten-milliliter reactors and the Quest 205 has ten
100-milliliter reactors.

FIRSTMATE
Our most recent addition to the Quest product line is the FirstMate, which we
initially shipped in 1999. FirstMate is an entry-level, manual parallel
synthesizer, which utilizes existing laboratory equipment and glassware.
Chemists use the FirstMate for all three stages of drug development. We
developed the FirstMate for those chemists and academicians who desire a
low-cost, entry-level system.

SURVEYOR AND ENDEAVOR

The Surveyor and Endeavor are instruments we developed specifically for
synthesis requirements in clinical development, where the chemists' goal is to
maximize yield and purity prior to commencement of large scale manufacturing.
This activity is called process optimization and is a form of parallel
synthesis. Process optimization involves the chemist making the same compound in
an iterative manner by varying the synthesis conditions such as the reactants
and/or temperature, and allowing periodic sampling and analysis of the mixture
for yield and purity.

SURVEYOR
The Surveyor is a fully automated ten-reactor synthesizer that allows the
chemist to vary the synthesis conditions in each reactor. In addition, the
Surveyor automates the tedious activity of mixture sampling and analysis. The
Surveyor utilizes the Quest Teflon reactor and vertical mixing system and the
Trident software. We developed the Surveyor as part of a consortium of five
pharmaceutical companies, in order to meet the needs of clinical development. We
initially shipped the Surveyor in 2000.

ENDEAVOR
The Endeavor is a semi-automated, parallel, high pressure reactor system
designed for reactions requiring greater than standard atmospheric pressures and
gas-phase reagents, such as hydrogen. With the Endeavor, a chemist can perform
eight simultaneous reactions. We initially shipped the Endeavor in 2000.

REAGENTS

Our reagents are used by chemists to perform a broad range of chemistries in
lead optimization and pre-clinical development and can be used in conjunction
with our instruments or independently. The primary benefit of our reagents is
that they allow chemists to perform easy work-up and purification

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of the reaction mixture to obtain the desired compounds by a simple filtration
process. Chemists can automate the filtration process using our instruments and
therefore achieve higher productivity by reducing the time spent manually
processing reaction mixtures.

ARGOGEL AND ARGOPORE
Chemists typically use our ArgoGel and ArgoPore reagent products to perform lead
optimization. To overcome the limitation of traditional reagents, we initially
formed a product development consortium consisting of four pharmaceutical
companies, Abbott Laboratories, Bristol-Myers Squibb, Merck and Novartis
Pharmaceuticals. We have developed additional products through collaborations
with Pharmacia, Parke-Davis and Stanford University. We currently offer nine
distinct products in each of the ArgoGel and ArgoPore product lines. In addition
we offer nine other basic reagent products. We shipped our first reagent
products in 1996.

POLYMER REAGENTS AND SOLUTION PHASE TOOLBOX
Chemists primarily use our Polymer Reagents and Solution Phase Toolbox products
during pre-clinical development. These chemists synthesize much smaller numbers
of compounds than chemists synthesize during lead optimization and these
chemists are more likely to use traditional synthesis methods. Both the Polymer
Reagents and Solution Phase Toolbox are new technologies that allow chemists to
accelerate the synthesis, work-up and purification of traditional synthesis
methods. We tailor our polymer reagents to permit chemists to perform a wide
variety of important synthetic reactions. The Solution Phase Toolbox is a series
of prepackaged polymers that are used by chemists performing traditional
work-ups and purification processes. We currently offer nine distinct Polymer
Reagents and six distinct Solution Phase Toolbox products. We initially shipped
these products in 1998.

PRODUCT DEVELOPMENT STRATEGY

Our product development strategy is to combine our expertise in chemistry and
engineering with an understanding of market needs to rapidly design and launch
products that fulfill these needs. We have a track record of quickly and
effectively developing solutions to our customer's problems. We took fewer than
12 months to develop our last two instruments, from design initiation to
delivery of the first commercial shipment.

To understand market needs, we form product development teams with our
customers. Through this process, we have developed innovative products that have
had extensive customer input, validation and testing prior to our commercially
introducing them. We have formed product development consortia and
collaborations with our customers.

Our consortia are non-exclusive arrangements in which we bring together several
companies, typically five to seven, who share the need to solve a common
problem. We meet with consortium members on a regular basis during the product
development period to review product definition, specifications, progress,
validation and testing. We may give consortium members prototypes for use in
their research programs and we incorporate their feedback into the final
product. Members typically pay a non-refundable participation fee, which may be
credited against future purchases of the product we develop. By participating in
our consortia, and becoming familiar with the performance and operating
characteristics of the product, members can achieve a nine-month to one-year
competitive advantage in using the new technology we develop. Consortium members
often become the initial references during the product development phase and
initial customers upon our commercialization of the product. We have used the
consortium approach to develop the Trident, Quest, Surveyor and reagent
products.

Through our collaborations, we in-license technology that we believe has
significant potential for commercialization. Typically, our partner will have
developed and tested a concept to the prototype

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level. We further develop and enhance the prototype into a commercially viable
product. Our contributions include design for manufacturing, cost reduction,
safety and code compliance and ease of use issues. Our partner is able to
purchase the final product at a substantial discount and may receive royalties
on product sales.

In June 1997, we entered into an exclusive five year License and Supply
Agreement with Merck & Co., Inc. related to the technology used in our Quest
product. In exchange for the right to this technology, we have granted Merck
substantial discounts on Quest and Quest related products. We used this approach
with the Endeavor product, which we developed in collaboration with Symyx. In
August 1999, we entered a license and supply agreement with Symyx Technologies
related to technology used in the Endeavor product. Symyx earns a royalty when
Endeavor product revenue is recognized. Either party may terminate the agreement
upon six months prior notice at any time after December 31, 2000. Through May
2000, Symyx earned approximately $63,000 in royalties and was given an Endeavor
Instrument pursuant to the terms of the agreement.

In addition, we entered into a Research Collaboration Agreement with the
University College London in September 1999. The term of this agreement is two
years, and is cancelable by either party upon written notice. Pursuant to this
agreement, we loaned a Trident Library Synthesizer to the University College
London and we support a full time staff member at the University in return for
access to published data and visitation rights at the site. We expect the
support of the staff member and related costs to total approximately $200,000
during the term of the agreement.

The following table lists our product development consortia and collaborations:

<TABLE>
<CAPTION>
TRIDENT QUEST SURVEYOR ENDEAVOR REAGENTS
---------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Abbott Laboratories, Abbott Laboratories, Aventis S.A. Symyx Technologies, Abbott Laboratories,
Inc. Inc. Inc. Inc.
Agouron
Ariad Pharmaceuticals, Affymax Research Pharmaceuticals, Bristol-Myers Squibb
Inc. Institute Inc. Co.
AstraZenaca Alanex Corporation Eli Lilly & Co. Merck & Co., Inc.
International Research Divisions
Rohm & Haas Co. Pharmacia
Aventis S.A. Aventis S.A. Corporation
Pfizer, Inc.
E.I. duPont de Merck & Co., Inc. Novartis
Nemours & Co. Pharmaceutical, Inc.
Genetics Institute, Parke-Davis,
Inc. Division
of Warner-Lambert
Merck & Co., Inc. & Co.
Merck KgAA Stanford University
</TABLE>

CUSTOMERS

Our customers consist of a broad range of companies in the pharmaceutical, life
sciences and biotechnology industries, as well as academic institutions. Through
March 31, 2000, we have sold our products to more than 545 customers and, we
have placed more than 600 instruments worldwide. Our leading customers are:

<TABLE>
<S> <C> <C>
Abbott Laboratories, Inc. E.I. duPont de Nemours & Co. Pfizer Inc.
Affymax Research Institute Glaxo Wellcome plc Pharmacia Corporation
Astrazeneca International Merck & Company, Inc. Pharmacopeia, Inc.
Aventis S.A. Monsanto Company Proctor & Gamble
Boehringer Ingelheim Novartis International SmithKline Beecham
Pharmaceuticals, Inc. Pharmaceuticals
</TABLE>

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SALES AND MARKETING

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

As of March 31, 2000, our direct sales and marketing organization included 41
full-time employees located in North America, Europe and Japan. Our team of
professionals is comprised of senior account-oriented sales people, application
chemists, service engineers, telesales people and marketing communication
specialists who sell directly to our customers worldwide. We had 13 direct sales
professionals with an average of 12 years of experience in selling high
technology products to the scientific industry and we had ten application
chemists. In addition to their academic expertise, the industrial laboratory
experience of our sales professionals is essential to their ability to
understand our customers needs. We had seven service engineers with expertise in
both chemistry and engineering to support our customers worldwide. We had five
professional marketing communication specialists located in the United States,
Europe and Japan dedicated to providing local marketing programs. In North
America we had three telesales people to support the direct sales efforts by
providing lead generation, lead qualification, and consumable product sales and
service sales.

We use distributors to provide local sales and marketing in some foreign
countries, including China, Australia, Korea, Eastern Europe, Finland, Sweden,
Denmark, Italy, Spain, Israel and India. In these countries, we seek to maintain
close contact with our customers and potential customers by providing
application chemistry support and service support through our worldwide direct
sales organization. We have developed both scientific seminars and technology
transfer programs to educate and train our customers. We conduct on-site
seminars in the use of our chemistry reagents, referencing important scientific
publications and research that validate their successful usage. Typically 20 to
40 researchers at a given customer site will participate in this type of
scientific seminar.

In addition to seminars, we have developed our "Advanced Implementation
Program," a technology implementation program, designed to accelerate the
adoption of our technology within a laboratory. Our customers leverage our
experience by participating in customized classes that teach how to plan
parallel chemistry synthesis, how to use our instruments, accessories, and
chemistry reagents and how to work-up the resulting chemistry products. We
monitor our participants' success and encourage them to publish their results
internally, thereby increasing our visibility within their company.

Our web site provides technical information regarding the use of our tools for
our customers. In addition, the Internet has the potential to become a
significant distribution channel for our reagents, instrument consumables and
entry level systems. The combination of our telesales with e-commerce makes it
very easy for a customer to make routine purchases of our reagents and
consumables. We have established ArgoStore, our proprietary web site for quick,
easy and routine purchasing of our reagents and consumables. In addition, we
have entered into agreements with Chemdex, a Ventro company, and SciQuest.com to
support the purchasing of our products.

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

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MANUFACTURING

A series of qualified outside vendors manufacture most of our instruments and
reagents to our specifications. Our vendors then deliver the finished product to
us for final quality assurance testing.

INSTRUMENTS
Our instrument manufacturing staff is comprised of senior level, highly skilled
manufacturing engineers, documentation support, material procurement and
assembly support resources, which are closely integrated within our product
development group. We focus these resources on the rapid development of
manufacturing processes and methods, which we transfer to our outside
subcontractors. Our contractors are responsible for ordering all components from
qualified vendors, inspecting, stocking, assembling and testing the modules
prior to shipment to our facility. We typically qualify multiple manufacturing
subcontractors, and we develop the relevant manufacturing processes internally,
enabling us to maintain control of the manufacturing program.

REAGENTS
Our chemistry organization develops, validates, documents and initially
manufactures our reagents at our facility. During reagent development, we
qualify outside manufacturers, known as toll manufacturers, so that we can begin
outsourcing production when demand and volume increase.

INTELLECTUAL PROPERTY

As of March 31, 2000, we owned a patent portfolio of six issued U.S. patents and
one issued foreign patent as well as several pending U.S. patent applications.
Corresponding foreign patent applications have been filed in a number of
countries. Of these issued patents, five U.S. patents relate to the reactor and
fluidics technology incorporated into our instruments. Several of our patent
applications relate to this technology and others relate to our reagent
technologies. We intend to continue to file patent applications covering any new
inventions incorporated into our products and technologies as appropriate. In
addition, we rely upon copyright protection as well as trade secrets, know-how
and continuing technological innovation to develop and maintain our competitive
position. Our success will depend in part upon our ability to obtain patent
protection for our products and technologies, to preserve our copyrights and
trade secrets, and to operate without infringing on the proprietary rights of
third parties.

Certain of our products incorporate technology subject to patent applications
licensed to us by third parties. Collectively, the related license agreements
require us to pay royalties, provide use of a prototype instrument and provide
discount pricing. These agreements are subject to termination under certain
circumstances, such as breach by us or if we fail to commercialize the products
incorporating the licensed technology. In particular, we have a license
agreement with Symyx Technologies, Inc. relating to technology incorporated in
our Endeavor product. Due to the recent release of this product, no royalties
have been paid. Either party can terminate this agreement at its discretion at
any time after December 31, 2000, upon six months' notice. If our licenses to
any such technology, or any similar licenses we may enter into in the future,
are terminated, we may be unable to continue selling such products and our
revenues would decline.

COMPETITION

We anticipate that competition will come primarily from companies providing
products based on traditional chemistry methods as well as companies that offer
competing products based on alternative technologies. In order to compete
effectively, we will need to demonstrate the advantages of our

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products over well established traditional chemistry methods and alternative
technologies and products. We will also need to demonstrate the potential
economic value of our products relative to traditional chemistry methods. Some
of the companies that provide products that compete with ours include
Mettler-Toledo AG and several smaller instrument and reagent companies. Our
future success will depend in large part on our ability to establish and
maintain a competitive position with respect to these products and future
technologies that may develop.

In many instances, our competitors and potential competitors have or will have
substantially greater financial, technical, research, and other resources and
larger, more established marketing, sales, distribution, and service
organizations than we do. Moreover, competitors may have greater name
recognition than we do, and may offer discounts as a competitive tactic. Our
competitors may succeed in developing or marketing technologies or products that
are more effective or commercially attractive than our products, or that would
render our technologies and products obsolete. Also, we may not have the
financial resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future.

GOVERNMENT REGULATION

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

EMPLOYEES

As of March 31, 2000, we had 99 employees. None of our employees are covered by
a collective bargaining agreement. We believe that our relations with our
employees are good.

FACILITIES

We occupy approximately 24,000 combined square feet of leased and sub-leased
office space and other facilities in San Carlos, California. These facilities
serve as the base for our marketing and product support operations, research and
development and manufacturing activities. We have leased substantially all of
our space through early 2001. We intend to use a portion of the proceeds of this
offering to relocate to new facilities. In addition, we lease approximately 200
square meters of office space in Muttenz, Switzerland and 200 square meters of
office space in Tokyo, Japan. These offices are the base operations for our
sales and support groups in the respective regions.

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LEGAL PROCEEDINGS

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

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Management

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is information with respect to each of our executive officers
and directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
David Binkley, Ph.D. ........................ 46 President, Chief Executive Officer and
Director
Lissa Goldenstein............................ 45 Vice President, Marketing and Sales
Doug Heigel.................................. 39 Vice President, Manufacturing
Jan Hughes................................... 39 Vice President, Product Development
Laura Lehman, Ph.D. ......................... 43 Vice President, Business Development
Terry Long................................... 39 Vice President, Concept Design
John Supan................................... 50 Vice President, Finance and Chief Financial
Officer
Brook Byers(1)(2)............................ 54 Chairman of the Board
Samuel Colella(2)............................ 60 Director
Hingge Hsu, M.D.(1).......................... 43 Director
Brian Metcalf, Ph.D. ........................ 54 Director
William Rastetter, Ph.D.(2).................. 52 Director
James Schlater(1)............................ 63 Director
</TABLE>

---------------

(1) Member of the audit committee
(2) Member of the compensation committee

David P. Binkley, Ph.D. Dr. Binkley has served as our President, Chief Executive
Officer and one of our directors since December 1996. From July 1997 to May 2000
he served as our Chief Financial Officer. From June 1993 to November 1996, he
served as a Vice President at Perkin-Elmer Corporation, where he was responsible
for its worldwide organic analysis business including molecular spectroscopy and
data analysis. Dr. Binkley joined Perkin-Elmer in 1979 and held a series of
increasingly responsible technical and management positions before becoming Vice
President. Dr. Binkley has a B.S. in Chemistry from Elizabethtown College and a
Ph.D. in Chemistry from Virginia Tech.

Lissa A. Goldenstein Ms. Goldenstein has served as our Vice President, Sales
and Marketing since January 1998. From January 1994 to December 1997, Ms.
Goldenstein was Senior Vice President, Worldwide Sales with Molecular
Simulations, a provider of molecular modeling and simulation software for life
and materials science research. While at Molecular Simulation Incorporated, Ms.
Goldenstein was President of Tejin Molecular Simulations, a joint venture in
Tokyo, which managed Molecular Simulation's business in Japan and the Asia
Pacific markets. Ms. Goldenstein has a B.S. in Architectural Engineering from
Pennsylvania State University and received her Professional Engineers license as
a civil engineer in the State of California in 1981.

Doug W. Heigel Mr. Heigel has served as our Vice President, Manufacturing since
October 1995. From February 1995 to October 1995, Mr. Heigel was responsible for
manufacturing at BioMolecular Technologies, a start-up manufacturer of biotech
instrumentation, where he served as their Instrument Manufacturing Manager. From
July 1988 to February 1995, he held various managerial positions in
manufacturing and engineering, including his final position as
Operations/Manufacturing Manager, at MTI Analytical Instruments, a manufacturer
of analytical instrumentation. Mr. Heigel has a B.S. in Mechanical Engineering
from Oregon State University.

Jan K. Hughes Mr. Hughes is one of our founders and has served as our Vice
President, Product Development since November 1994. From June 1985 to November
1994, he served as Engineering Group Leader for New Synthesis Systems at Applied
Biosystems, Inc., where he was responsible for the development of peptide and
DNA synthesis instrumentation. Mr. Hughes has a B.S. in Mechanical Engineering
from California Polytechnic State University, San Luis Obispo.

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Laura S. Lehman, Ph.D. Dr. Lehman has served as our Vice President of Business
Development since August 1999. From June 1994 to July of 1999, she was at
RiboGene, Inc., a pharmaceutical discovery and development company, where she
held the positions of Vice President of Drug Discovery and Drug Development
until January of 1996 and Vice President of Research until her departure. While
at RiboGene, she was responsible for the strategic management of all preclinical
and clinical projects and the coordination of the projects with their corporate
partners. Dr. Lehman has a B.S. degree in Chemistry and a M.S. degree in Organic
Chemistry from Bucknell University and a Ph.D. degree in Organic Chemistry from
Duke University.

Terry Long Mr. Long has served as our Vice President, Concept Design since
April 1996. From December 1991 to March 1996, Mr. Long served as Executive Vice
President for Protein Technologies, Inc., a division of Rainin Instruments, a
manufacturer of pipetting products and services. While at Protein Technologies,
Inc., he was responsible for product development of peptide synthesis and
preparative electrophoresis instrumentation. Mr. Long has a B.S. degree in
Chemical Engineering from the University of Arizona.

John T. Supan Mr. Supan has served as our Vice President, Finance and Chief
Financial Officer since May 2000. From September 1997 to May 2000, he served as
an independent consultant and then as a Director with Azia Core, Ltd., a
consulting and investment firm where he worked with clients in the high tech and
bio-pharmaceutical industries. Mr. Supan was Vice President of Finance and Chief
Financial Officer with Beacon Diagnostics from April 1992 through August 1997.
Mr. Supan joined Ernst & Young, LLP, a public accounting firm, in September 1976
as a staff accountant, and was named a partner in October 1986. He left Ernst &
Young, LLP to pursue industry experience. Mr. Supan received a B.S. in Business
Administration from California State University, San Jose and is a Certified
Public Accountant.

Brook H. Byers Mr. Byers has served as our Chairman of the Board of Directors
since January 1995. He is a partner of Kleiner Perkins Caufield & Byers, a
private venture capital firm that he joined in 1977. He also serves as a
director of Ventro, Inc., Drugstore.com, Inc. and a number of privately held
technology companies. Mr. Byers sits on the Board of Directors of the University
of California, San Francisco Foundation and is director of the California
Healthcare Institute.

Samuel D. Colella Mr. Colella has served as one of our directors since 1995.
Since 1984, he has been a general partner of Institutional Venture Partners, a
venture capital firm. Mr. Colella also serves as Chairman of Onyx
Pharmaceuticals and serves as a director of AngioTrax, Inc., Benefit Point.Com,
MedPool.com, Symyx Technologies, SurroMed., Inc., and Thermage, Inc. Mr. Colella
has a B.S. in business and engineering from the University of Pittsburgh and an
M.B.A. from Stanford University.

Hingge Hsu, M.D. Dr. Hsu has served as one of our directors since May 1999. He
is a partner with Schroder Ventures, Boston, a dedicated healthcare and life
sciences private equity fund, where he has had the primary responsibility for
biotechnology and other life sciences investments since September 1998. From
1996 to 1998, Dr. Hsu was a principal in the Investment Banking Department at
Robertson Stephens where he led a variety of equity and merger and acquisition
transactions in the life sciences sector. From 1995 to 1996, and from 1993 to
1995, he held various business development and strategic planning positions at
Chiron Corporation and Gensia, Inc. respectively. Dr. Hsu received a B.A. degree
in chemistry and biology from the University of California, San Diego, an M.D.
degree from Yale University School of Medicine and an M.B.A. from Harvard
Business School.

Brian Metcalf, Ph.D. Dr. Metcalf has served as one of our directors since May
2000. From March 2000 to the present he has been a Senior Vice President and
Chief Scientific Officer with Kosan Biosciences. From December 1983 to March
2000 Dr. Metcalf was the Senior Vice President of Discovery Chemistry and
Platform Technologies with SmithKline Beecham. Dr. Metcalf received his

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B.S. and Ph.D. in Organic Chemistry from the University of Western Australia and
performed his postdoctoral work at Stanford University.

William H. Rastetter, Ph.D. Dr. Rastetter has served as one of our directors
since 1995. Since December 1986 he has served as the President and Chief
Executive Officer and as a director of IDEC Pharmaceuticals Corporation. In
addition, from 1988 to 1993 he served as its Chief Financial Officer, and in May
1996 was appointed to the position of Chairman of the Board of Directors. Dr.
Rastetter also serves as a director of Spiros Development Corporation II, a Dura
Pharmaceuticals affiliated company formed to conduct research and development on
products and devices to treat respiratory disorders.

James M. Schlater Mr. Schlater has served as one of our directors since 1995.
He was a co-founder of Molecular Dynamics, a manufacturer of imaging
instrumentation for bioanalysis, in July 1987, and served as its Chief Executive
Officer and Chairman of the Board of Directors until Amersham Pharmacia Biotech,
Inc., acquired the company in October 1998.

BOARD COMPOSITION

We currently have eight authorized directorships, of which two are vacant. In
accordance with the terms of our certificate of incorporation, the terms of
office of the directors are divided into three classes:

+ Class I, whose term will expire at the annual meeting of stockholders to be
held in 2001;

+ Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002; and

+ Class III, whose term will expire at the annual meeting of stockholders to be
held in 2003.

The Class I directors are Mr. James Schlater and Dr. Hingge Hsu, the Class II
directors are Mr. Brook Byers and Mr. Sam Colella, and the Class III director
are Drs. David Binkley, Brian Metcalf and William Rastetter. At each annual
meeting of stockholders after the initial classification or special meeting in
lieu thereof, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election or special meeting held in lieu thereof. The
authorized number of directors may be changed only by resolution of the board of
directors or a super-majority vote of the stockholders. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management.

BOARD COMMITTEES

The audit committee of the board of directors was established in May 1995. The
audit committee reviews, acts on and reports to the board of directors on
various auditing and accounting matters, including the recommendation of our
independent auditors, the scope of the annual audits, fees to be paid to the
independent auditors, the performance of our independent auditors and our
accounting practices. The members of our audit committee are Mr. Brook Byers,
Dr. Hingge Hsu and Mr. James Schlater, each of whom is an independent director.

The compensation committee of the board of directors was established in May
1995, and determines the salaries and benefits for our employees, directors and
other individuals compensated by us. The compensation committee also administers
our stock option plans, including determining the stock option grants for our
employees, consultants, directors and other individuals. The members of the

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compensation committee are Mr. Brook Byers, Dr. William Rastetter and Mr. Samuel
Colella, each of whom is an independent director.

DIRECTOR COMPENSATION

Currently, we do not provide cash compensation to members of our board of
directors for serving on our board or for attendance at committee meetings.
Members of our board of directors are reimbursed for expenses in connection with
attendance at board and committee meetings. In consideration for services as
non-employee directors, we have in the past granted options to purchase our
common stock pursuant to the terms of our stock plans, and our board continues
to have the discretion to grant options to new non-employee directors. Beginning
in 2001 our outside directors will each receive annual nondiscretionary grants
of options to purchase 4,400 shares of our common stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the compensation committee has been an officer or employee of ours
at any time. None of our executive officers serves as a member of the board of
directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our amended and restated certificate of incorporation and our amended and
restated bylaws provide that our directors and officers shall be indemnified by
us to the fullest extent authorized by Delaware law, as it now exists or may in
the future be amended, against all expenses and liabilities reasonably incurred
in connection with their service for or on our behalf. In addition, our amended
and restated certificate of incorporation provides that our directors will not
be personally liable for monetary damages to us for breaches of their fiduciary
duty as directors, unless they violated their duty of loyalty to us or our
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors. We have obtained insurance that insures
our directors and officers against specified losses and which insures us against
specific obligations to indemnify our directors and officers.

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EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION

The following table shows all compensation received during the year ended
December 31, 1999 by our Chief Executive Officer and our four other highest-paid
executive officers, collectively referred to as the named executive officers.
There was no other compensation paid to the named executive officers in 1999.

SUMMARY COMPENSATION

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION AWARDS
SECURITIES
ANNUAL COMPENSATION OTHER ANNUAL UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David Binkley......................... $238,818 $53,536 $-- 132,042 $--
President and Chief Executive
Officer
Lissa Goldenstein..................... 158,048 55,312 -- 30,809 --
Vice President, Marketing and Sales
Doug Heigel........................... 117,843 19,776 -- 13,974 --
Vice President, Manufacturing
Jan Hughes............................ 143,298 24,153 -- 17,605 --
Vice President, Product Development
Terry Long............................ 149,782 25,263 -- 2,970 --
Vice President, Concept Design
</TABLE>

OPTIONS

The following table shows information regarding options granted to the executive
officers listed in the summary compensation table above during the fiscal year
ended December 31, 1999.

Each option represents the right to purchase one share of our common stock. The
options generally become vested over four years. See "Management -- Employee
benefit plans" for more details regarding these options. In the year ended
December 31, 1999, we granted options to purchase an aggregate of 882,290 shares
of our common stock to various officers, employees, directors and consultants.

The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the initial public offering
price of $15.00 per share. Actual gains, if any, on stock option

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exercises are dependent on the future performance of our common stock and
overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.

OPTION GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL APPRECIATION OF STOCK PRICE FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM
OPTIONS GRANTED TO PRICE PER EXPIRATION --------------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Binkley............. 132,042 15.3% $ 1.14 10/21/09 $3,075,710 $4,986,716
Lissa Goldenstein......... 30,809 3.6 1.14 10/21/09 717,647 1,163,537
Doug Heigel............... 13,974 1.6 1.14 10/21/09 325,502 527,744
Jan Hughes................ 17,605 2.0 1.14 10/21/09 410,081 664,873
Terry Long................ 2,970 0.3 1.14 10/21/09 69,181 112,165
</TABLE>

The following table shows information as of December 31, 1999, concerning the
number and value of unexercised options held by each of the executive officers
listed in the summary compensation table above. Options shown as exercisable in
the table below are immediately exercisable. There was no public trading market
for our common stock as of December 31, 1999. Accordingly, the value of the
unexercised in-the-money options listed below has been calculated on the basis
of the initial public offering price, less the applicable exercise price per
share, multiplied by the number of shares underlying such options.

AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999, AND YEAR-END
OPTION VALUES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999
UPON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Binkley.............. 134,292 $106,824 37,595 238,868 $546,741 $3,400,573
Lissa Goldenstein.......... -- -- 28,701 59,326 413,424 839,245
Doug Heigel................ -- -- 57,802 30,224 854,593 430,197
Jan Hughes................. -- -- 23,601 37,908 340,144 537,396
Terry Long................. -- -- 69,860 18,166 1,040,931 263,506
</TABLE>

EMPLOYMENT AGREEMENTS

By offer letter, dated October 29, 1996, we agreed that we would grant to David
P. Binkley, Ph.D., options to purchase 440,000 shares of our common stock that
would vest over time during the course of his employment. The letter further
provides that if we are acquired or merged with another company and Dr. Binkley
is not offered a position of similar responsibility with the new company and
subsequently leaves employment, any unvested options held by Dr. Binkley at such
time will automatically vest.

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47
<PAGE> 49
MANAGEMENT
--------------------------------------------------------------------------------

EMPLOYEE BENEFIT PLANS

1995 INCENTIVE STOCK PLAN

Our 1995 Incentive Stock Plan was approved by our board of directors in May 1995
and approved by our stockholders in May 1996. The 1995 Plan was subsequently
amended by the board of directors in November 1996, January and September 1997
and July 1999. Our 1995 plan authorizes the issuance of up to 3,464,179 shares
of our common stock as either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 or nonstatutory stock options.
As of March 31, 2000, we had 1,765,416 options to purchase common stock under
this plan outstanding to employees, directors and consultants with a weighted
average exercise price of $0.76 per share. After the completion of this
offering, no further options will be granted under this plan, the 1995 Plan will
terminate, and all unissued shares under the 1995 Plan as of the effective date
of this offering and all shares returned to the 1995 Plan shall be reserved for
issuance under the 2000 Incentive Stock Plan.

Our board of directors, or a board committee, has the power to determine the
terms of the options, including the exercise price of the options, the number of
shares subject to each option, the exercisability thereof, and the form of
consideration payable on such exercise, provided that the exercise price for
incentive stock options must be at least 100% of fair market value. Incentive
stock options granted to any holder of 10% or more of the combined voting power
of all classes of our stock must have an exercise price of not less than 110% of
fair market value and be exercisable for a term of no more than five years.

The 1995 Plan provides that in the event of our merger with or into another
corporation, options and stock purchase rights shall be assumed or substituted
for by the successor corporation. In the event the successor corporation refuses
to assume or substitute for our options or stock purchase rights, then the
options and stock purchase rights shall terminate as of the closing of the
merger.

2000 EMPLOYEE STOCK PURCHASE PLAN

Our 2000 Employee Stock Purchase Plan was adopted by our board of directors in
April 2000 and will be submitted for approval by our shareholders prior to the
effectiveness of this offering. A total of 176,000 shares of common stock have
been reserved for issuance under our 2000 Employee Stock Purchase Plan, plus
annual increases equal to the lesser of 440,000 shares, 2% of the outstanding
shares on such date, or a lesser amount determined by our board of directors.

Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the United States tax code, contains consecutive twenty-four
month offering period. Each offering period contains four six month purchase
periods. The offering periods generally start on the first trading day on or
after February 1 and August 1 of each year, except for the first such offering
period which commences on the first trading day on or after the effective date
of this offering and ends on the last trading day on or before July 31, 2002.

Employees are eligible to participate if they are customarily employed by us or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, any employee who immediately after grant
owns stock possessing 5% or more of the total combined voting power or value of
all classes of our capital stock, or whose rights to purchase stock under all of
our employee stock purchase plans accrues at a rate that exceeds $25,000 worth
of stock for each calendar year may not be granted an option to purchase stock
under this plan. The 2000 Employee Stock Purchase Plan permits participants to
purchase our common stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's base
straight time gross earnings, bonuses, commissions, overtime payments, and
cash-based incentive

--------------------------------------------------------------------------------
48
<PAGE> 50
MANAGEMENT
--------------------------------------------------------------------------------

compensation, but exclusive of any non-cash compensation. The maximum number of
shares a participant may purchase during a single purchase period is 4,400
shares.

Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each purchase period. The price of stock purchased
under the 2000 Employee Stock Purchase Plan is generally 85% of the lower of the
fair market value of the common stock at the beginning of the offering period or
at the end of the purchase period. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.

Rights granted under the 2000 Employee Stock Purchase Plan are not transferable
by a participant other than by will, the laws of descent and distribution, or as
otherwise provided under the plan. The 2000 Employee Stock Purchase Plan
provides that, in the event of our merger with or into another corporation or a
sale of substantially all our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set. The 2000
Employee Stock Purchase Plan will terminate automatically in 2010, unless
terminated earlier. Our board of directors has the authority to amend or
terminate the 2000 Employee Stock Purchase Plan, except that no such action may
adversely affect any outstanding rights to purchase stock under the 2000
Employee Stock Purchase Plan. Our board of directors has the exclusive authority
to interpret and apply the provisions of the 2000 Employee Stock Purchase Plan.

2000 INCENTIVE STOCK PLAN

Our 2000 Stock Plan was adopted by our board of directors in April, 2000, and
will be approved by our stockholders prior to the effectiveness of this
offering. This plan provides for the grant of incentive stock options to our
employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. Subject to the approval of our
shareholders, prior to the effectiveness of this offering a total of 1,760,000
shares of our common stock will be reserved for issuance pursuant to our 2000
Stock Plan, plus any shares reserved for issuance under the 1995 Plan as of the
effective date of the Company's registration statement and any shares returned
to the 1995 Plan.

No options have yet been issued pursuant to the 2000 Stock Plan. The number of
shares reserved for issuance under our 2000 Stock Plan will increase annually on
the first day of the Company's fiscal year beginning in 2001 by an amount equal
to the lesser of 5% of the outstanding shares of our common stock on the first
day of the year, 1,320,000 shares or such lesser amount as our board of
directors may determine.

Our board of directors or a committee of our board administers the 2000 Stock
Plan. The committee may consist of two or more outside directors to satisfy
certain tax and securities requirements. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
purchase right, the exercisability of the options and the form of consideration
payable upon exercise. The administrator determines the exercise price of
options granted under our stock option plan, but with respect to incentive stock
options, the exercise price must at least be equal to the fair market value of
our common stock on the date of grant. Additionally, the term of an incentive
stock option may not exceed ten years. The administrator determines the term of
all other options. No optionee may be granted an option to purchase more than
440,000 shares in any fiscal year. In connection with his or her initial
service, an optionee may be granted an additional option to purchase up to
440,000 shares of our common stock. After termination of one of our employees,
directors or consultants, he or she may exercise his or her option for the
period of time stated in the option agreement. If termination is

--------------------------------------------------------------------------------
49
<PAGE> 51
MANAGEMENT
--------------------------------------------------------------------------------

due to death or disability, the option will generally remain exercisable for 12
months following such termination. In all other cases, the option will generally
remain exercisable for three months. However, an option may never be exercised
later than the expiration of its term.

The administrator determines the exercise price of stock purchase rights granted
under our 2000 Stock Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option that we
may exercise upon the voluntary or involuntary termination of the purchaser's
service with us for any reason, including death or disability. The purchase
price for shares we repurchase will generally be the original price paid by the
purchaser. The administrator determines the rate at which our repurchase option
will lapse. Our stock option plan generally does not allow for the transfer of
options or stock purchase rights and only the optionee may exercise an option
and stock purchase right during his or her lifetime.

Our stock option plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute for each option or stock purchase right
outstanding under our 2000 Stock Plan. If the outstanding options or stock
purchase rights are not assumed or substituted for, all outstanding options and
stock purchase rights become fully vested and exercisable. Our 2000 Stock Plan
will automatically terminate in 2010, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the 2000 Stock Plan provided it does not adversely affect any option
previously granted under our 2000 Stock Plan.

DIRECTOR OPTION PROGRAM

The Director Option Program is part of our 2000 Stock Plan and provides for the
periodic grant of nonstatutory stock options to those non-employee directors who
are not "beneficial owners" (as defined in Rule 13d-3 of the Securities Act of
1934) of 2.5% or more of the Company's total voting power on the date of any
grant under the 2000 Stock Plan.

All grants of options to our non-employee directors under the Director Program
are automatic. We will grant to each individual who first become a non-employee
director on or after our initial public offering, an option to purchase 13,200
shares when such person first becomes a non-employee director (except for those
directors who became non-employee directors by ceasing to be employee
directors). The shares subject to the option vest monthly over a three-year
term, provided the individual remains an outside director on such dates.

Each outside director shall automatically be granted an option to purchase 4,400
shares on each annual meeting of the shareholders of the Company occurring after
the end of our fiscal year 2000, if immediately after such meeting, he or she
shall continue to serve on the board and has been a director for at least six
months prior to the annual shareholders meeting. Such shares subject to the
option vest monthly over a one-year term, provided the individual remains an
outside director on such dates.

All options granted under our Director Program have a term of ten years and an
exercise price equal to fair market value on the date of grant. After
termination as a non-employee director with us, an optionee must exercise an
option at the time set forth in his or her option agreement. If termination is
due to death or disability, the option will remain exercisable for 12 months. In
all other cases, the option will remain exercisable for a period of three
months. However, an option may never be exercised later than the expiration of
its term. A non-employee director may not transfer options granted under our
Director Program other than by will or the laws of descent and distribution.
Only the non-employee director may exercise the option during his or her
lifetime.

In the event of a change of control of us, all of our outstanding options
granted pursuant to the Director Option Program become fully vested and
exercisable.

--------------------------------------------------------------------------------
50
<PAGE> 52

--------------------------------------------------------------------------------

Related party transactions

SALES OF SECURITIES

From January 1, 1997 through March 31, 2000, we have issued the following
securities in private placement transactions:

+ 1,180,000 shares of our Series C convertible preferred stock, at a purchase
price of $5.00 per share, for an aggregate purchase price of $5,900,000
between March and June of 1997; and

+ 2,608,695 shares of our Series D convertible preferred stock, at a purchase
price of $5.75 per share, for an aggregate purchase price of $14,999,996 in
May 1999.

Each share of preferred stock is immediately convertible into 0.88 of a share of
common stock. All preferred stock was issued to accredited investors in reliance
upon an exemption from registration under Regulation D of the Securities Act.

The purchasers of more than $60,000 of these securities include, among others,
the following directors and holders of more than 5% of our outstanding stock and
their affiliates:

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
----------------------------------------------------------------------------------------------------------
SERIES C SERIES D TOTAL CONSIDERATION
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
Kleiner Perkins Caufield & Byers VII(1)..................... -- 304,924 $1,753,313
2750 Sand Hill Road
Menlo Park, CA 94025
Funds associated with Institutional Venture Partners(2)..... -- 262,261 1,508,001
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Funds associated with Robertson Stephens & Company(3)....... -- 101,739 584,999
555 California Street, 26th Floor
San Francisco, CA 94104
Funds associated with Schroder Ventures(4).................. -- 1,739,130 9,999,998
P.O. Box HM 1368
Hamilton, HM FX
Bermuda
</TABLE>

-------------------------
(1) Mr. Brook H. Byers, the chairman of our board of directors, is a partner of
Kleiner Perkins Caufield & Byers VII. Mr. Byers disclaims beneficial
ownership of the shares held by these funds except to the extent of his
pecuniary interest therein.

(2) Includes 257,016 shares of Series D Preferred Stock held by Institutional
Venture Partners VI, L.P. and 5,245 shares of Series D Preferred Stock held
by Institutional Venture Management VI. Mr. Samuel D. Colella, one of our
directors, is a general partner of these funds. Mr. Colella disclaims
beneficial ownership of the shares held by these funds except to the extent
of his pecuniary interest therein.

(3) Includes 86,435 shares of Series D Preferred Stock held by RS & Co. IV, L.P.
and 15,304 shares of Series D Preferred Stock held by Bayview Investors,
Ltd. Robertson Stephens & Company is a holder of more than 5% of our
outstanding Stock.

(4) Includes 1,372,098 shares of Series D Preferred Stock held by Schroder
Ventures International Life Sciences Fund II, LP1 and 367,032 shares of
Series D Preferred Stock held by Schroder Ventures International Life
Sciences Fund II, LP2. Dr. Hingge Hsu, one of our directors, is a partner of
these funds. Dr. Hsu disclaims beneficial ownership of the shares held by
these funds except to the extent of his pecuniary interest therein.

For additional information regarding the ownership of securities by executive
officers, directors and stockholders who beneficially own 5% or more of our
outstanding common stock, please see "Principal stockholders."

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51
<PAGE> 53
RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

LOAN TO OFFICER

In December 1996, David Binkley, our president and chief executive officer
borrowed $200,000 from us, evidenced by a promissory note secured by his
residence. The note bears interest at the rate of 6.31% per annum and is due on
the earlier of December 17, 2001, the disposition of his residence, his
separation from us or 180 days after the expiration of any lock-up agreement
entered into by Mr. Binkley in connection with this offering.

--------------------------------------------------------------------------------
52
<PAGE> 54

--------------------------------------------------------------------------------

Principal stockholders

The following table shows information we have with respect to the beneficial
ownership of our common stock as of May 31, 2000, and as adjusted to reflect the
sale of the shares of common stock offered under this prospectus by:

+ each person or group of affiliated persons we know to own beneficially 5% or
more of our common stock;

+ each of our directors;

+ each executive officer listed in the "Summary compensation" table above; and

+ all of our directors and executive officers as a group.

Except as indicated in the footnotes to this table and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. The table below includes the
number of shares underlying options and warrants that are exercisable within 60
days from May 31, 2000, and assumes the conversion of all shares of our
preferred stock into 9,978,538 shares of our common stock prior to this
offering. It is therefore based on 12,674,957 shares of our common stock
outstanding prior to this offering and 17,274,957 shares outstanding immediately
after this offering. The address for those individuals for which an address is
not otherwise indicated is: 887 Industrial Road, Suite G, San Carlos, CA 94070.

<TABLE>
<CAPTION>
PERCENT OWNED
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER TOTAL NUMBER OFFERING OFFERING
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS
David Binkley(1)................................ 408,734 3.2% 2.4%
Lissa Goldenstein(2)............................ 41,538 * *
Doug Heigel(3).................................. 65,999 * *
Jan Hughes(4)................................... 249,174 2.9 1.4
Terry Long(5)................................... 78,296 * *
Brook Byers..................................... -- -- --
Samuel Colella.................................. -- -- --
Hingge Hsu...................................... -- -- --
Brian Metcalf(6)................................ 734 * *
William Rastetter(7)............................ 53,138 * *
James Schlater(8)............................... 98,266 * *
All directors and Named Executive Officers as a
group (11 persons)............................ 995,879 7.9 5.8
FIVE PERCENT STOCKHOLDERS
Funds associated with Kleiner Perkins Caufield &
Byers(9)...................................... 2,945,561 23.2 17.1
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>

--------------------------------------------------------------------------------
53
<PAGE> 55
PRINCIPAL STOCKHOLDERS
--------------------------------------------------------------------------------

-------------------------
* Represents beneficial ownership of less than 1%.

(1) Includes 113,109 shares subject to options exercisable within 60 days of
May 31, 2000.

(2) Includes 7,334 shares subject to options exercisable within 60 days of May
31, 2000.

(3) Includes 5,213 shares subject to options exercisable within 60 days of May
31, 2000.

(4) Includes 6,957 shares subject to options exercisable within 60 days of May
31, 2000.

(5) Includes 1,467 shares subject to options exercisable within 60 days of May
31, 2000.

(6) Includes 734 shares subject to options exercisable within 60 days of May
31, 2000.

(7) Includes 22,000 shares subject to options exercisable within 60 days of May
31, 2000.

(8) Includes 8,800 shares subject to options exercisable within 60 days of May
31, 2000.

(9) Includes 2,915,000 shares held by Kleiner Perkins Caufield & Byers VII and
30,461 shares held by KPCB Life Sciences Zaibatsu Fund II. Mr. Brook Byers,
the chairman of our board of directors, is a partner of these funds. Mr.
Byers disclaims beneficial ownership of the shares held by these funds
except to the extent of his pecuniary interest therein.

(10) Includes 2,460,020 shares held by Institutional Venture Partners VI, L.P.,
50,646 shares held by Institutional Venture Management VI and 21,661 shares
held by IVP Founders Fund I. Mr. Samuel Colella, one of our directors, is a
general partner of these funds. Mr. Colella disclaims beneficial ownership
of the shares held by these funds except to the extent of his pecuniary
interest therein.

(11) Includes 766,523 shares held by RS & Co. IV, L.P., 338,461 shares held by
The Robertson Stephens Orphan Fund, L.P., 135,312 shares held by Bayview
Investors, Ltd. and 70,399 shares held by The Robertson Stephens Orphan
Offshore Fund, L.P.

(12) Includes 1,207,446 shares held by Schroder Ventures International Life
Sciences Fund II, LP1 and 322,988 shares held by Schroder Ventures
International Life Sciences Fund II, LP2. Dr. Hingge Hsu, one of our
directors, is a partner of these funds. Dr. Hsu disclaims beneficial
ownership of the shares held by these funds except to the extent of his
pecuniary interest therein.

--------------------------------------------------------------------------------
54
<PAGE> 56

--------------------------------------------------------------------------------

Description of capital stock

The following information describes our common stock and preferred stock, as
well as options and warrants to purchase our common stock, and provisions of our
certificate of incorporation and our bylaws, all as will be in effect upon the
closing of this offering. We intend to amend our certificate of incorporation
and by-laws prior to completion of the offering. This description is only a
summary. You should also refer to our certificate of incorporation and bylaws,
which have been filed with the SEC as exhibits to our registration statement, of
which this prospectus forms a part. The descriptions of our common stock and
preferred stock, as well as options and warrants to purchase our common stock,
reflect changes to our capital structure that will occur upon the closing of
this offering in accordance with the terms of our amended certificate of
incorporation.

Upon completion of this offering, our authorized capital stock will consist of
120,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000
shares of preferred stock, par value $0.0001 per share.

COMMON STOCK

As of March 31, 2000, there were 2,416,909 shares of our common stock
outstanding and held of record by 79 stockholders. There will be 16,995,447
shares of our common stock outstanding upon the closing of this offering, which
gives effect to the issuance of 4,600,000 shares of our common stock offered by
us under this prospectus and the conversion of our preferred stock discussed
below.

Each share of our common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our stockholders and are entitled to one vote for each
share of our common stock held.

Subject to the prior rights and preferences, if any, applicable to shares of our
preferred stock or any series of our preferred stock, the holders of our common
stock are entitled to receive dividends, payable in cash, stock or otherwise, as
may be declared by our board out of any funds legally available for the payment
of dividends.

If we voluntarily or involuntarily liquidate, dissolve or wind-up, the holders
of our common stock will be entitled to receive after distribution in full of
the preferential amounts, if any, to be distributed to the holders of our
preferred stock or any series of our preferred stock, all of the remaining
assets available for distribution ratably in proportion to the number of shares
of our common stock held by them. Holders of our common stock have no
preferences or any preemptive conversion or exchange rights.

PREFERRED STOCK

As of March 31, 2000, there were 11,339,268 shares of our convertible preferred
stock outstanding. Upon the closing of this offering, all outstanding shares of
our convertible preferred stock will be automatically converted into 9,978,538
shares of our common stock and will be held of record by 43 stockholders. These
shares of our convertible preferred stock will no longer be authorized, issued
or outstanding. Our amended and restated certificate of incorporation, which
becomes effective upon the closing of this offering, authorizes the issuance of
10,000,000 shares of our preferred stock, par value $0.0001 per share.

Upon completion of this offering our board will be authorized to provide for the
issuance of shares of our preferred stock in one or more series, and to fix for
each series voting rights, if any, designations,

--------------------------------------------------------------------------------
55
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------

preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions as provided in a resolution or
resolutions adopted by the board. Our board will have the ability to authorize
the issuance of shares of our preferred stock with terms and conditions that
could discourage a takeover or other transaction that holders of some or a
majority of shares of our common stock might believe to be in their best
interests or in which holders of our common stock might receive a premium for
their shares over the then market price.

WARRANTS

As of March 31, 2000, we had outstanding warrants to purchase a total of 44,000
shares of our common stock, at an exercise price of $1.36 per share. As of March
31, 2000, we had outstanding warrants to purchase a total of 91,665 shares of
our Series C preferred stock, at an exercise price of $6.00 per share. The
warrants contain anti-dilution provisions providing for adjustments of the
exercise price and the number of shares underlying the warrants upon the
occurrence of certain events, including any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transaction. The
warrants expire as follow: warrants to purchase 6,802 shares of Series C
preferred stock will expire on the earlier of July 7, 2004 or the third
anniversary of the current offering; warrants to purchase 28,197 shares of
Series C preferred stock will expire on the earlier of August 12, 2004 or the
third anniversary of the current offering; warrants to purchase 36,666 shares of
Series C preferred stock will expire on the earlier of July 7, 2005 or the third
anniversary of the current offering; a warrant to purchase 20,000 Shares of
Series C preferred stock will expire on the earlier of January 19, 2006 or the
third anniversary of the current offering; and a warrant to purchase 44,000
shares of common stock will expire on April 17, 2001. All of these warrants will
be exercisable immediately before this offering. The warrants to purchase
preferred stock will, after this offering, be exercisable for a total of 80,665
shares of common stock.

REGISTRATION RIGHTS

Under the terms of an agreement with some of our stockholders, the holders of
our common and preferred stock representing 12,330,135 shares of common stock,
on an as converted basis, are entitled to demand the registration of their
shares under the Securities Act of 1933. The holders of at least 40% of such
shares or the holders of shares worth the equivalent of $5 million, if lesser,
are entitled to demand that we register their shares under the Securities Act of
1933, subject to limitations described in the relevant agreement. We are not
required to effect more than two registrations for such holders pursuant to
these demand registration rights. These demand rights expire on either the fifth
anniversary of the effective date of this offering or, for an individual holder,
upon that holder becoming eligible to sell, in accordance with Rule 144 of the
Securities Act of 1933 and within a three month period, all shares with
registration rights held by such holder, whichever is later. In addition, these
holders are entitled to piggyback registration rights with respect to the
registration of their shares of our common stock. If we propose to register any
shares of our common stock either for our account or for the account of other
security holders, the holders of shares having piggyback rights are entitled to
receive notice of the registration and are entitled to include their shares in
the registration, subject to some limitations. Further, at any time after we
become eligible to file a registration statement on Form S-3, a holder or
holders of shares with registration rights may require us to file registration
statements under the Securities Act of 1933 on Form S-3 with respect to their
shares of our common stock if the aggregate offering price of these shares is
expected to exceed $1,000,000. These registration rights are subject to
additional conditions and limitations, among which is the right of the
underwriters of an offering to limit the number of shares of our common stock
held by security holders with registration rights to be included in such
registration. We are generally required to bear all of the expenses of all these
registrations except selling expenses incurred on behalf of holders

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56
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------

requesting registration. We are not required to pay any registration expenses
for Form S-3 registrations after the fourth such registration has been
requested. Registration of any of the shares of our common stock held by
security holders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act of 1933.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:

+ our acquisition by means of a tender offer;

+ our acquisition by proxy contest or other means; and

+ the removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure our company outweighs the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. The amendment of any of the following
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.

ELECTION AND REMOVAL OF DIRECTORS
Effective upon filing of our amended and restated certificate of incorporation
upon completion of this offering, our amended and restated bylaws provide for
the division of our board of directors into three classes, as nearly equal in
number as possible, with the directors in each class serving for three-year
terms, and one class being elected each year by our stockholders. This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of us and may maintain
the incumbency of our board of directors, as it generally makes it more
difficult for stockholders to replace a majority of the directors. Further, our
amended and restated certificate of incorporation to be filed upon completion of
this offering and restated bylaws do not provide for cumulative voting in the
election of directors.

STOCKHOLDER MEETINGS
Under our amended and restated certificate of incorporation and amended and
restated bylaws, only our board of directors, chairman of the board or chief
executive officer may call special meetings of stockholders. Our restated bylaws
establish advance notice procedures with respect to stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee thereof. In
addition, our amended and restated certificate of incorporation eliminates the
right of stockholders to act by written consent without a meeting and eliminates
cumulative voting.

UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deterring or delaying
hostile takeovers or delaying changes in control or management.

--------------------------------------------------------------------------------
57
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------

SECTION 203
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:

+ prior to the date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;

+ upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors or officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or

+ on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.

Section 203 defines "business combination" to include:

+ any merger or consolidation involving the corporation and the interested
stockholder;

+ any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;

+ subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; or

+ the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is U.S. Stock Transfer.

--------------------------------------------------------------------------------
58
<PAGE> 60

--------------------------------------------------------------------------------

Shares eligible for future sale

Prior to this offering, there has been no public market for our common stock.
The market price of our common stock after this offering could decline as a
result of the sale of a large number of shares of our common stock in the
market, or the perception that such sales could occur. Such sales also could
make it more difficult for us to sell equity securities in the future at a time
and price that we deem appropriate. Based on the number of shares outstanding at
March 31, 2000, after this offering we will have 16,995,447 outstanding shares
of common stock. Of these shares, the shares being offered hereby are freely
tradable. This leaves 12,395,447 shares eligible for sale in the public market
as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
-- On the date of this prospectus
12,377,213 At 180 days from the date of this prospectus
18,234 At various times after 180 days from the date of this
prospectus
</TABLE>

The holders of 100% of our common stock, including all of our directors and
officers, together with the holders of options to purchase 1,765,416 shares of
common stock and the holders of warrants to purchase 124,665 shares of common
stock and preferred stock, have entered into lock-up agreements under which they
have agreed with the underwriters not to offer, sell, contract to sell, hedge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 relating to, any of its
common stock or securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, without the prior written
consent of UBS Warburg LLC.

In general, under Rule 144 of the Securities Act of 1933, a person or persons
whose shares are required to be aggregated, including an affiliate, whose shares
have been owned for at least one year is entitled to sell, within any
three-month period after the date of this prospectus, a number of shares that
does not exceed the greater of 1% of the then outstanding shares of common
stock -- approximately 163,954 shares immediately after this offering -- or the
average weekly trading volume in our common stock during the four calendar weeks
preceding the date on which notice of such sale is filed, subject to certain
restrictions. In addition, a person who is not deemed to have been an affiliate
of ours at any time during the 90 days preceding a sale and whose shares have
been beneficially owned by nonaffiliates for at least two years would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.

Following 90 days after the date of this prospectus, and subject to the
expiration of the lock-up agreements referred to above, shares issued upon
exercise of options that we granted prior to the date of this offering will also
be available for sale in the public market pursuant to Rule 701 under the
Securities Act of 1933. Rule 701 permits resales of such shares in reliance upon
Rule 144 under the Securities Act of 1933 but without compliance with the
restrictions, including the holding period requirement, imposed under Rule 144.
As of March 31, 2000, options to purchase a total of 1,765,416 shares of common
stock were outstanding.

Upon the closing of this offering, we intend to file a registration statement to
register for resale the 5,664,179 shares of common stock reserved for issuance
under our stock option and employee stock purchase plans. We expect the
registration statement to become effective immediately upon filing. Shares
issued upon the exercise of stock options granted under our stock option plans
will be eligible for resale in the public market from time to time subject to
vesting and, in the case of certain options, the expiration of the lock-up
agreements referred to above.

--------------------------------------------------------------------------------
59
<PAGE> 61

--------------------------------------------------------------------------------

Underwriting

We and the underwriters named below have entered into an underwriting agreement
concerning the shares we are offering. Subject to conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the following
table. UBS Warburg LLC, ING Barings LLC and SG Cowen Securities Corporation are
the representatives of the underwriters.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
------------------------------------------------------------------------
UBS Warburg LLC............................................. 2,090,000
ING Barings LLC............................................. 1,045,000
SG Cowen Securities Corporation............................. 1,045,000
Bear, Stearns & Co. Inc..................................... 70,000
Cantor Fitzgerald & Co...................................... 70,000
Morgan Stanley & Co. Incorporated........................... 70,000
Dain Rauscher Incorporated.................................. 35,000
Gruntal & Co., L.L.C........................................ 35,000
Pacific Growth Equities, Inc................................ 35,000
Pennsylvania Merchant Group................................. 35,000
Raymond James & Associates, Inc............................. 35,000
Wedbush Morgan Securities Inc............................... 35,000
----------
Total............................................. 4,600,000
==========
</TABLE>

If the underwriters sell more shares than the total number of shares set forth
in the table above, the underwriters have a 30-day option to buy from us up to
690,000 additional shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If shares are
purchased under this option, the underwriters will severally purchase the shares
in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
690,000 additional shares.

<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
--------------------------------------------------------------------------------------------
Per share................................................... $ 1.05 $ 1.05
Total.................................................. $4,830,000 $5,554,500
</TABLE>

We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,200,000.

Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.63 per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $0.10 per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.

The underwriters have informed us that they do not expect discretionary sales to
exceed 5% of the shares of common stock to be offered.

We, our directors, officers and certain of our stockholders have agreed with the
underwriters not to offer, sell, contract to sell, hedge or otherwise dispose
of, directly or indirectly, or file with the SEC a registration statement under
the Securities Act of 1933 relating to, any of our common stock or

--------------------------------------------------------------------------------
60
<PAGE> 62
UNDERWRITING
--------------------------------------------------------------------------------

securities convertible into or exchangeable for shares of our common stock
during the period beginning on the date of this prospectus continuing through
the date 180 days after the date of this prospectus, without the prior written
consent of UBS Warburg LLC.

The underwriters have reserved for sale, at the initial public offering price,
up to 200,000 shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in our reserved share program. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares in this offering.

Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives of the underwriters. The principal factors to be
considered by the representatives and us in determining the initial public
offering price include:

+ the information set forth in this prospectus and otherwise available to the
representatives;

+ the history and the prospects for the industry in which we compete;

+ the ability of our management;

+ our prospects for future earnings, the present state of our development, and
our current financial position;

+ the general condition of the securities markets at the time of this offering;
and

+ the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.

In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions by the underwriters
may include short sales, stabilizing transactions and purchases to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of our shares than they are required to
purchase in the offering. Stabilizing transactions consist of bids or purchases
made for the purpose of preventing or retarding a decline in the market price of
our common stock while our offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of our common stock. As a result, the price of our common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected by the underwriters on the Nasdaq
National Market, in the over-the-counter market or otherwise.

We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.

--------------------------------------------------------------------------------
61
<PAGE> 63

--------------------------------------------------------------------------------

Legal matters

The validity of our common stock offered hereby will be passed upon for us by
Wilson Sonsini Goodrich and Rosati P.C., Palo Alto, California. As of the date
of this prospectus, an investment partnership composed of certain members of and
persons associated with Wilson Sonsini Goodrich & Rosati P.C., in addition to an
individual member of Wilson Sonsini Goodrich & Rosati P.C., beneficially own an
aggregate of 3,385 shares of our preferred stock. Dewey Ballantine LLP, New
York, New York, is acting as counsel for the underwriters in connection with
various legal matters relating to the shares of common stock offered by this
prospectus.

Experts

Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999 as set forth in their report. We have included
our financial statements in this prospectus in reliance on Ernst & Young LLP's
report given on their authority as experts in accounting and auditing.

Where you can find more information

We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to the
shares of common stock to be sold in this offering. This prospectus does not
contain all the information set forth in the registration statement. For further
information with respect to us and the shares of common stock to be sold in this
offering, we refer you to the registration statement. Statements contained in
this prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. Whenever we make reference in this
prospectus to any of our contracts or other documents, the reference may not be
complete, and you should refer to the exhibits that are apart of the
registration statement for a copy of the contract or document.

You may read and copy all or any portion of the registration statement or any
other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's web site http://www.sec.gov.

As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.

This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors of
these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.

--------------------------------------------------------------------------------
62
<PAGE> 64

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
------------------------------------------------------------------
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

--------------------------------------------------------------------------------
F- 1
<PAGE> 65

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

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Argonaut Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Argonaut
Technologies, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Argonaut
Technologies, Inc. at December 31, 1998 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

/s/ ERNST & YOUNG LLP

Palo Alto, California
April 18, 2000, except as to the stock split described
in Note 12, as to which the date is April 25, 2000

--------------------------------------------------------------------------------
F- 2
<PAGE> 66

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

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA AT
DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 2000 2000
----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 2,261 $ 4,946 $ 4,000
Short-term investments........................ - 6,127 5,137
Accounts receivable, less allowance for
doubtful accounts of $50 in 1998, 1999, and
2000........................................ 2,601 3,462 2,295
Inventories................................... 2,191 2,110 2,500
Prepaid expenses and other current assets..... 413 589 579
-------- -------- --------
Total current assets............................ 7,466 17,234 14,511
Property and equipment, net..................... 1,651 1,620 1,773
Note receivable from officer.................... 200 200 200
Other assets.................................... 46 26 26
-------- -------- --------
$ 9,363 $ 19,080 $ 16,510
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 615 $ 865 $ 767
Accrued compensation.......................... 703 756 555
Other accrued liabilities..................... 828 657 706
Deferred revenue.............................. 1,046 2,608 2,066
Current portion of capital lease
obligations................................. 491 303 273
Current portion of long-term debt............. 668 2,984 2,839
-------- -------- --------
Total current liabilities....................... 4,351 8,173 7,206
Noncurrent portion of capital lease
obligations................................... 772 468 408
Noncurrent portion of long-term debt............ 3,375 1,391 1,244
Commitments
Stockholders' equity:
Convertible preferred stock -- $0.0001 par
value; 20,800,000 shares authorized at
December 31, 1998 and 26,200,000 shares
authorized at December 31, 1999 and at March
31, 2000, issuable in series (10,000,000
shares pro forma); 8,730,573, 11,339,268,
and 11,339,268 shares issued and outstanding
at December 31, 1998 and 1999, and at March
31, 2000, respectively (none pro forma);
aggregate liquidation preference of $35,027
at December 31, 1999 and at March 31, 2000
(none pro forma)............................ 1 1 1 $ --
Common stock -- $0.0001 par value; 26,800,000
shares authorized at December 31, 1998 and
32,200,000 shares authorized at December 31,
1999 and at March 31, 2000 (120,000,000
shares pro forma); 2,023,933, 2,342,573 and
2,416,909 shares issued and outstanding at
December 31, 1998 and 1999, and at March 31,
2000, respectively (12,395,447 shares pro
forma)...................................... -- -- -- 1
Additional paid-in capital.................... 20,179 39,069 39,759 39,759
Deferred stock compensation................... -- (3,106) (3,147) (3,147)
Accumulated deficit........................... (19,315) (26,918) (28,935) (28,935)
Other comprehensive income (loss)............. -- 2 (26) (26)
-------- -------- -------- --------
Total stockholders' equity...................... 865 9,048 7,652 $ 7,652
-------- -------- -------- ========
$ 9,363 $ 19,080 $ 16,510
======== ======== ========
</TABLE>

See accompanying notes.

--------------------------------------------------------------------------------
F- 3
<PAGE> 67

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

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes.

--------------------------------------------------------------------------------
F- 4
<PAGE> 68

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED OTHER
PREFERRED STOCK COMMON STOCK PAID-IN STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1996....................... 7,550,573 $1 1,758,860 $-- $14,115 $ -- $ (7,459) $ --
Net loss and comprehensive
loss..................... -- -- -- -- -- -- (6,200) --
Issuance of Series C
convertible preferred
stock.................... 1,180,000 -- -- -- 5,872 -- -- --
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... -- -- 4,220 -- 35 -- -- --
---------- -- ---------- -- ------- ------- -------- ----
Balances at December 31,
1997....................... 8,730,573 1 1,763,080 -- 20,022 -- (13,659) --
Net loss and comprehensive
loss..................... -- -- -- -- -- -- (5,656) --
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... -- -- 260,853 -- 114 -- -- --
Issuance of warrants for
loan arrangement......... -- -- -- -- 41 -- -- --
Compensation expense
related to common stock
and options to
consultants.............. -- -- -- -- 2 -- -- --
---------- -- ---------- -- ------- ------- -------- ----
Balances at December 31,
1998....................... 8,730,573 1 2,023,933 -- 20,179 -- (19,315) --
Net loss................... -- -- -- -- -- -- (7,603) --
Other comprehensive income:
Foreign currency
translation
adjustments............ -- -- -- -- -- -- -- 2
Total comprehensive
loss................... -- -- -- -- -- -- -- --
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... -- -- 287,840 -- 101 -- -- --
Issuance of common stock to
director in exchange for
promissory note.......... -- -- 13,200 -- 15 -- -- --
Issuance of common stock as
charitable donation...... -- -- 17,600 -- 20 -- -- --
Issuance of Series D
convertible preferred
stock.................... 2,608,695 -- -- -- 14,961 -- -- --
Issuance of warrant for
loan arrangement......... -- -- -- -- 22 -- -- --
Compensation expense
related to issuance of
options to consultants... -- -- -- -- 12 -- -- --
Deferred stock
compensation............. -- -- -- -- 3,759 (3,759) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 653 -- --
---------- -- ---------- -- ------- ------- -------- ----
Balances at December 31,
1999....................... 11,339,268 1 2,342,573 -- 39,069 (3,106) (26,918) 2
Net loss (unaudited)....... -- -- -- -- -- -- (2,017) --
Other comprehensive income:
Foreign currency
translation adjustments
(unaudited)............ -- -- -- -- -- -- -- (28)
Total comprehensive loss
(unaudited)............ -- -- -- -- -- -- -- --
Issuance of common stock
upon exercise of stock
options (unaudited)...... -- -- 74,336 -- 43 -- -- --
Compensation related to
issuance of options to
consultants
(unaudited).............. -- -- -- -- 107 -- -- --
Deferred stock
compensation............. -- -- -- -- 540 (540) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 499 -- --
---------- -- ---------- -- ------- ------- -------- ----
Balances at March 31, 2000
(unaudited)................ 11,339,268 $1 2,416,909 $-- $39,759 $(3,147) $(28,935) $(26)
========== == ========== == ======= ======= ======== ====

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
-----------------------------
Balance at December 31,
1996....................... $ 6,657
Net loss and comprehensive
loss..................... (6,200)
Issuance of Series C
convertible preferred
stock.................... 5,872
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... 35
-------
Balances at December 31,
1997....................... 6,364
Net loss and comprehensive
loss..................... (5,656)
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... 114
Issuance of warrants for
loan arrangement......... 41
Compensation expense
related to common stock
and options to
consultants.............. 2
-------
Balances at December 31,
1998....................... 865
Net loss................... (7,603)
Other comprehensive income:
Foreign currency
translation
adjustments............ 2
-------
Total comprehensive
loss................... (7,601)
Issuance of common stock
upon exercise of stock
options, net of
repurchase............... 101
Issuance of common stock to
director in exchange for
promissory note.......... 15
Issuance of common stock as
charitable donation...... 20
Issuance of Series D
convertible preferred
stock.................... 14,961
Issuance of warrant for
loan arrangement......... 22
Compensation expense
related to issuance of
options to consultants... 12
Deferred stock
compensation............. --
Amortization of deferred
stock compensation....... 653
-------
Balances at December 31,
1999....................... 9,048
Net loss (unaudited)....... (2,017)
Other comprehensive income:
Foreign currency
translation adjustments
(unaudited)............ (28)
-------
Total comprehensive loss
(unaudited)............ (2,045)
Issuance of common stock
upon exercise of stock
options (unaudited)...... 43
Compensation related to
issuance of options to
consultants
(unaudited).............. 107
Deferred stock
compensation............. --
Amortization of deferred
stock compensation....... 499
-------
Balances at March 31, 2000
(unaudited)................ $ 7,652
=======
</TABLE>

See accompanying notes.

--------------------------------------------------------------------------------
F- 5
<PAGE> 69

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
-------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $(6,200) $(5,656) $(7,603) $(1,397) $(2,017)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 590 676 714 187 182
Stock compensation............................ -- -- 665 -- 606
Issuance of equity for noncash benefits....... 7 5 42 -- --
Change in cumulative translation adjustment... -- -- 2 (9) (28)
Changes in assets and liabilities:
Accounts receivable........................ (125) (1,420) (861) 471 1,167
Inventories................................ (537) (1,019) 81 (220) (390)
Prepaid expenses and other current
assets................................... (195) (132) (176) 24 10
Other assets............................... (17) (15) 20 -- --
Accounts payable........................... 44 51 250 92 (98)
Accrued compensation....................... 177 221 53 61 (201)
Other accrued liabilities.................. 210 440 (171) (8) 49
Deferred revenue........................... 158 (423) 1,584 188 (542)
------- ------- ------- ------- -------
Net cash used in operating activities........... (5,888) (7,272) (5,400) (611) (1,262)
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Capital expenditures, net....................... (306) (430) (690) (244) (335)
Purchase of short-term investments.............. (974) -- (6,127) -- --
Sale of short-term investments.................. -- 997 -- -- 990
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities.................................... (1,280) 567 (6,817) (244) 655
------- ------- ------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 1,500 3,000 1,000 1,000 --
Repayment of long-term debt..................... -- (457) (668) (145) (292)
Principal payments on capital lease
obligations................................... (244) (359) (492) (117) (90)
Net proceeds from issuances of common stock..... 28 114 101 8 43
Net proceeds from issuance of convertible
preferred stock............................... 5,872 -- 14,961 -- --
------- ------- ------- ------- -------
Net cash provided by financing activities....... 7,156 2,298 14,902 746 (339)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... (12) (4,407) 2,685 (109) (946)
Cash and cash equivalents at beginning of
period........................................ 6,680 6,668 2,261 2,261 4,946
------- ------- ------- ------- -------
Cash and cash equivalents at end of period...... $ 6,668 $ 2,261 $ 4,946 $ 2,152 $ 4,000
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................... $ 155 $ 325 $ 577 $ 181 $ 135
======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Equipment acquired under capital leases......... $ 565 $ 481 $ -- $ -- $ --
======= ======= ======= ======= =======
Options and warrants for services............... $ -- $ 43 $ 22 $ 22 $ --
======= ======= ======= ======= =======
Common stock for promissory note................ $ -- $ -- $ 15 $ -- $ --
======= ======= ======= ======= =======
Deferred stock compensation..................... $ -- $ -- $ 3,759 $ -- $ 540
======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

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F- 6
<PAGE> 70

ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Argonaut Technologies, Inc. (the "Company") was incorporated in the state of
Delaware on November 10, 1994. The Company is a pioneer in the development,
manufacturing and marketing of innovative products that enable chemists to use
high speed parallel synthesis for the development of new drugs. Parallel
synthesis is a process by which multiple compounds are created simultaneously.
The Company's products include a variety of parallel chemical synthesizers and
reagents and enable chemists to increase their productivity, accelerate the drug
development process and reduce costs. The Company's products are used for
chemistry development in the pharmaceutical, biotechnology, life sciences, and
chemical research fields worldwide. Its principal markets are in the United
States, Western Europe, and the Far East.

The Company has two wholly owned subsidiaries, Argonaut Technologies KK in Japan
and Argonaut Technologies AG in Switzerland.

The Company's current operating plan anticipates that the Company will require
additional capital to fund its operations, continue its research and development
programs, and build its sales and marketing organization prior to reaching
profitability. To date, the Company has financed its operations with proceeds
from private equity offerings, long-term debt, and from equipment leases and
other financing arrangements. The Company plans to seek additional funding
through public or private financing arrangements with third parties. Should the
Company fail to raise additional funding, it will be required to delay, reduce
the scope of, or eliminate its operations or obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain technologies or products that the Company may otherwise seek
to retain.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its wholly owned subsidiaries, Argonaut
Technologies KK and Argonaut Technologies AG. All significant intercompany
accounts and transactions have been eliminated on consolidation.

INTERIM FINANCIAL INFORMATION
The financial information at March 31, 2000 and for the three months ended March
31, 1999 and 2000 is unaudited but, in the opinion of management, has been
prepared on the same basis as the annual financial statements and includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for such periods. Results for the
three months ended March 31, 2000 are not necessarily indicative of the results
to be expected for any subsequent period.

UNAUDITED PRO FORMA INFORMATION
If the Company's initial public offering ("IPO") as described in Note 12 is
consummated, all of the preferred stock outstanding will automatically be
converted into common stock. The unaudited pro forma stockholders' equity at
March 31, 2000 has been adjusted for the assumed conversion of preferred stock
based on the shares of preferred stock outstanding at March 31, 2000.

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F- 7
<PAGE> 71
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign subsidiaries
stated in local functional currencies to U.S. dollars at the rates of exchange
in effect at the end of the period. Revenues and expenses are translated using
rates of exchange in effect during the period. Gains and losses from translation
of financial statements denominated in foreign currencies, if material, are
included in stockholders' equity.

FOREIGN CURRENCY TRANSACTIONS
The Company records foreign currency transactions at the exchange rate
prevailing at the date of the transaction. Monetary assets and liabilities
denominated in foreign currency are retranslated at the exchange rates in effect
at the balance sheet date. All translation differences arising from foreign
currency transactions are recorded through profit and loss.

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

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

The Company accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115").

Under SFAS 115, all affected debt and equity securities must be stated at fair
value and classified as held-to-maturity, trading, or available-for-sale.
Management determines the appropriate classification of securities at the time
of purchase and reevaluates such designation as of each balance sheet date.

All investments in debt securities have been designated as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity, if
material. Realized gains and losses and declines in value judged to be other-
than-temporary, if any, on available-for-sale securities are included in other
income. The cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale is included in
interest income.

REVENUE RECOGNITION
The Company recognizes revenue when earned. For products with no future
obligation, revenue is recognized upon shipment. For those products where the
Company has obligations to provide installation services, revenue is recognized
upon installation. Sales which require customer acceptance or have rights of
return are not recognized as revenue until the requirements have been met or
rights of return have expired.

The Company has entered into agreements with certain customers whereby the
customers provide funds for the development of new products or product
enhancements. The amounts paid by the customers are applied toward the purchase
of products from the Company. These amounts have been

--------------------------------------------------------------------------------
F- 8
<PAGE> 72
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

recorded as deferred revenue in the accompanying balance sheet and will be
recognized upon shipment of a product and when all performance obligations have
been met.

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 on an as-incurred basis.

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

ADVERTISING COSTS
Advertising costs are accounted for as expenses in the period in which they are
incurred. Advertising expense for 1997, 1998, and 1999 was $195,000, $243,000,
and $274,000, respectively, and $122,000 for the three months ended March 31,
2000.

INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual
costs on a first-in, first-out cost method) or market value. Reserves are
established for excess, slow-moving or obsolete inventory on a specific
identification basis and include considerations such as changes in customer
demand, technology developments or other economic factors.

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

IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition is less than it carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through March 31,
2000, there have been no such losses.

CONCENTRATIONS OF RISK
The Company outsources part of its manufacturing process to third party
contractors. There are no other third party contractors who could readily assume
this manufacturing function on short notice. Any delay in production could
result in failure to meet customer demand.

--------------------------------------------------------------------------------
F- 9
<PAGE> 73
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to continue
to account for its 1995 Incentive Stock Plan and issuances of restricted stock
to employees in accordance with the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Pro forma disclosures required by SFAS 123 are included in Note
8.

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

COMPREHENSIVE LOSS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments to be
included as part of total comprehensive loss. Total comprehensive loss has been
disclosed in the consolidated statement of stockholders' equity.

NET LOSS PER SHARE
Net loss per share has been computed according to the Financial Accounting
Standards No. 128, "Earnings Per Share," which requires disclosure of basic and
diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, shares subject to repurchase, warrants, and convertible
securities. Diluted earnings per share includes the impact of potentially
dilutive securities (calculated using the treasury stock method). Following the
guidance given by the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and preferred stock that has been issued or
granted for nominal consideration prior to the anticipated effective date of the
initial public offering must be included in the calculation of basic and diluted
net loss per common share as if these shares had been outstanding for all
periods presented. To date, the Company has not issued or granted shares for
nominal consideration.

Pro forma net loss per share includes shares issuable upon the conversion of
outstanding shares of preferred stock (using the as-if-converted method) from
the original date of issuance.

--------------------------------------------------------------------------------
F- 10
<PAGE> 74
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A reconciliation of shares used in the calculations is as follows (in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
-------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Weighted-average shares of common stock
outstanding.............................. 1,691 1,834 2,142 2,047 2,350
Less weighted-average shares subject to
repurchase............................... (319) (124) -- -- --
----- ----- ------ ----- ------
Weighted-average shares used in net loss per
share, basic and diluted................. 1,372 1,710 2,142 2,047 2,350
===== ===== =====
Adjustment to reflect weighted-average
effect of assumed conversions of
preferred stock (unaudited).............. 9,121 9,979
------ ------
Weighted-average shares used in pro forma
net loss per share, basic and diluted
(unaudited).............................. 11,263 12,329
====== ======
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
-------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock................... 8,731 8,731 11,339 8,731 11,339
Outstanding options........................... 1,219 1,426 1,776 1,362 1,765
Warrants...................................... 79 116 136 136 136
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities" ("SFAS 133") which provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, which defers the effective date of SFAS 133 to
years beginning after June 15, 2000. The Company does not anticipate SFAS 133
will have an impact on its results of operations or financial condition when
adopted.

In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on revenue recognition based on interpretations
and practices followed by the SEC. The Company has adopted this guidance in its
financial statements.

--------------------------------------------------------------------------------
F- 11
<PAGE> 75
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. MARKETABLE SECURITIES

Marketable securities consist of the following (in thousands):

<TABLE>
<CAPTION>
AMORTIZED COST AND
FAIR VALUE AT
DECEMBER 31, MARCH 31,
1999 2000
-----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Money market funds.......................................... $ 5 $ 4
Corporate commercial paper.................................. 3,692 2,750
Corporate notes............................................. 3,247 3,295
Market auction preferreds................................... 2,114 808
------ ------
$9,058 $6,857
====== ======
Reported as:
Cash equivalents.......................................... $2,931 $1,720
Short-term investments.................................... 6,127 5,137
------ ------
$9,058 $6,857
====== ======
</TABLE>

Market auction preferreds are short-term debt securities in which interest is
reset every seven to twenty-eight days. The investor can elect to withdraw the
funds or reinvest at the new interest rate at each reset date.

At December 31, 1998, the Company had no investments in marketable securities.

At December 31, 1999 and March 31, 2000, the average maturity of the investments
was approximately three and two months, respectively.

There were no material gross realized gains or losses from sales of securities
in the periods presented. Unrealized gains and losses on investments were not
material at December 31, 1998 and 1999, or March 31, 2000.

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
---------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................... $1,334 $1,175 $1,447
Work in process............................................. 373 208 413
Finished goods.............................................. 484 727 640
------ ------ ------
$2,191 $2,110 $2,500
====== ====== ======
</TABLE>

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F- 12
<PAGE> 76
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 2000
-----------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Laboratory and office equipment............................ $ 3,058 $ 3,738 $ 4,073
Leasehold improvements..................................... 247 250 250
------- ------- -------
3,305 3,988 4,323
Less accumulated depreciation and amortization............. (1,654) (2,368) (2,550)
------- ------- -------
Property and equipment, net................................ $ 1,651 $ 1,620 $ 1,773
======= ======= =======
</TABLE>

Equipment leased under capital leases is included in laboratory and office
equipment. At December 31, 1998 and 1999 and at March 31, 2000, equipment under
capital leases was approximately $2.2 million, $1.5 million and $1.3 million
with accumulated amortization of approximately $1,219,000, $898,000, and
$797,000, respectively.

5. NOTE RECEIVABLE FROM OFFICER

In December 1996, an officer of the Company borrowed $200,000 in exchange for a
note secured by the officer's residence. The note and accrued interest, at a
rate of 6.31% per annum, are due at the earlier of December 17, 2001,
disposition of the officer's residence, or at the time of separation from the
Company, or ten days after the completion of the offering.

6. LEASES

The Company leases its primary office and research facilities in San Carlos,
California and a research facility in Arizona under operating leases which
expire in January 2001 and April 2002, respectively. The Company has an option
to extend the terms of the leases prior to the expiration date at the current
monthly rate adjusted according to the Consumer Price Index. The Company
finances certain laboratory and office equipment under capital leases. Future
minimum lease payments under all noncancelable leases are as follows (in
thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------------------------------------------------------------------------
<S> <C> <C>
Year ended December 31,
2000...................................................... $ 375 $388
2001...................................................... 327 14
2002...................................................... 193 5
----- ----
Total minimum payment required.............................. 895 $407
====
Less amount representing interest........................... (124)
-----
Present value of future lease payments...................... 771
Less current portion........................................ (303)
-----
Noncurrent obligations under capital leases................. $ 468
=====
</TABLE>

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F- 13
<PAGE> 77
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Rent expense under operating leases was approximately $347,000, $477,000, and
$511,000 in 1997, 1998, and 1999, respectively.

7. LONG-TERM DEBT

In July 1997, the Company entered into a loan agreement for $1.5 million with a
financial institution. The loan has an interest rate of 10.5% and is repayable
in 30 monthly installments after six months of interest-only payments. It is
secured by the assets of the Company and subordinated to institutional
creditors. The annual principal maturity of the debt at December 31, 1999 was
approximately $439,000 in 2000.

In July 1998, the Company entered into a loan agreement (the "Loan") and a
receivables loan agreement (the "Receivables Loan") with a financial institution
for a total of up to $8.0 million ($4.0 million under each loan). The Loan bears
interest at rates of 11.75% to 12.5% and is repayable in 16 quarterly
installments after an initial three quarters of interest-only payments. The
Receivables Loan bears interest at prime plus 1.5% at the time of the draw down
and the average interest rate for 1999 was 10.0%. The Receivables Loan is
repayable two years after the draw down and interest is payable monthly.

Also, under the terms of the Loan agreement, the Company is required to issue
warrants to purchase 20,000 shares of Series C convertible preferred stock for
each draw down of $1.0 million. Under the terms of the Receivables Loan
agreement, the Company is required to issue two warrants each to purchase 16,666
shares of Series C convertible preferred stock, one on signing of the agreement
and the second if the draw down exceeds $2.0 million. Both loans are secured by
the assets of the Company and subordinated to institutional creditors.

At December 31, 1999, the Company had drawn down $2.0 million against the Loan
line and $2.0 million against the Receivables Loan line and issued three
warrants to purchase a total of 56,666 shares of Series C convertible preferred
stock (see Note 8). The aggregate annual principal maturities of the debt at
December 31, 1999 were approximately: $2.5 million in 2000, $612,000 in 2001,
$688,000 in 2002, and $91,000 in 2003.

Under the terms of each of the loan agreements, the Company is prohibited from
declaring dividends without the consent of the financial institution.

The carrying amount for the Company's long-term and short-term debt approximated
fair value at each of balance sheet date. The fair value of the Company's debt
was estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rate for similar types of borrowing arrangements.

8. STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK
All series of preferred stock are convertible at the stockholders' option at any
time into 0.88 of a share of common stock, subject to adjustment for
antidilution. Conversion is automatic upon the closing of an underwritten public
offering with aggregate offering proceeds exceeding $25,000,000 and an offering
price of at least $7.39 per share (appropriately adjusted for any stock splits,
stock dividends, recapitalization, or similar events) or written election of
holders of record or more than 2/3 of the outstanding shares.

--------------------------------------------------------------------------------
F- 14
<PAGE> 78
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Holders of Series A, A-1, B, B-1, C, C-1, D, and D-1 convertible preferred stock
are entitled to noncumulative dividends of $0.08, $0.08, $0.26, $0.26, $0.40,
$0.40, $0.46 and $0.46 per share, respectively, if and when declared by the
board of directors. These dividends are to be paid in advance of any
distributions to common stockholders. No dividends have been declared through
March 31, 2000.

In the event of a liquidation or winding up of the Company, holders of Series A,
A-1, B, B-1, C, C-1, D, and D-1 convertible preferred stock shall have a
liquidation preference of $1.00, $1.00, $3.25, $3.25, $5.00, $5.00, $5.75, and
$5.75 per share, respectively, together with any declared but unpaid dividends,
over holders of common shares.

Preferred stockholders are entitled to the number of votes they would have upon
conversion of their preferred shares into common stock.

The authorized, issued and outstanding Series A, A-1, B, B-1, C, C-1, D, and D-1
shares of convertible preferred stock were as follows:

<TABLE>
<CAPTION>
ISSUANCE
SHARES PRICE AGGREGATE
DESIGNATION SHARES ISSUED AND PER LIQUIDATION
(ALL CONVERTIBLE) AUTHORIZED OUTSTANDING SHARE PREFERENCE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A.............................. 5,000,000 4,627,500 $1.00 $ 4,627,500
Series A-1............................ 5,000,000 -- -- --
Series B.............................. 3,000,000 2,923,073 $3.25 9,499,987
Series B-1............................ 3,000,000 -- -- --
Series C.............................. 1,600,000 1,180,000 $5.00 5,900,000
Series C-1............................ 1,600,000 -- -- --
---------- ---------- -----------
December 31, 1997 and 1998.............. 19,200,000 8,730,573 20,027,487
Series D.............................. 2,700,000 2,608,695 $5.75 14,999,996
Series D-1............................ 2,700,000 -- -- --
---------- ---------- -----------
December 31, 1999 and March 31, 2000
(unaudited)........................... 24,600,000 11,339,268 $35,027,483
========== ========== ===========
</TABLE>

The Company has an additional 1,600,000 authorized shares of preferred stock not
yet designated to any series.

WARRANTS
In conjunction with a capital lease line executed in April 1995, the Company
issued a warrant to purchase 44,000 shares of common stock at an exercise price
of $1.36 per share. The warrant expires in April 2001.

In 1997, the Company issued a series of warrants to purchase 34,999 shares of
Series C convertible preferred stock at an exercise price of $6.00 per share in
connection with the execution of a capital lease line and a loan and security
agreement. These warrants are exercisable for a period of seven years or three
years from the effective date of the Company's initial public offering,
whichever is longer. However, should the Company accelerate repayment of its
borrowings under this arrangement, the number of shares which may be purchased
in connection with these warrants would be reduced.

In 1998, the Company issued two warrants to purchase a total of 36,666 shares of
Series C convertible preferred stock at an exercise price of $6.00 per share in
connection with two loan

--------------------------------------------------------------------------------
F- 15
<PAGE> 79
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreements entered into in July 1998 (see Note 7). These warrants are
exercisable for a period of seven years or three years from the effective date
of the Company's initial public offering, whichever is longer. The fair value of
these warrants, determined using a Black-Scholes valuation model, was $40,699
and is being amortized to interest expense over the term of the loan.

In 1999, the Company issued one warrant to purchase 20,000 shares of Series C
convertible preferred stock at an exercise price of $6.00 per share in
connection with a drawdown on one of their loans (see Note 7). The warrant is
exercisable for a period of seven years or three years from the effective date
of the Company's initial public offering, whichever is longer. The fair value of
the warrant, determined using a Black-Scholes valuation model, was $22,200 and
is being amortized to interest expense over the term of the loan.

1995 INCENTIVE STOCK PLAN
The Company's 1995 Incentive Stock Plan (the "Plan") provides for (i) the grant
of incentive stock options to employees, (ii) the grant of nonstatutory stock
options to employees and consultants, and (iii) the grant of stock purchase
rights. A total of 3,464,179 shares of common stock have been authorized for
issuance under the Plan.

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

--------------------------------------------------------------------------------
F- 16
<PAGE> 80
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of activity under the Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT OPTIONS PRICE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996........................ 407,371 924,338 $0.25
Additional shares authorized...................... 660,000 -- --
Options granted................................... (471,230) 471,230 0.52
Options exercised................................. -- (91,805) 0.22
Options canceled.................................. 84,625 (84,625) 0.18
--------- ---------
Balance at December 31, 1997........................ 680,766 1,219,138 0.34
Options granted................................... (519,888) 519,888 0.57
Options exercised................................. -- (236,375) 0.31
Options canceled.................................. 76,912 (76,912) 0.41
Shares repurchased................................ 27,820 -- 0.09
--------- ---------
Balance at December 31, 1998........................ 265,610 1,425,739 0.43
Additional shares authorized...................... 1,320,000 -- --
Common stock granted out of the Plan.............. (13,200) -- --
Options granted................................... (882,290) 882,290 1.07
Options exercised................................. -- (288,920) 0.35
Options canceled.................................. 243,592 (243,592) 0.57
Shares repurchased................................ 990 -- 0.06
--------- ---------
Balance at December 31, 1999........................ 934,702 1,775,517 0.74
Options granted (unaudited)....................... (81,859) 81,859 1.14
Options exercised (unaudited)..................... -- (74,356) 0.58
Options canceled (unaudited)...................... 17,604 (17,604) 1.14
--------- ---------
Balance at March 31, 2000 (unaudited)............... 870,447 1,765,416 0.76
========= =========
</TABLE>

All options and shares were granted with exercise prices equal to the fair value
of the Company's common stock as determined by the Company's board of directors
as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OF OPTIONS CONTRACTUAL LIFE PRICE OF OPTIONS PRICE
-----------------------------------------------------------------------------------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.06 148,655 6.14 $0.06 141,081 $0.06
$0.34 254,971 6.88 $0.34 118,888 $0.34
$0.57 596,899 8.27 $0.57 292,197 $0.57
$1.14 774,992 9.79 $1.14 21,730 $1.14
--------- -------
1,775,517 8.56 $0.74 573,896 $0.42
========= =======
</TABLE>

--------------------------------------------------------------------------------
F- 17
<PAGE> 81
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
MARCH 31, 2000 (UNAUDITED)
-----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OF OPTIONS CONTRACTUAL LIFE PRICE OF OPTIONS PRICE
-----------------------------------------------------------------------------------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.06 147,335 5.90 $0.06 145,868 $0.06
$0.34 250,240 6.64 $0.34 144,884 $0.34
$0.57 533,076 8.07 $0.57 269,974 $0.57
$1.14 834,765 9.58 $1.14 52,268 $1.14
--------- -------
1,765,416 8.40 $0.76 612,994 $0.44
========= =======
</TABLE>

Pro forma information regarding net income and net loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the minimum
value method with the following assumptions in 1997, 1998, and 1999: risk-free
interest rate of 6.11%, 5.08%, and 5.32%, respectively; an expected option life
of 6.5 years, 6.5 years, 7 years, respectively; and no dividends. The
weighted-average fair value of the stock options granted were $0.17 in 1997 and
1998, $0.34 in 1999, and $0.35 at March 31, 2000.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, MARCH 31,
1997 1998 1999 2000
------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
Net loss:
As reported................................... $(6,200) $(5,656) $(7,603) $(2,017)
Pro forma..................................... $(6,249) $(5,740) $(7,894) $(2,046)
Basic and diluted net loss per share:
As reported................................... $ (4.52) $ (3.31) $ (3.55) $ (0.86)
Pro forma..................................... $ (4.55) $ (3.36) $ (3.69) $ (0.87)
</TABLE>

The pro forma net loss is not necessarily indicative of potential pro forma
effects on results for future years.

The Company has recorded deferred stock compensation with respect to options
granted to employees of approximately $3.8 million for the year ended December
31, 1999 and approximately $540,000 for the three month period ended March 31,
2000. Deferred stock compensation represents the difference between the exercise
price of the options and the fair value of the common stock at the date of
grant. The fair value was determined based on the business factors underlying
the value of the Company's common stock on the date of grant viewed in light of
the Company's planned initial public offering and the expected initial public
offering price per share. The deferred stock compensation is being amortized to
operations over the four-year vesting periods of the options using the graded
vesting method.

The Company has granted 13,200 and 4,401 options to consultants in exchange for
services for the years ended December 31, 1998 and 1999, respectively and 17,604
for the three month period ended March 31, 2000. The Company recorded
compensation expense related to these options of $12,000

--------------------------------------------------------------------------------
F- 18
<PAGE> 82
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

for the year ended December 31, 1999 and $107,000 for the three months ended
March 31, 2000. The related expense for the year ended December 31, 1998 was not
material. In accordance with SFAS 123 and EITF 96-18, options granted to
consultants are periodically revalued as they vest.

RESERVED SHARES
As of December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:

<TABLE>
<S> <C>
Warrants.................................................... 44,000
Incentive stock plan........................................ 2,710,219
Preferred stock............................................. 10,059,203
----------
12,813,442
==========
</TABLE>

In addition, the Company has reserved 91,665 shares of Series C preferred stock
for future issuance upon exercise of warrants.

COMMON STOCK
In May 1999, the Company issued 15,000 shares of common stock to a director of a
subsidiary company in exchange for a promissory note. The promissory note was
recorded in current assets at December 31, 1999 and was repaid in March 2000.

Also in May 1999, the Company issued 20,000 shares of common stock to a
charitable foundation as a donation. The fair value of the common stock at the
time of issuance was expensed to profit and loss.

9. 401(K) RETIREMENT SAVINGS PLAN

The Company maintains a 401(k) retirement savings plan for its full-time
employees. Each participant in the Plan may elect to contribute from 1% to 20%
of annual compensation to the Plan. The Company, at its discretion, may make
contributions to the Plan. The Company's expenses related to the Plan have been
immaterial.

10. INCOME TAXES

As of December 31, 1999, the Company had federal net operating loss and research
credit carryforwards of approximately $23.0 million and $600,000, respectively,
which expire on various dates between 2010 and 2019. The Company also had state
net operating loss and research credit carryforwards of approximately $7.4
million and $500,000, respectively. The State net operating loss will expire on
various dates between 2003 and 2004. The State research credits do not expire.

--------------------------------------------------------------------------------
F- 19
<PAGE> 83
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards............................ $ 6,100 $ 8,200
Research credit carryforwards............................... 900 1,100
Capitalized research and development........................ 700 800
Other....................................................... 300 400
------- --------
Deferred tax assets......................................... 8,000 10,500
Valuation allowance......................................... (8,000) (10,500)
------- --------
$ -- $ --
======= ========
</TABLE>

Because of the Company's lack of earnings history, the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
$2.3 million and $2.5 million during the years ended December 31, 1998 and 1999,
respectively.

11. MARKET SALES, EXPORT SALES, AND SIGNIFICANT CUSTOMERS

The Company has determined that it operates in only one segment in accordance
with SFAS 131 as it only reports profit and loss information on an aggregate
basis to its chief operating decision maker.

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
---------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Instrument............................... $5,248 $10,850 $ 9,030 $2,653 $3,009
Chemistry................................ 578 1,226 1,528 328 555
------ ------- ------- ------ ------
$5,826 $12,076 $10,558 $2,981 $3,564
====== ======= ======= ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1997 1998 1999 1999 2000
---------------------------------------------------------------------------------------------
(UNAUDITED
<S> <C> <C> <C> <C> <C>
U.S.A.................................... $2,920 $ 7,279 $ 6,472 $1,794 $2,689
Western Europe........................... 1,089 2,649 2,687 802 262
Far East (principally Japan)............. 1,817 2,148 1,399 385 613
------ ------- ------- ------ ------
$5,826 $12,076 $10,558 $2,981 $3,564
====== ======= ======= ====== ======
</TABLE>

An international distributor represented 22% and 13% of total net sales during
the years ended December 31, 1997 and 1998, respectively. No single customer
accounted for more than 10% of total net sales during 1999 and the three month
period ended March 31, 2000.

--------------------------------------------------------------------------------
F- 20
<PAGE> 84
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenues are attributed to countries based on the location of the customer.

12. INITIAL PUBLIC OFFERING AND STOCK SPLIT (UNAUDITED)

In April 2000, the board of directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering. If the
offering contemplated by this prospectus is consummated, the preferred stock
outstanding as of the closing date will automatically be converted into shares
of the Company's common stock.

A 0.88 for one reverse stock split of the Company's common stock will become
effective prior to the time of the Initial Public Offering. As a result of this
reverse stock split, the conversion ratio of the Company's preferred stock will
automatically be amended to 0.88 for one pursuant to the Company's Amended and
Restated Certificate of Incorporation. All common share, options and per share
amounts in the accompanying consolidated financial statements have been adjusted
retroactively to reflect the stock split.

13. SUBSEQUENT EVENTS (UNAUDITED)

2000 INCENTIVE STOCK PLAN
In April 2000, subject to stockholder approval, the Company adopted its 2000
Incentive Stock Plan (the "2000 Plan") and initially reserved a total of
1,760,000 shares of common stock for issuance. Under the terms of the 2000 Plan,
the number of shares reserved shall increase annually on the first day of the
Company's fiscal year beginning 2001 by the lesser of (i) 1,320,000 shares, (ii)
5% of the outstanding shares on such date or (iii) an amount determined by the
Board.

2000 EMPLOYEE STOCK PURCHASE PLAN
In April 2000, subject to stockholder approval, the Company adopted its 2000
Employee Stock Purchase Plan (the "Purchase Plan") and initially reserved a
total of 176,000 shares. Under the terms of the Purchase Plan, the number of
shares reserved shall increase annually on the first day of the Company's fiscal
year beginning in 2001 by the lesser of (i) 440,000 shares, (ii) 2% of the
outstanding shares on such date or (iii) a lesser amount determined by the
board. The Purchase Plan permits eligible employees to purchase common stock at
a discount through payroll during defined offering periods. The price at which
the stock is purchased is equal to the lower of 85% of the fair market value of
the common stock on the first day of the offering or 85% of the fair market
value of the Company's common stock on the purchase date. The initial offering
period will commence on the effective date of the offering.

ADDITIONAL DEFERRED STOCK COMPENSATION
In April and May 2000 the Company granted options to purchase a total of 238,105
shares of common stock to its employees. The Company estimates that additional
deferred stock compensation of approximately $1.7 million will be recorded as a
result of these options. The additional deferred stock compensation will be
amortized to compensation expense in accordance with the Company's policy. In
the same period, the Company granted options to purchase 35,204 shares of common
stock to consultants. Compensation expense related to these options will be
recorded as they vest in accordance with SFAS 123 and EITF 96-18. The Company
also granted performance-based options to purchase 77,020 shares to certain
employees. The Company will record compensation expense on these options when
and if they vest.

--------------------------------------------------------------------------------
F- 21
<PAGE> 85
ARGONAUT TECHNOLOGIES, INC.
DECEMBER 31, 1999
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE RECEIVABLE FROM OFFICER
In June 2000, the note receivable from an officer (see Note 5) was amended to
replace one of the due dates from ten days after the completion of the offering
to 180 days after the expiration of any lock-up agreement in connection with the
initial public offering.

--------------------------------------------------------------------------------
F- 22
<PAGE> 86

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