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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:For the quarterly period ended June 30, 2004
 OR o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:For the transition period
from            toCommission file number: 001-12128
 Matritech, Inc.   Delaware
    
    04-2985132(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 330 Nevada Street, Newton, Massachusetts 02460   (617) 928-0820   Indicate by check mark whether the registrant:(1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
o
Yes   þ No As of August 2, 2004, there were 42,027,691 shares of the Registrants
Common Stock outstanding.




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##### Table of Contents



MATRITECH, INC. INDEX PagePART I            FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of December 31, 2003 and June 30, 2004
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2004
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II            OTHER INFORMATIONItem 2.
Changes in Securities, Use of Proceeds and Issuer Purchased Equity
Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 6. Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    33EX-3.5 Certificate of AmendmentEX-10.1 Second Amendment to Agreement of LeaseEX-10.3 2002 Employee Stock Purchase PlanEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. MATRITECH, INC. 
 CONSOLIDATED BALANCE
SHEETS (UNAUDITED) December 31,
    
    June 30,2003
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,518,124
    
    
    $
    8,967,505Accounts receivable less allowance of $23,591 in 2003 and 2004
    
    
    556,624
    
    
    
    811,047Inventories, net
    
    
    609,211
    
    
    
    624,020Prepaid expenses and other current assets
    
    
    390,090
    
    
    
    402,256Total current assets
    
    
    9,074,049
    
    
    
    10,804,828Property and equipment, at cost:Laboratory equipment
    
    
    2,437,430
    
    
    
    2,447,407Office equipment
    
    
    408,153
    
    
    
    448,797Laboratory furniture
    
    
    62,739
    
    
    
    62,739Leasehold improvements
    
    
    88,865
    
    
    
    141,267Automobiles
    
    
    47,053
    
    
    
    45,4533,044,240
    
    
    
    3,145,663Less
 Accumulated depreciation and amortization
    
    
    2,107,544
    
    
    
    2,203,714936,696
    
    
    
    941,949Goodwill
    
    
    132,615
    
    
    
    132,615Other assets
    
    
    246,706
    
    
    
    192,257Receivable from related party
    
    
    28,254
    
    
    
    22,217Total assets
    
    $
    10,418,320
    
    
    $
    12,093,866LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of notes payable
    
    $
    301,647
    
    
    $
    12,181Current maturities of convertible debt
    
    
    1,554,067
    
    
    
    1,179,548Accounts payable
    
    
    281,697
    
    
    
    524,224Accrued expenses
    
    
    976,242
    
    
    
    1,482,209Deferred revenue
    
    
    525,940
    
    
    
    501,120Total current liabilities
    
    
    3,639,593
    
    
    
    3,699,282Notes payable, less current maturities
    
    
    25,202
    
    
    
    18,271Convertible debt, less current maturities
    
    
    1,312,860
    
    
    
    659,892Deferred revenue
    
    
    642,435
    
    
    
    645,849Total liabilities
    
    
    5,620,090
    
    
    
    5,023,294Commitments and ContingenciesStockholders Equity:Preferred
stock, $1.00 par value
Authorized4,000,000 shares
Issued and outstandingno shares
    
    
    
    
    
    
    Common stock, $0.01 par value
Authorized60,000,000 shares in 2003 and 90,000,000 in 2004Issued and outstanding36,121,934 shares in 2003 and 41,690,575 shares in 2004
    
    
    361,219
    
    
    
    416,905Additional paid-in capital
    
    
    83,316,769
    
    
    
    91,458,920Accumulated other comprehensive income (loss)
    
    
    119,119
    
    
    
    107,129Accumulated deficit
    
    
    (78,998,877
    )
    
    
    (84,912,382
    )Total stockholders equity
    
    
    4,798,230
    
    
    
    7,070,572Total liabilities and stockholders equity
    
    $
    10,418,320
    
    
    $
    12,093,866
 The accompanying notes are an integral part of these consolidated financial statements. 3




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MATRITECH, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenue:Product sales
    
    $
    1,039,243
    
    
    $
    1,632,079
    
    
    $
    1,903,797
    
    
    $
    3,017,751Alliance and collaboration revenue
    
    
    98,723
    
    
    
    49,950
    
    
    
    149,696
    
    
    
    97,905Total revenue
    
    
    1,137,966
    
    
    
    1,682,029
    
    
    
    2,053,493
    
    
    
    3,115,656Expenses:Cost of product sales
    
    
    524,984
    
    
    
    645,790
    
    
    
    1,071,715
    
    
    
    1,185,166Research, development and clinical expense
    
    
    666,206
    
    
    
    690,333
    
    
    
    1,397,888
    
    
    
    1,405,779Selling, general and administrative expense
    
    
    1,642,068
    
    
    
    2,783,028
    
    
    
    3,248,674
    
    
    
    5,052,023Total operating expenses
    
    
    2,833,258
    
    
    
    4,119,151
    
    
    
    5,718,277
    
    
    
    7,642,968Loss from operations
    
    
    (1,695,292
    )
    
    
    (2,437,122
    )
    
    
    (3,664,784
    )
    
    
    (4,527,312
    )Interest income
    
    
    22,469
    
    
    
    29,068
    
    
    
    43,948
    
    
    
    49,026Interest expense
    
    
    193,616
    
    
    
    813,207
    
    
    
    200,203
    
    
    
    1,435,219Net loss
    
    $
    (1,866,439
    )
    
    $
    (3,221,261
    )
    
    $
    (3,821,039
    )
    
    $
    (5,913,505
    )Basic and diluted net loss per common share
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    $
    (0.15
    )Basic and diluted weighted average number of common shares outstanding
    
    
    32,120,388
    
    
    
    41,473,897
    
    
    
    32,120,186
    
    
    
    39,084,829
 The accompanying notes are an integral part of these consolidated financial statements. 4




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MATRITECH, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months EndedJune 30,2003
    
    2004Cash Flows from Operating Activities:Net loss
    
    $

    (3,821,039
    )
    
    $
    (5,913,505
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    131,511
    
    
    
    112,033Amortization of deferred compensation
    
    
    35,710
    
    
    
    Amortization of debt discount
    
    
    92,807
    
    
    
    1,080,414Amortization of deferred charges
    
    
    
    
    
    
    114,777Issuance of common stock for interest on debt
    
    
    
    
    
    
    187,340Noncash interest expense
    
    
    
    
    
    
    46,628Changes in assets and liabilities:Accounts receivable
    
    
    347,774
    
    
    
    (254,423
    )Inventories
    
    
    (49,145
    )
    
    
    (14,809
    )Prepaid expenses and other assets
    
    
    (17,992
    )
    
    
    (66,457
    )Accounts payable
    
    
    (161,847
    )
    
    
    242,527Accrued expenses
    
    
    (48,348
    )
    
    
    505,967Deferred revenue
    
    
    (24,389
    )
    
    
    (21,406
    )Net cash used in operating activities
    
    
    (3,514,958
    )
    
    
    (3,980,914
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (133,939
    )
    
    
    (120,485
    )Net cash used in investing activities
    
    
    (133,939
    )
    
    
    (120,485
    )Cash Flows from Financing Activities:Payments on notes payable
    
    
    (78,426
    )
    
    
    (288,956
    )Proceeds from convertible debentures and warrants, net
    
    
    4,556,083
    
    
    
    Proceeds from sale of common stock and warrants
    
    
    
    
    
    
    5,846,969Proceeds from issuance of common stock under employee stock purchase plan
    
    
    7,000
    
    
    
    9,000Net cash provided by financing activities
    
    
    4,484,657
    
    
    
    5,567,013Effect of foreign exchange on cash and cash equivalents
    
    
    79,377
    
    
    
    (16,233
    )Increase in cash and cash equivalents
    
    
    915,137
    
    
    
    1,449,381Cash and cash equivalents, beginning of period
    
    
    4,172,013
    
    
    
    7,518,124Cash and cash equivalents, end of period
    
    $
    5,087,150
    
    
    $
    8,967,505Supplemental Cash Flow Information:Cash paid during the year for interest
    
    $
    76,146
    
    
    $
    6,686Stock issued
for debt payments
    
    
    
    
    
    
    815,860Stock issued for interest payments
    
    
    
    
    
    
    187,341
 The accompanying notes are an integral part of these consolidated financial statements. 5




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MATRITECH, INC. 
 NOTES TO UNAUDITED, CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Basis of Presentation The quarterly financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and include, in the opinion of
management, all adjustments, consisting of normal, recurring adjustments
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. The results for the interim periods presented are not necessarily
indicative of results to be expected for any future period. These consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2003 filed with the SEC (File No.
001-12128). We have incurred losses from operations since our inception. We have an
accumulated deficit of $85 million at June 30, 2004. Based on our current rate
of cash utilization, our cash at June 30, 2004 is expected to fund operations
through at least December, 2004 provided we pay interest and principal on our
convertible debentures in stock. Our financing plans include continuing to
seek to raise additional capital and we will consider various financing
alternatives, including equity or debt financings and corporate partnering
arrangements. The primary sources of the additional capital we raised in 2002,
2003 and 2004 have been equity and convertible debt, and we expect
equity-related instruments will continue to be our principal source of
additional capital. After 2004, we will likely need to raise additional
capital through third party financing of debt or equity in order to fund our
operations. We may not be able to raise needed capital on terms that are
acceptable to us, or at all. If we raise funds on unfavorable terms, we may
provide rights and preferences to new investors which are not available to
current shareholders. In addition, our existing financing arrangements contain
anti-dilutive provisions which may require us to issue additional securities if
certain conditions are met. If we do not receive additional financing or do
not receive an adequate amount of additional financing, we will be required to
curtail our expenses by reducing research and/or marketing or by taking other
steps that could hurt our future performance, including but not limited to, the
premature sale of some or all of our assets or product lines on undesirable
terms, merger with or acquisition by another company on unsatisfactory terms or
the cessation of operations. Any future equity financings will dilute the
ownership interest of our existing investors and may have an adverse impact on
the price of our common stock. Any of the foregoing steps will have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that capital will be available on terms acceptable to
us, if at all. 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of Matritech,
Inc., a Delaware corporation and our wholly-owned subsidiary Matritech GmbH
based in Freiburg, Germany. All significant intercompany balances and
transactions have been eliminated at consolidation level. (b) Inventories Inventories are stated at the lower of cost (determined on a first-in
first-out basis) or market and consist of the following: December 31,
    
    June 30,2003
    
    2004Raw materials
    
    $
    147,192
    
    
    $
    185,144Work-in-process
    
    
    4,327
    
    
    
    12,353Finished goods
    
    
    400,735
    
    
    
    365,417Consignment inventory
    
    
    56,957
    
    
    
    61,106$
    609,211
    
    
    $
    624,020
 6




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(c) Revenue Recognition Deferred revenue consists of the following: December 31,
    
    June 30,2003
    
    2004Collaboration fees
    
    $
    828,048
    
    
    $
    780,137Deferred product revenue
    
    
    340,327
    
    
    
    366,832$
    1,168,375
    
    
    $
    1,146,969
 (d) Comprehensive Loss Comprehensive loss is comprised of net loss and certain changes in
stockholders equity that are excluded from net loss. The Company includes
foreign currency translation adjustments in other comprehensive income (loss)
for Matritech GmbH as the functional currency is not the U.S. dollar. The
composition of accumulated other comprehensive income (loss) is as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Reported net loss
    
    $
    (1,866,439
    )
    
    $
    (3,221,261
    )
    
    $
    (3,821,039
    )
    
    $
    (5,913,505
    )Other comprehensive income (loss)Foreign currency translation
adjustments
    
    
    34,699
    
    
    
    (3,453
    )
    
    
    82,686
    
    
    
    (11,990
    )Comprehensive loss
    
    $
    (1,831,740
    )
    
    $
    (3,224,714
    )
    
    $
    (3,738,353
    )
    
    $
    (5,925,495
    )
 (e) Stock-Based Compensation We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25) and related
interpretations, in accounting for our stock-based compensation plans, rather
than the alternative fair value accounting method provided for under Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation,(SFAS No. 123). In accordance with Emerging Issues Task Force
(EITF) Issue No. 96-18, we record compensation expense equal to the fair
value of options granted to non-employees over the vesting period, which is
generally the period of service. The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss
    
    $
    (1,866,439
    )
    
    $
    (3,221,261
    )
    
    $
    (3,821,039
    )
    
    $
    (5,913,505
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards
    
    
    (258,915
    )
    
    
    (278,343
    )
    
    
    (526,769
    )
    
    
    (541,446
    )Pro forma net loss
    
    $
    (2,125,354
    )
    
    $
    (3,499,604
    )
    
    $
    (4,347,808
    )
    
    $
    (6,454,951
    )Net loss per common share:Basic and diluted  as reported
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    $
    (0.15
    )Basic and diluted  pro forma
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.14
    )
    
    $
    (0.17
    )
 7




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The fair value of stock options and common shares issued pursuant to the
stock option and stock purchase plans at the date of grant were estimated using
the Black-Scholes model with the following weighted-average assumptions: 2003
    
    2004Risk-free interest rate
    
    
    2.70 - 3.58
    %
    
    
    3.74  4.69
    %Expected dividend yield
    
    
    
    
    
    
    Expected life
    
    7 years
    
    7 yearsExpected volatility
    
    
    110
    %
    
    
    144
    %
 (f) Net Loss per Common Share We compute earnings per share in accordance with SFAS No. 128, Earnings
per Share. Basic net loss per common share is computed by dividing net loss by
the weighted average number of common shares outstanding during the year.
Diluted loss per share is the same as basic loss per share as the effects of
our potential common stock equivalents are antidilutive. At June 30, 2003 and
2004, potential common stock equivalents consisted of stock options, warrants,
and convertible debentures. The number of antidilutive securities excluded
from the computation of diluted loss per share were 5,784,015 and 10,151,858
for the periods ended June 30, 2003 and 2004, respectively. 3. Stockholders Equity On March 19, 2004 we completed a private placement of 4,858,887 shares of
our common stock at a price of $1.35 per share and warrants to purchase
1,214,725 shares of our common stock at a price of $2.00 per share for an
aggregate consideration of $6,559,500 (before cash commissions and expenses of
approximately $713,000). In addition we issued warrants to various placement
agents for a total of 434,475 shares at an exercise price of $2.00 per share.
These warrants are valued at approximately $560,000. The warrants issued as
part of this private placement are exercisable until March 19, 2009. This transaction has also been deemed to be a dilutive issuance under the
terms of the Convertible Debentures we issued in March 2003 and our warrants
issued in connection with the Convertible Debenture financing (the March 2003
Warrants). As a result, the Convertible Debentures are currently convertible
into 2,801,833 shares of our common stock at a price of $1.51 per share,
representing an increase of 995,013 shares from the conversion terms of the
debenture at December 31, 2003, and the March 2003 Warrants are exercisable to
purchase shares of our common stock at a price of $1.35 per share representing
a decrease in purchase price of $0.32 per share. We calculated an additional
beneficial conversion charge totaling approximately $1,339,000 (see table
below in Note 4) which was recorded as a debt discount in the first quarter of 2004 and
is being amortized over the remaining life of the debt. 4. Convertible Debt A summary of the Convertible Debt accounting is as follows: Proceeds at
closing in March 2003
    
    $
    5,000,000Less:Fair value ascribed to the warrants and recorded as debt discount
    
    
    (950,000
    )Fair value ascribed to placement agent warrant and recorded as debt discount
    
    
    (131,000
    )Beneficial conversion feature calculated on date of closing and recorded as
debt discount
    
    
    (199,000
    )Additional beneficial conversion feature recorded in the fourth quarter of
2003 as debt discount
    
    
    (1,497,000
    )Additional beneficial conversion feature recorded in the first quarter of
2004 as debt discount
    
    
    (1,339,000
    )Cumulative principal payments made in stock
    
    
    (769,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    1,724,000Balance, June 30, 2004
    
    $
    1,839,000
 8




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The debt discount is being amortized to interest expense using the
effective interest method over the term of the debt. For the three and six
month periods ended June 30, 2004, $635,000 and $1,080,000, respectively,
representing amortization of these costs is included in interest expense. Debt issuance costs attributable to the Convertible Debentures, which
totaled approximately $475,000, have been capitalized as other assets and other
current assets on the consolidated balance sheet and will be amortized based on
the effective interest method over the term of the debt. For the three and six
month periods ended June 30, 2004, $56,000 and $115,000, respectively
representing amortization of these costs is included in interest expense. As
of June 30, 2004 unamortized debt issuance costs totaled $215,000, of which
$167,000 is included in other current assets. Minimum future payments on the debt are as follows: 2004
    
    $
    1,287,0002005
    
    
    2,445,0002006
    
    
    776,000Total payments
    
    
    4,508,000Less: Portion related to periodic interest payments
    
    
    (278,000
    )Non-cash interest related to debt discount
    
    
    (2,391,000
    )Balance, June 30, 2004
    
    
    1,839,000Less current portion
    
    
    1,179,000Long-term portion
    
    $
    660,000
 The fair value of the Convertible Debt at June 30, 2004 as estimated by
management is approximately $3.7 million. The carrying value of the Convertible
Debt in the Companys financial statements reflects discounts related to
beneficial conversion charges calculated in accordance with EITF Issue No.
00-27. The Convertible Debentures allow the interest and principal to be paid in
common stock at a discount to value, but only if (i) we are not in default
under the terms of the Convertible Debentures, (ii) there is an effective
registration statement covering such shares, (iii) our common stock is listed
on one of American Stock Exchange, New York Stock Exchange, Nasdaq National
Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our
election to make payments in stock and have made payment of all other amounts
then due under the Convertible Debentures, (v) the issuance of such shares
would not cause the holders to own more than 9.999% of the outstanding shares
of our common stock, (vi) no public announcement of a change of control or
other reclassification transaction has been made and (vii) we have sufficient
authorized but unissued and unreserved shares to satisfy all share issuance
obligations under the March 2003 financing. The first and second quarter of
2004s interest payments ($98,000 and $89,000, respectively) were made in stock
and the March, April, May and June, 2004 principal repayments of $192,000 each
(totaling $769,000 at June 30, 2004) were made in stock and unless a default
occurs, the remaining payments scheduled for both interest and principal are
expected to be made in stock. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations. This Quarterly Report on Form 10-Q, our other reports and communications
to our securityholders, as well as oral statements made by our officers or
agents may contain forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements may relate to, among other things, our future revenue, operating
income and the plans and objectives of management. In particular, certain
statements contained in the Managements Discussion and Analysis of Financial
Condition and Results of Operations, including Factors That May Affect Future
Results constitute forward-looking statements. Actual events or results may
differ materially from those stated in any forward-looking statement. Factors
that may cause such differences are discussed below and in our other reports
filed with the SEC. Overview Matritech, Inc. is a biotechnology company principally engaged in the
development, manufacture, marketing, distribution and licensing of cancer
diagnostic technologies, products and services. We are focused primarily on the
early detection of various types of cancer because treatment options may be greater and/or more
successful and treatment costs may be lower when tumors are detected in their
early stages. Our revenues are derived from product sales, milestone payments
for development work, and payments relating to licensing activities and other
grants of rights. 9




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The products we have developed are based on our proprietary nuclear matrix
protein (NMP) technology. The nuclear matrix, a three-dimensional protein
framework within the nucleus of cells, plays a fundamental role in determining
cell type by physically organizing the contents of the nucleus, including DNA.
We focus our research on finding differences in the types and amounts of
proteins found in the tissue, blood and urine in patients with and without
cancer. We design our products to detect these differences and to generate
medically useful information in order to assist physicians in their diagnosis
and treatment of patients. Products developed by our scientists and based upon our proprietary NMP
technology became our most important source of revenue and revenue growth in
2003. NMP22® product sales exceeded sales from other products for the first
time in 2003, and we expect them to be our largest and most important source of
revenue for the foreseeable future. We continue to distribute allergy products
for a third party in Europe, but revenues from these products declined in 2003.
These trends continued in the first half of 2004. Prior to 2003, our revenues
were derived primarily from selling products made by others and through
licensing activities and other payments from strategic partnerships or
alliances. Effective November 2003, we changed our U.S. distributor arrangement with
Cytogen Corporation for our most important product, our NMP22 BladderChek®
Test, to permit us to sell directly to urologists, as we have done in Germany
since 2001. This change has resulted in increased sales, increased revenue per
test, improvement in our gross profit margin and increased selling, general and
administrative (SG&A) expenses in 2004 compared to 2003. SG&A expenses substantially increased in the second quarter of 2004 from
the second quarter of 2003. This increase was caused primarily by the
higher
costs needed to support the direct distribution of the NMP22 BladderChek Tests.
The increased selling expenditures will likely increase our losses in the
short term (See Results of Operations below), but our goal is to eventually
generate sufficient gross profit from sales growth to cover our increased
selling expenses and achieve our goal of profitability. In addition, because
the financial future of Matritech is so closely related to increasing the sales
of NMP22 BladderChek Tests, we are taking steps to ensure we can meet
anticipated demand for these devices in the future. We are continuing our collaboration with Sysmex Corporation, a leading
manufacturer of automated laboratory instruments based in Kobe, Japan, in the
field of cervical tissue testing. We are also continuing the development of
our core diagnostic technology in breast cancer. We measure our progress in
such programs by achievements such as entering into new strategic partnerships
or alliances, obtaining positive clinical trial results, and ultimately
securing regulatory approvals such as our four FDA approvals for NMP22
products. If we can successfully leverage our strategic partnerships, we
expect to meet our goal of limiting the increase in our own annual research and
development expenditures to less than 20% per year over the next few years. In
the second quarter of 2004 research and development expenditures were 4% higher
than comparable expenses in the second quarter of 2003. In the first half of
2004 research and development expenditures were comparable to expenses in the
first half of 2003. We have been unprofitable since inception and expect to incur significant
additional operating losses for at least the next several years. For the
period from inception to June 30, 2004, we incurred a cumulative net loss of
approximately $85 million. To provide funds to support our new distribution
arrangements and our ongoing research and development efforts, we raised
additional capital in the first quarter of 2004 and may raise additional
capital later in the year. A failure to adequately finance the Company could
have a material adverse impact on our ability to achieve our objectives.
Success in raising equity to fund the cost of these product distribution and
development programs is an important element of our strategy. 10




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##### Table of Contents



Results of Operations Quarter Ended June 30, 2003 (Q2 2003) Compared with Quarter Ended June
30, 2004 (Q2 2004) Revenues Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeProduct Sales:NMP22 BladderChek Test Sales
    
    $
    320,000
    
    
    $
    904,000
    
    
    $
    584,000
    
    
    
    183
    %NMP22 Lab Test Kit Sales
    
    
    243,000
    
    
    
    234,000
    
    
    
    (9,000
    )
    
    
    (4
    %)Other Product Sales
    
    
    476,000
    
    
    
    494,000
    
    
    
    18,000
    
    
    
    4
    %Total Product Sales
    
    
    1,039,000
    
    
    
    1,632,000
    
    
    
    593,000
    
    
    
    57
    %Alliance & Collaboration Revenue
    
    
    99,000
    
    
    
    50,000
    
    
    
    (49,000
    )
    
    
    (49
    %)Total Revenue
    
    $
    1,138,000
    
    
    $
    1,682,000
    
    
    $
    544,000
    
    
    
    48
    %
 The increase in revenue from our NMP22 product line is due to a $544,000
sales increase, primarily in the U.S. and Europe, and a $31,000 favorable
exchange rate impact. NMP22 BladderChek Test sales accounted for approximately
79% of sales in the NMP22 product line in the second quarter of 2004, compared
to 57% in the second quarter of 2003.
The NMP22 BladderChek Test sales growth is the result of increased selling
efforts applied to the test, principally through initiating a
direct-to-the-doctor selling effort in the United States in the fourth quarter
of 2003, continuing our direct-to-the-urologist selling activity in Germany and
obtaining additional reimbursement coverage by Medicare and other health plan
insurance payors throughout the United States. We announced in April, 2004
that Medicare reimbursement programs in 49 states cover the NMP22 BladderChek
Test for both monitoring and diagnosis of bladder cancer, giving our customers
reimbursement coverage for nearly all 39 million Medicare-eligible lives in the
United States. Since most people who suffer from bladder cancer are over the
age of 65, the majority of those in the U.S. being treated or at risk for
bladder cancer are Medicare insured. The decrease in the NMP22 Lab Test Kit
sales is due to a decline in distributor sales in markets other than Germany
and the US. Revenue from sales of non-NMP22 products decreased by $12,000 due to the
implementation by regulatory authorities of a new patient fee structure in
Germany in the first quarter of 2004 and due to decreased customer demand for
the allergy products we distribute. This decrease was offset by a $30,000
favorable exchange rate impact. Alliance and collaboration revenue decreased by $49,000 as the 2003 period
included alliance revenue related to special projects undertaken on behalf of
Sysmex and reimbursed by them. Those projects were essentially completed
during 2003. During the second quarter of 2004 we shipped approximately $44,000 of the
NMP22 BladderChek Test to distributors for which we did not have sufficient
history to estimate returns. Accordingly, this amount is recorded as deferred
revenue and is included in the balance at June 30, 2004, and will be recognized
as revenue when the distributor reports to us that it has either shipped or
disposed of the devices (indicating that the possibility of return is remote). Deferred revenue consists of the following: June 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeCollaboration fees
    
    $
    858,000
    
    
    $
    780,000
    
    
    $
    (78,000
    )
    
    
    (9
    %)Deferred product revenue
    
    
    344,000
    
    
    
    367,000
    
    
    
    23,000
    
    
    
    7
    %$
    1,202,000
    
    
    $
    1,147,000
    
    
    $
    (55,000
    )
    
    
    (5
    %)
 Cost of Product Sales Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeProduct Sales
    
    $
    1,039,000
    
    
    $
    1,632,000
    
    
    $
    593,000
    
    
    
    57
    %Cost of Product Sales
    
    
    525,000
    
    
    
    646,000
    
    
    
    121,000
    
    
    
    23
    %Gross Profit
    
    $
    514,000
    
    
    $
    986,000
    
    
    
    472,000
    
    
    
    92
    %Gross Profit Margin
    
    
    49
    %
    
    
    60
    %
 11




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##### Table of Contents



The decrease in cost of product sales on a percentage basis and the
increase in our gross profit margin is largely the result of (i) higher price
per unit in the United States we receive because we are now selling NMP22
products directly rather than through a distributor and (ii) increased sales of
higher margin NMP22 products worldwide as a percentage of total sales. Research and Development and Clinical Expenses Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    666,000
    
    
    $
    690,000
    
    
    $
    24,000
    
    
    
    4
    %
 Research and development, clinical and regulatory expenses increased
slightly over the second quarter of 2003. Selling, General and Administrative Expenses Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeGross Profit
    
    $
    514,000
    
    
    $
    986,000
    
    
    $
    472,000
    
    
    
    92
    %Selling, General and
Administrative Expenses
    
    
    1,642,000
    
    
    
    2,783,000
    
    
    
    1,141,000
    
    
    
    69
    %SG&A as % of Gross Profit
    
    
    319
    %
    
    
    282
    %
 Selling, general and administrative expenses increased primarily due to a
$495,000 increase in payroll costs resulting from increased headcount, mainly
to support direct sales efforts described above, and a $348,000 increase in
sales-related marketing expenses. In addition, $118,000 was incurred for costs
to comply with Sarbanes-Oxley legislation, and there was an unfavorable foreign
currency exchange rate impact of $42,000 on non-US selling, general and
administrative expenses. We believe that a decrease in our SG&A expenses as a percentage of our
gross profit from 319% in the second quarter of 2003 to 282% in the second
quarter of 2004 is a useful measure of our performance. During the second
half of the year, we expect the growth of gross profits to increase more
rapidly than sales as our higher margin NMP22 products, including our NMP22
Test Kit (Lab Test Kit) and our BladderChek Test, become a larger percentage
of our sales and the lower margin non-NMP22 products decrease as a percentage
of sales. We also expect the growth in gross profits to exceed the growth in
SG&A expenses, and that SG&A expenses as a percent of our gross profit should
continue to decline. Operating Loss Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    1,695,000
    
    
    $
    2,437,000
    
    
    $
    742,000
    
    
    
    44
    %
 The operating loss increased primarily due to increased selling, general
and administrative expenses discussed above. Interest Income Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeInterest Income
    
    $
    22,000
    
    
    $
    29,000
    
    
    $
    7,000
    
    
    
    32
    %
 Interest income increased slightly over the second quarter of 2003 due to
a higher average cash balance offset by lower interest rates. 12




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##### Table of Contents



Interest Expense Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    
    
    
    
    $
    120,000
    
    
    $
    120,000
    
    
    
    Non-Cash Charges to Interest Expense
    
    $
    124,000
    
    
    
    691,000
    
    
    
    567,000
    
    
    
    457
    %Total
    
    $
    124,000
    
    
    $
    811,000
    
    
    $
    687,000
    
    
    
    554
    %Interest Related to Other Debt:Interest Paid in Cash
    
    $
    70,000
    
    
    $
    2,000
    
    
    $
    (68,000
    )
    
    
    (97
    %)Total Interest
    
    $
    194,000
    
    
    $
    813,000
    
    
    $
    619,000
    
    
    
    319
    %
 Interest expense increased substantially in 2004 because we completed a $5
million private placement of Convertible Debentures in March of 2003 and,
subsequent to issuance, have recorded an additional $2.8 million of
non-cash charges related to the Convertible Debentures which will be charged to our
income statement prior to March, 2006. As of June 30, 2004, approximately $2
million of the $4.6 million non-cash charges and deferred financing costs have
been amortized and charged as interest expense and the remaining $2.6 million
will be amortized using the effective interest rate method over the remaining
quarters until March, 2006. The Convertible Debentures allow the interest and principal to be paid in
common stock at a discount to valuation, but only if (i) we are not in default
under the terms of the Convertible Debentures, (ii) there is an effective
registration statement covering such shares, (iii) our common stock is listed
on one of American Stock Exchange, New York Stock Exchange, Nasdaq National
Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our
election to make payments in stock and have made payment of all other amounts
then due under the Convertible Debentures, (v) the issuance of such shares
would not cause the holders to own more than 9.999% of the outstanding shares
of our common stock, (vi) no public announcement of a change of control or
other reclassification transaction has been made and (vii) we have sufficient
authorized but unissued and unreserved shares to satisfy all share issuance
obligations under the March 2003 financing. The first and second quarter of
2004s interest payments ($98,000 and $89,000, respectively) were made in stock
and the March, April, May and June, 2004 principal repayments of $192,000 each
(totaling $769,000) were made in stock and, unless a default occurs, the
remaining payments scheduled for both interest and principal are expected to be
made in stock. Non-Cash Charges to Interest Expense consisted of:  
    
    $56,000 of amortized deferred financing costs, which
contributed to reducing the original $475,000 balance of deferred
financing costs to $215,000 at June 30, 2004;
    
    $32,000 of non-cash charges to record the discount to
valuation incurred when making the principal repayment in stock
rather than cash;
    
    $635,000 of amortized debt discount, which contributed to
reducing the $4,116,000 of debt discount on our $5,000,000 note to
$2,391,000 at June 30, 2004. This debt discount is comprised of
the following: the fair value allocated to the warrants issued in
conjunction with the convertible debt, the charge to account for
the beneficial conversion feature recorded at the date the debt
was entered into as well as in the fourth quarter of 2003 and the
first quarter of 2004 as a result of the anti-dilution provisions
triggered by the financings. The following table demonstrates the accounting for the Convertible
Debentures and related discounts during 2003 and the resulting balance at June
30, 2004. 13




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##### Table of Contents



Value ofDebenturesOriginal Value of Debt
    
    $
    5,000,000Discounts Recorded in 2003
    
    
    (2,777,000
    )2003 Amortization of Discounts
    
    
    644,000Carrying Value of Debt at 12/31/2003
    
    $
    2,867,000Discounts Recorded in 2004
    
    
    (1,339,000
    )2004 Amortization of Discounts
    
    
    1,080,000Payment in Stock
    
    
    (769,000
    )Carrying Value of Debt at 6/30/2004
    
    $
    1,839,000
 None of the types of activities listed in the above table is expected to
affect our cash balances unless we are unable to use our common stock to make
principal and interest payments. If we use our common stock for the above
activities, they will result in additional dilution. See Factors That May
Affect Future Results  We have substantially increased our indebtedness and
may not be able to meet our payment obligation. Net Loss Q2 2003
    
    Q2 2004
    
    $ Change
    
    % ChangeNet Loss
    
    $
    1,866,000
    
    
    $
    3,221,000
    
    
    $
    1,355,000
    
    
    
    73
    %
 The net loss increased primarily due to increased selling, general and
administrative expenses and increased interest expense discussed above, offset
by the increase in revenues. Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2004 Revenues Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeProduct Sales:NMP22 BladderChek Test Sales
    
    $
    509,000
    
    
    $
    1,638,000
    
    
    $
    1,129,000
    
    
    
    222
    %NMP22 Lab Test Kit Sales
    
    
    416,000
    
    
    
    429,000
    
    
    
    13,000
    
    
    
    3
    %Other Product Sales
    
    
    978,000
    
    
    
    951,000
    
    
    
    (27,000
    )
    
    
    (3
    %)Total Product Sales
    
    
    1,903,000
    
    
    
    3,018,000
    
    
    
    1,115,000
    
    
    
    59
    %Alliance & Collaboration Revenue
    
    
    150,000
    
    
    
    98,000
    
    
    
    (52,000
    )
    
    
    (35
    %)Total Revenue
    
    $
    2,053,000
    
    
    $
    3,116,000
    
    
    $
    1,063,000
    
    
    
    52
    %
 The increase in revenues from our NMP22 product line is due to a
$1,034,000 sales increase, primarily in the U.S. and Europe, and a $108,000
favorable exchange rate impact. NMP22 BladderChek Test sales accounted for
approximately 79% of sales in the NMP22 product line in the first half quarter
of 2004, compared to 55% for the first half of 2003. The NMP22 BladderChek
Test sales growth is the result of increased selling efforts applied to the
test, principally through initiating a direct-to-the-doctor selling effort in
the United States in the fourth quarter of 2003, continuing our
direct-to-the-urologist selling activity in Germany and obtaining additional
reimbursement coverage by Medicare and other health plan insurance payors
throughout the United States. We announced in April, 2004 that Medicare
reimbursement programs in 49 states cover the NMP22 BladderChek Test for both
monitoring and diagnosis of bladder cancer, providing reimbursement coverage
for nearly all 39 million Medicare-eligible lives in the United States. Since
most people who suffer from bladder cancer are over the age of 65, the majority
of those in the U.S. being treated or at risk for bladder cancer are Medicare
insured. The increase in NMP22 Lab Test Kit sales is due to continued sales
growth in the US offset by a decline in distributor sales in markets other than
Germany and the US. 14




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##### Table of Contents



Revenue from sales of non-NMP22 products decreased by $122,000 due to the
implementation by regulatory authorities of a new patient fee structure in
Germany in the first quarter of 2004 and due to decreased customer demand for
the allergy products we distribute. This decrease was offset by a $95,000
favorable exchange rate impact. Alliance and collaboration revenue decreased by $52,000 as the 2003 period
included alliance revenue related to special projects undertaken on behalf of
Sysmex and reimbursed by them. Those projects were essentially completed
during 2003. During the first half of 2004 we shipped approximately $98,000 of the
NMP22 BladderChek Test to distributors for which we did not have sufficient
history to estimate returns. Accordingly, this amount is recorded as deferred
revenue and is included in the balance at June 30, 2004, and will be recognized
as revenue when the distributor reports to us that it has either shipped or
disposed of the devices (indicating that the possibility of return is remote). Deferred revenue consists of the following: June 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeCollaboration fees
    
    $
    858,000
    
    
    $
    780,000
    
    
    $
    (78,000
    )
    
    
    (9
    %)Deferred product revenue
    
    
    344,000
    
    
    
    367,000
    
    
    
    23,000
    
    
    
    7
    %$
    1,202,000
    
    
    $
    1,147,000
    
    
    $
    (55,000
    )
    
    
    (5
    %)
 Cost of Product Sales Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeProduct Sales
    
    $
    1,904,000
    
    
    $
    3,018,000
    
    
    $
    1,114,000
    
    
    
    59
    %Cost of Product Sales
    
    
    1,072,000
    
    
    
    1,185,000
    
    
    
    113,000
    
    
    
    11
    %Gross Profit
    
    $
    832,000
    
    
    $
    1,833,000
    
    
    $
    1,001,000
    
    
    
    120
    %Gross Profit Margin
    
    
    44
    %
    
    
    61
    %
 The decrease in cost of product sales on a percentage basis and the
increase in our gross profit margin is largely the result of (i) higher price
per unit in the United States we receive because we are now selling NMP22
products directly rather than through a distributor and (ii) increased sales of
higher margin NMP22 products worldwide as a percentage of total sales. Research and Development and Clinical Expenses Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeResearch and
Development,
Clinical and
Regulatory Expenses
    
    $
    1,398,000
    
    
    $
    1,406,000
    
    
    $
    8,000
    
    
    
    1
    %
 Research and development, clinical and regulatory expenses remained
essentially constant from the first half of 2003. Selling, General and Administrative Expenses Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeGross Profit
    
    $
    832,000
    
    
    $
    1,833,000
    
    
    $
    1,001,000
    
    
    
    120
    %Selling, General and
Administrative Expenses
    
    $
    3,249,000
    
    
    $
    5,052,000
    
    
    $
    1,803,000
    
    
    
    55
    %SG&A as % of Gross Profit
    
    
    391
    %
    
    
    276
    %
 Selling, general and administrative expenses increased primarily due to a
$909,000 increase in payroll costs resulting from increased headcount, mainly
to support direct sales efforts described above, and a $511,000 increase in
sales-related marketing expenses. In addition, $118,000 was incurred to comply with the Sarbanes-Oxley
legislation, and there was an unfavorable foreign currency exchange rate impact
of $130,000 on non-US selling, general and administrative expenses. 15




---



##### Table of Contents



We believe that a decrease in our SG&A expenses as a percentage of our
gross profit from 391% in the first half of 2003 to 276% in the first half of
2004 is a useful measure of our performance. During the second half of the
year, we expect the growth of gross profits to increase more rapidly than sales
as our higher margin NMP22 products, including our Lab Test Kit and our
BladderChek Test, become a larger percentage of our sales and the lower margin
non-NMP22 products decrease as a percentage of sales. We also expect the
growth in gross profits to exceed the growth in SG&A expenses, and that SG&A
expenses as a percent of our gross profit should continue to decline. Operating Loss Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    3,665,000
    
    
    $
    4,527,000
    
    
    $
    862,000
    
    
    
    24
    %
 The operating loss increased primarily due to increased selling, general
and administrative expenses discussed above. Interest Income Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeInterest Income
    
    $
    44,000
    
    
    $
    49,000
    
    
    $
    5,000
    
    
    
    11
    %
 Interest income increased slightly over the first half of 2003 due to a
higher average cash balance offset by lower interest rates. Interest Expense Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    
    
    
    
    $
    219,000
    
    
    $
    219,000
    
    
    
    Non-Cash Charges to Interest Expense
    
    $
    124,000
    
    
    
    1,210,000
    
    
    
    1,086,000
    
    
    
    876
    %Total
    
    $
    124,000
    
    
    $
    1,429,000
    
    
    $
    1,305,000
    
    
    
    1052
    %Interest Related to Other Debt:Interest Paid in Cash
    
    $
    76,000
    
    
    $
    6,000
    
    
    $
    (70,000
    )
    
    
    (92
    %)Total Interest
    
    $
    200,000
    
    
    $
    1,435,000
    
    
    $
    1,235,000
    
    
    
    618
    %
 Interest expense increased substantially in 2004 because we completed a $5
million private placement of Convertible Debentures in March of 2003 and, upon
and subsequent to issuance, have recorded $4.1 million of non-cash charges
and $475,000 of deferred financing costs related to the Convertible Debentures
which will be charged to our income statement prior to March, 2006. As of June 30,
2004, approximately $2.0 million of these non-cash charges and deferred
financing costs have been amortized and charged as interest expense and the
remaining $2.6 million will be amortized using the effective interest rate
method over the remaining quarters until March, 2006. The Convertible Debentures allow the interest and principal to be paid in
common stock at a discount to valuation, but only if (i) we are not in default
under the terms of the Convertible Debentures, (ii) there is an effective
registration statement covering such shares, (iii) our common stock is listed
on one of American Stock Exchange, New York Stock Exchange, Nasdaq National
Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our
election to make payments in stock and have made payment of all other amounts
then due under the Convertible Debentures, (v) the issuance of
such shares would not cause the holders to own more than 9.999% of the outstanding
shares of our common stock, (vi) no public announcement of a change of control
or other reclassification transaction has been made and (vii) we have
sufficient authorized but unissued and unreserved shares to satisfy all share
issuance obligations under the March 2003 financing. The first and second
quarter of 2004s interest payments ($98,000 and $89,000, respectively) were
made in stock and the March, April, May and June, 2004 principal repayments of
$192,000 each (totaling $769,000 thru June 30, 2004) were made in stock and,
unless a default occurs, the remaining payments scheduled for both interest and
principal are expected to be made in stock. 16




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##### Table of Contents



Non-Cash
Charges to Interest Expense consisted of :  
    
    $115,000 of amortized deferred financing costs, which
contributed to reducing the original $475,000 balance of deferred
financing costs to $215,000 at June 30, 2004;  
    
    $47,000 of non-cash charges to record the discount to
valuation incurred when making the principal repayment in stock
rather than cash;  
    
    $1,080,000 of amortized debt discount, which contributed
to reducing the $4,116,000 of debt discount on our $5,000,000 note
to $2,391,000 at June 30, 2004. This debt discount is comprised
of the following: the fair value allocated to the warrants issued
in conjunction with the convertible debt, the charge to account
for the beneficial conversion feature recorded at the date the
debt was entered into as well as in the fourth quarter of 2003 and
the first quarter of 2004 as a result of the anti-dilution
provisions triggered by the financings. The following table demonstrates the accounting for the Convertible
Debentures and related discounts during 2003 and the resulting balance at June
30, 2004. Value ofDebenturesOriginal Value of Debt
    
    $
    5,000,000Discounts Recorded in 2003
    
    
    (2,777,000
    )2003 Amortization of Discounts
    
    
    644,000Carrying Value of Debt at 12/31/2003
    
    $
    2,867,000Discounts Recorded in 2004
    
    
    (1,339,000
    )2004 Amortization of Discounts
    
    
    1,080,000Payment in Stock
    
    
    (769,000
    )Carrying Value of Debt at 6/30/2004
    
    $
    1,839,000
 None of the types of activities listed in the above table is expected to affect
our cash balances unless we are unable to use our common stock to make
principal and interest payments. If we use our common stock for the above
activities, they will result in additional dilution. See Factors That May
Affect Future Results  We have substantially increased our indebtedness and
may not be able to meet our payment obligation. Net Loss Six Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2004
    
    $ Change
    
    % ChangeNet Loss
    
    $
    3,821,000
    
    
    $
    5,913,000
    
    
    $
    2,092,000
    
    
    
    55
    %
 The net loss increased primarily due to increased selling, general and
administrative expenses and increased interest expense discussed above, offset
by the increase in revenues. Liquidity and Capital Resources Our operating activities used cash in the first half of 2003 and 2004
primarily to fund our Net Losses excluding Non-cash Charges. The Non-cash
Charges are due to amortization of debt discount and deferred charges related
to our convertible debt. 17




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Summary Cash Flow Six Months
    
    Six MonthsEnded
    
    EndedJune 30, 2003
    
    June 30, 2004Net Loss
    
    $
    (3,821,000
    )
    
    $
    (5,913,000
    )Non-cash Charges
    
    
    260,000
    
    
    
    1,541,000Changes in Assets and Liabilities
    
    
    46,000
    
    
    
    391,000Net Operating Uses
    
    
    (3,515,000
    )
    
    
    (3,981,000
    )Net Investment Uses
    
    
    (134,000
    )
    
    
    (121,000
    )Net Financing Sources
    
    
    4,485,000
    
    
    
    5,567,000Foreign exchange effect
    
    
    79,000
    
    
    
    (16,000
    )Change in cash and cash equivalents
    
    $
    915,000
    
    
    $
    1,449,000
 To the extent our direct sales represent a larger percentage of total
sales, U.S. accounts receivable will have different characteristics in the
future because they will represent receivables from physicians rather than from
distributors. While we do not have enough data to be certain, we expect that
the Days Sales Outstanding (DSO) may increase due to this trend. As of the
quarter ended June 30, 2004, DSO was approximately 45 days versus approximately
34 days for the comparable period of 2003. With more regular and smaller
shipments to individual physicians, we will be exposed to a greater volume of
transactions in the future which we expect to improve our concentration of
credit risk but this benefit may be offset by an extended collection cycle. We have incurred losses from operations since our inception. We have
financed our operations primarily through private and public offerings of our
equity securities, through funded development and marketing agreements and
through product sales. Of our $85 million accumulated deficit, essentially all
was financed with various equity-related securities. At June 30, 2004, we had
cash and cash equivalents of $8,968,000 and working capital of $7,106,000.
Based on our current rate of cash utilization, our cash at June 30, 2004 is
expected to fund operations through at least December 2004 provided we pay
interest and principal on our Convertible Debentures in stock. The primary source of the additional capital we raised in 2002, 2003 and
2004 has been equity and convertible debt, and we expect that equity-related
instruments will continue to be our principal source of additional capital.
After 2004, we will likely need to raise additional capital through third party
financing of debt or equity in order to fund our operations. We will
continue to seek to raise additional capital and will consider various
financing alternatives, including equity or debt financings convertible into
equity and corporate partnering arrangements. We do not expect to raise
significant debt capital over the next two years because our Convertible
Debenture has a prohibition against any debt having a ranking senior to the
Convertible Debenture. Since we are obliged to retire the Convertible
Debenture over the next two years and are permitted to do so with common stock
under certain circumstances, this constraint on our financing choices should be
removed by the end of the first quarter of 2006. While we have been successful
in raising adequate equity capital to fund Company operations, numerous factors
could adversely affect our ability to do so in the future and could affect the
Companys operations adversely. See Factors That May Affect Future Results  
We will need to obtain additional capital in the future and if we are unable
to obtain such capital on acceptable terms, or at the appropriate time, we may
not be able to continue our existing operations. Any future equity financings will dilute the ownership interest of our
existing investors and may have an adverse impact on the price of our common
stock. As of June 30, 2004, our fully diluted as if converted capital
structure was as follows: Common stock outstanding
    
    
    41,691,000Stock reserved for converting debentures
    
    
    2,802,000Stock reserved for warrant exercises
    
    
    4,765,000Stock reserved for outstanding stock options
    
    
    2,585,000Stock reserved for employee stock purchase plan issuances
    
    
    212,000Stock reserved for existing stock option and incentive plans
    
    
    2,273,000Total
    
    
    54,328,000
 18




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The above table does not include shares we may use for payment of interest
on our Convertible Debentures or the extra shares which may be required if we
redeem the debenture rather than the holder converting it. We plan to use our
common stock to pay such interest and to redeem the debenture if it is not
converted, and such use of our common stock will result in further dilution,
particularly if our share price declines significantly. The above chart also
does not include any additional shares we may be required to issue if we engage
in a financing transaction which is deemed to be an anti-dilutive issuance
under the terms of our Convertible Debentures or other future financings. We
may not be permitted to make payments of interest or principal on our
Convertible Debentures in which case we will require additional financing. Our authorized common stock is 90 million shares. Our shareholders
authorized 30 million additional shares of stock (from 60 million shares to 90
million shares) at our Annual Meeting of Stockholders held on June 11, 2004.
However, if our shareholders do not authorize additional stock at other times
when we may request such authorization, we may be unable to issue adequate
amounts of additional equity to finance the Company appropriately. If we do
not receive additional financing or do not receive an adequate amount of
additional financing, we will be required to curtail our expenses by reducing
sales staff, research and/or marketing or to take other steps that could hurt
our future performance, including but not limited to, the premature sale of
some or all of our assets or product lines on undesirable terms, merger with or
acquisition by another company on unsatisfactory terms or the cessation of
operations. Any of the foregoing steps will have a material adverse effect on
our business, financial condition and results of operations. There can be no
assurance that capital will be available on terms acceptable to us, if at all. Financings On
March 19, 2004, we completed a private placement of 4,858,887 shares of
our common stock at a price of $1.35 and warrants to purchase 1,214,725 shares
of our common stock at a price of $2.00 per share for an aggregate
consideration of $6,559,500 (before cash commissions and expenses of
approximately $713,000). In addition we issued warrants to various placement
agents for a total of 434,475 shares at an exercise price of $2.00 per share.
The warrants issued as part of this private placement are exercisable until
March 19, 2009. This sale has also been deemed to be a dilutive issuance under
the terms of the Convertible Debentures and our March 2003 Warrants. As a
result, the Convertible Debentures are currently convertible into 3,183,902
shares of our common stock at a price of $1.51 per share, representing an
increase of 612,944 shares from the conversion terms of the debenture at
November 6, 2003, and the March 2003 Warrants are exercisable to purchase
shares of our common stock at a price of $1.35 per share. We have calculated
an additional beneficial conversion charge totaling approximately $1,340,000
which has been recorded as an additional debt discount in the first half of
2004 and will be amortized over the remaining life of the debt. Contractual Obligations We have no material capital expenditure commitments. In May, 2004, we entered into an amendment to the lease covering our corporate
offices in Newton, Massachusetts, which extends the term of our lease through
December 31, 2010 at the same annual base rental rate we are currently paying,
$405,000. The amendment also grants us a further option to renew the lease for
another five year term at the then market rate. Off Balance Sheet Arrangements Currently, we have no off balance sheet arrangements. Critical Accounting Policies and Estimates These financial statements have been prepared in conformity with
accounting principles generally accepted in the United States. Preparation of
these statements requires management to make judgments and estimates. Some
accounting policies have a significant impact on amounts reported in these
financial statements. A summary of our significant accounting policies and a
description of accounting policies that are considered critical is contained in
our 2003 Annual Report on Form 10-K, filed on March 30, 2004, in the Notes to
Consolidated Financial Statements, Note 1 and the Critical Accounting Policies
section. Research and Development We are engaged in the research, production and marketing of cancer
diagnostic products. All of our research and development expenditures, whether
conducted by our own staff or by external scientists on our behalf and at our
expense, are recorded as expenses as incurred and amounted to approximately
$44.1 million for the period since our inception in October of 1987 through
June 30, 2004. Research and development expenses include the salaries and
related overhead of our research
personnel, laboratory supplies, payments to third parties to help us execute
clinical trials, depreciation of research related equipment, legal expenses
related to filing and prosecuting patents, other direct expenses and an
allocation of our occupancy and related expenses based on the square footage
occupied by our research and development staff and their laboratories. 19




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Our research and development scientists typically are assigned to one
project at a time but may also provide support for other projects. In
addition, our various programs share a substantial amount of our common fixed
costs such as facility depreciation, utilities and maintenance. All of our
research and development programs are similar in nature as they are based on
our common protein discovery technology and a significant finding in any one
cancer type may provide a similar benefit across all programs. Accordingly, we
do not track our research and development costs by individual research and
development programs. Development Programs The table below summarizes our development programs, including stage of
development and current FDA status. ClinicalProgram
    
    Technology Format
    
    Application
    
    Stage of Development
    
    FDA Status
    
    
    
    
    
    
    
    NMP22 Bladder
    
    Lab Test Kit
    
    Monitoring
    
    Commercialized
    
    ApprovedNMP22 Bladder
    
    Lab Test Kit
    
    Diagnosis
    
    Commercialized
    
    ApprovedNMP22 Bladder
    
    POC Test Device
    
    Monitoring
    
    Commercialized
    
    ClearedNMP22 Bladder
    
    POC Test Device
    
    Diagnosis
    
    Commercialized
    
    ApprovedNMP179 Cervical
    
    Non-Slide-Based Cellular
Analysis System
    
    Screening
    
    Licensee Sysmex is
conducting further
product development
    
    *NMP48 Prostate
    
    Proprietary Laboratory Procedure
    
    Not Determined
    
    Research & Development
    
    **NMP48 Prostate
    
    Lab Test Kit
    
    Not Determined
    
    Research & Development
    
    *NMP48 Prostate
    
    POC Test Device
    
    Not Determined
    
    Research & Development
    
    *NMP66 Breast
    
    Proprietary Laboratory Procedure
    
    Not Determined
    
    Development Agreement
with Mitsubishi
Kagaku Iatron, Inc.
    
    **NMP66 Breast
    
    Lab Test Kit
    
    Not Determined
    
    Research & Development
    
    *NMP66 Breast
    
    POC Test Device
    
    Not Determined
    
    Research & Development
    
    *NMP35 Colon
    
    All
    
    Not Determined
    
    Inactive
    
    ** *
  *
    
    If submitted for a screening or diagnosis application, FDA will likely require Premarket Approval (PMA). If submitted as a
monitoring test, FDA may only require Premarket Clearance (510(k)).**
    
    If offered (as intended) as a service, an FDA submission may not be required. If the service includes a reagent such as an antibody
provided by a party other than the laboratory conducting the test, the FDA will likely require an Analyte Specific Reagent notification at
a minimum. In May, 2004, Sysmex Corporation announced the commencement of preclinical
trials of a non-slide-based cellular analysis system incorporating our NMP179
technology. If Sysmexs preclinical and anticipated clinical trials are
successful, it is Sysmexs goal to make this technology commercially available
in the U.S. in 2006. It is our goal to have either Mitsubishi Kagaku Iatron,
Inc. or another clinical partner undertake clinical trials in 2004 of services
or products incorporating our NMP66 technology. 20




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##### Table of Contents



Spending on Research and Development Projects.Total research and
development spending in the second quarter of 2004 was approximately $690,000.
We expect research and development expenditures to be less than $7.5 million
over 2004 and 2005 and to be devoted to our various programs as discussed
below. NMP22  Bladder.Except for sponsoring additional clinical trials to
demonstrate different ways to use the information generated by the products, we
do not currently plan to incur any significant additional research spending on
any of these products. We do expect to spend, from time to time, funds for
product support and manufacturing improvement which are not expected to exceed
$750,000 over 2004 and 2005. NMP179  Cervical.Discovery research on this product was completed prior
to 2000 and our expenditures in 2002, 2003 and 2004 have been principally for
technical support of the licensing activity. Substantially all future costs to
support additional research and development of this product are expected to be
paid for by Sysmex. If we incur any additional costs in connection with this
program, we expect such costs to be aimed at licensing this technology to a
company with a slide-based cervical cancer detection system. Breast and Prostate Cancer.Over the next two years, research and
development funds will be spent principally to develop both products and
services for breast and prostate cancer, to improve the controls,
reproducibility and costs of our mass spectrometry technology and to further
develop our ligand binding based technology for Lab Test Kits and Point-of-Care
Test Devices. We expect that development of NMP66 products and services for
breast cancer will have greater emphasis in 2004 than development of products
and services for our NMP48 technology. Depending on the ongoing results of our programs we will make decisions on
how to proceed and will consider options including, but not limited to,
terminating certain activities, licensing the technology to third parties or
selling the technology to third parties. As a result of these uncertainties
surrounding these projects we cannot reasonably estimate the likelihood of
reaching commercialization goals set forth in the table above. The nature,
timing and costs of the efforts to reach those goals, and the amount or timing
of the net cash inflows of our individual programs are not possible to predict. Factors That May Affect Future Results Our future financial and operational results are subject to a number of
material risks and uncertainties that may affect such results or conditions,
including: We have a history of operating losses, are continuing to lose money and
may never be profitable. We have incurred operating losses since we began operations in 1987.
These losses have resulted principally from costs incurred in research and
development and from selling, general and administrative costs associated with
our market development and selling efforts. Our accumulated deficit from
inception through June 30, 2004 is $85,000,000. Our product sales and net
losses for each of the past three fiscal years and the first half of 2004 have
been: Six MonthsEndedJune 30, 2004
    
    2003
    
    2002
    
    2001Product Sales
    
    $
    3,018,000
    
    
    $
    4,018,000
    
    
    $
    3,094,000
    
    
    $
    2,341,000Net Losses
    
    $
    5,913,000
    
    
    $
    7,878,000
    
    
    $
    8,278,000
    
    
    $
    8,731,000
 We expect to continue to incur additional operating losses in the future
as we continue to develop new products and seek to commercialize the results of
our research and development efforts. Our ability to achieve long-term
profitability is dependent upon our success in those development and
commercializing efforts. We do not believe we will be profitable in the
foreseeable future. We will need to obtain additional capital in the future and if we are
unable to obtain such capital on acceptable terms, or at the appropriate time,
we may not be able to continue our existing operations. We do not currently generate revenues sufficient to operate our business
and do not believe we will do so in the foreseeable future. In our quarter
ended June 30, 2004, we had a net loss of $3.2 million, and as of June 30,
2004, we only had $9 million of cash and cash equivalents. As a result, we
must rely on our ability to raise capital from outside sources in order to
continue operations in the short-term and long-term. In March, 2003 we
completed a sale of convertible debentures and accompanying warrants, in
October and November, 2003 we completed a sale of common stock and accompanying
warrants, and in March, 2004 we completed a sale of common stock and accompanying
warrants. We will continue to seek to raise additional capital through various
financing alternatives, including equity or debt financings and corporate
partnering arrangements. However, we may not be able to raise needed capital
on terms that are acceptable to us, or at all. 21




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##### Table of Contents



The terms of our 2003 sales of convertible debentures and common stock
greatly restrict our ability to raise capital. Under the terms of our
convertible debenture financing, we are prohibited from entering into
obligations that are senior to the debentures. The purchasers of the common
stock sold in the fall of 2003 also have rights, under the terms of those
financings, to participate in our future financings. These provisions may
severely limit our ability to attract new investors and raise additional
financing on acceptable terms. In addition, in order to attract such new
investors and obtain additional capital, we may be forced to provide rights and
preferences to new investors which are not available to current shareholders. If we do not receive an adequate amount of additional financing in the
future, we may be unable to meet any cash payment obligations required by the
convertible debentures, or we may be required to curtail our expenses or to
take other steps that could hurt our future performance, including but not
limited to, the premature sale of some or all of our assets or product lines on
undesirable terms, merger with or acquisition by another company on
unsatisfactory terms or the cessation of operations. We have substantial indebtedness and may not be able to meet our payment
obligations. As a result of the 2003 sale of convertible debentures, we substantially
increased our indebtedness from approximately $475,000 at the end of 2002 to
approximately $1.9 million at the end of the second quarter of 2004. The convertible debentures permit us to make interest and principal
payments in shares of common stock instead of cash, but only if (i) we are not
in default under the terms of the convertible debentures, (ii) there is an
effective registration statement covering such shares, (iii) our common stock
is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq
National Market or Nasdaq SmallCap Market, (iv) we have provided proper notice
of our election to make payments in stock and have made payment of all other
amounts then due under the convertible debentures, (v) the issuance of such
shares would not cause the holders to own more than 9.999% of the outstanding
shares of our common stock, (vi) no public announcement of a change of control
or other reclassification transaction has been made and (vii) we have
sufficient authorized but unissued and unreserved shares to satisfy all share
issuance obligations under the March 2003 financing. If we are not able to
make interest and principal payments on the debentures in shares of stock, such
payments must be made in cash and, unless we are able to raise additional
capital from another source, we may not have sufficient funds to make such
payments. If we make such payments in stock, however, it will result in
significant dilution. In addition, the convertible debentures require us to pay interest and
liquidated damages and may become immediately due and payable at a premium of
120% of the outstanding principal amount plus accrued interest and damages in
the event we default under their terms. Potential defaults would include,
among other things:  
    
    our inability to make payments as they become due;  
    
    failure to remain listed on any of the Nasdaq SmallCap Market,
New York Stock Exchange, American Stock Exchange or the Nasdaq
National Market;  
    
    sale or disposition of our assets in excess of 33% of our total assets;  
    
    failure to timely deliver stock certificates upon conversion; and  
    
    default on our existing or future liabilities in excess of $150,000. If we default under the terms of the convertible debentures, we probably
will not be able to meet our payment obligations. In addition, the increased
level of our indebtedness could, among other things:  
    
    make it difficult for us to make payment on this debt and other obligations;  
    
    make it difficult for us to obtain future financing;  
    
    require redirection of significant amounts of cash flow from operations to service our indebtedness;  
    
    require us to take measures such as the reduction in scale of
our operations that might hurt our future performance in order to
satisfy our debt obligations; and  
    
    make us more vulnerable to bankruptcy. 22




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##### Table of Contents



The operations of our European subsidiary involve currency exchange
variability and other risks. Matritech GmbH, our European subsidiary, accounted for approximately 61%
of our product sales for the second quarter of 2004. Accounts of our European
subsidiary are maintained in Euros and are translated into U.S. Dollars. To
the extent that foreign currency exchange rates fluctuate in the future, we may
be exposed to significant financial variability, both favorable and
unfavorable. During the second quarter of 2004, exchange rate fluctuations
were favorable compared to the same quarter last year as indicated in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations. However, rate changes in the future may lead to unfavorable
results. In addition, although we have integrated the operations of this subsidiary
since its acquisition in June 2000, we still must coordinate geographically
separate organizations, manage personnel with disparate business backgrounds
and conduct business in a different regulatory and corporate culture. It
remains to be seen whether the use of this subsidiary to spearhead the
marketing effort of our products in Europe will be successful in the long-term. Our cash requirements have significantly increased to support a larger
employee sales force, to pay for order processing, shipping and collection
costs normally borne by distributors, to finance the accounts receivable from
physician practices that likely will be collected over a longer cycle, and
distribution arrangements for sale of our NMP22 BladderChek Test are not
well-established. Since November, 2003 we have had the responsibility for sales of NMP22
BladderChek Tests to urologists in the US, including invoicing and collecting
the revenue from sales. We have increased our sales and marketing expenditures
and added order processing, shipping and collection resources to perform
functions which have, until recently, been performed by our U.S. distributor.
We have little experience in performing these functions in the United States to
support sales directly to physicians, and the time and cost to develop these
resources combined with the risk that they may not function effectively
increases the risk that the rate of sales growth for our NMP22 BladderChek Test
will slow. Sales of products directly to physicians may result in larger accounts
receivable and longer collection cycles than sales to distributors and
increases the risk that accounts receivable will not be collected. Carrying
larger accounts receivable balances and assuming greater collection risk may
also increase our financing requirements. We rely primarily on distributors to market NMP22 BladderChek Tests in
territories other than the United States and Germany, but our history with our
distributors is limited and we do not know whether they will achieve
substantial sales levels of our products. The failure of our distributors to
successfully market our products in territories other than the US and Germany
could have significant adverse effects on our future revenues. We compete with other methods of diagnosing cancer that are in existence
or may be successfully developed by others and our technology may not prevail. Although we are not aware of any other company using nuclear matrix
protein technology in commercial diagnostic or therapeutic products,
competition in the development and marketing of cancer diagnostics and
therapeutics, using a variety of technologies, is intense. Many pharmaceutical
companies, biotechnology companies, public and private universities and
research organizations actively engage in the research and development of
cancer diagnostic products. Many of these organizations have greater
financial, manufacturing, marketing and human resources than we do. We expect that our Lab Test Kits and our Point-of-Care Test Devices will
compete with existing FDA-approved tests, such as tests known as BTA and
UroVysion bladder cancer tests, which have been approved for monitoring bladder
cancer and may become approved for diagnosis of bladder cancer; a test known as
CEA, which is used primarily for monitoring colorectal and breast cancers; a
test known as CA19.9, which is used primarily for monitoring colorectal and
gastric cancers; a test known as PSA, which is used primarily for monitoring
and screening prostate cancer; tests known as TRUQUANT® BR RIA, CA15.3 and
CA27.29, which are used for monitoring breast cancer; and specimen collection
and analysis systems known as ThinPrep® (Cytyc) and SurePath (TriPath). We are
also aware of a number of companies that have announced that they are engaged
in developing cancer diagnostic products based upon oncogene technology. Our
diagnostic products will also compete with more invasive or expensive
procedures such as minimally invasive surgery, bone scans, magnetic resonance
imaging and other in vivo imaging techniques. In addition, other companies may
introduce competing diagnostic products based on alternative technologies that
may adversely affect our competitive position. As a result, our products may
become less competitive, obsolete or non-competitive. Healthcare reform measures, third-party reimbursement policies and
physician or hospital preferences could limit the per-product revenues for our
products. 23




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##### Table of Contents



Our ability to commercialize our products successfully will depend in part
on the extent to which reimbursement for the services based on our products
will be available from government health administration authorities, private
health insurers and other third-party payors. In most countries, the
reimbursement of any medical device (or a service based on a medical device)
which has not received that countrys national regulatory approval for clinical
use is at the discretion of the patients insurance carrier, whether private or
public. Even if use of a device or the performance of a service has been
previously approved for reimbursement, insurance carriers and healthcare plans
may decide not to continue to reimburse it at all, not to continue to reimburse
it for certain medical applications and/or to decrease the reimbursement
amount. If we develop a Proprietary Laboratory Procedure for the US market
that does not require FDA approval, we do not expect third-party reimbursement
until we obtain FDA approval for a product which generates similar information. In many countries, the amount of reimbursement for any medical device (or
a service based on a medical device) is substantially lower than the price set
by the physician or medical institution. Therefore, obtaining reimbursement
coverage should generally be expected to reduce per-product revenue and to
potentially broaden the number of patients who can afford to take advantage of
the product or service. We believe this has occurred in the United States as
reimbursement has been obtained in various states and would expect it to occur
in other countries in which our products are sold. This has not yet happened
in the principal countries of Europe and Asia where the NMP22 Lab Test Kit and
the NMP22 BladderChek Test Device are being sold. Healthcare reform is an area of continuing attention and a priority of
many governmental officials. Medicare has frozen reimbursement for clinical
laboratory tests at 2003 levels and future changes could impose limitations on
the prices we will be able to charge for our products or the amount of
reimbursement available for our products from governmental agencies or
third-party payors. While we cannot predict whether any legislative or
regulatory proposals will be adopted or the effect that the proposals may have
on our business, the announcement or adoption of the proposals could hurt our
business by reducing demand for our products or increasing the pressure on the
prices we charge and could hurt our stock price because of investor reactions. The preferences of physicians, hospitals, clinics and other customers may
also limit our per-product revenue because their profit expectations when
purchasing our product may influence their use and ordering behavior.
Physicians have developed an expectation for generating profits when they
purchase devices for use in their practice. To the extent that we are not able
to price our product to provide such an opportunity, sales of our devices may
suffer. We are subject to extensive government regulation which adds to the cost
and complexity of our business, may result in unexpected delays and
difficulties, and may impose severe penalties for violations. The FDA and many foreign governments extensively regulate the medical
devices that we market and manufacture. The FDA regulates the clinical
testing, manufacture, labeling, distribution and promotion of medical devices
in the United States and agencies in the European Union, Japan and other
countries where we sell our products have similar regulations. Any products
that we or our suppliers manufacture or distribute in accordance with FDA
approvals are subject to pervasive and continuing regulation by the FDA,
including:  
    
    we and our distributors are required to comply with record
keeping requirements and to report adverse experiences with the use
of the devices we make and distribute;  
    
    we are required to register our establishments and list our
devices with the FDA and are subject to periodic inspections by the
FDA and certain state agencies; and  
    
    our products are required to be manufactured in accordance with
a series of complex regulations known as Quality System Regulations
which impose procedural and documentation requirements on us with
respect to manufacturing and quality assurance activities. If we fail to comply with the FDAs requirements, including those listed
above, we may face a number of costly and/or time consuming consequences,
including:  
    
    fines;  
    
    injunctions;  
    
    civil penalties;  
    
    recall or seizure of products;  
    
    total or partial suspension of production; 24




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
    
    failure of the government to grant premarket clearance or premarket approval for devices;  
    
    withdrawal of marketing approvals; and  
    
    criminal prosecution. The FDA and foreign governmental agencies have the authority to request the
repair, replacement or refund of the cost of any device that we manufacture or
distribute if it is faulty. Failure to comply with medical device and quality
regulations in countries outside the United States where we sell our product
can result in fines, penalties, seizure or return of products and the inability
to sell the product in those countries. Labeling and promotional activities are subject to scrutiny in the United
States by the FDA and, in certain instances, by the Federal Trade Commission,
and by regulatory bodies in most countries outside the United States where we
sell products. For example, our NMP22 Lab Test Kit has received FDA approval
and may be promoted by us only as an aid in the management of patients with
bladder cancer or as a diagnostic aid for use for previously undiagnosed
individuals who have symptoms of or are at risk for bladder cancer. The FDA
actively enforces regulations prohibiting the promotion of devices for
unapproved uses and the promotion of devices for which premarket approval has
not been obtained. Consequently, for example, we cannot currently promote the
NMP22 Lab Test Kit for any unapproved use. If we or our suppliers fail to
comply with these manufacturing or promotional requirements, we may face
regulatory enforcement action by the FDA that would prevent us or our suppliers
from manufacturing or selling our products, hurt our ability to conduct testing
necessary to obtain market approval for these products and reduce our potential
sales revenues. In addition to federal regulations regarding manufacture and promotion of
medical devices, we are also subject to a variety of state laws and regulations
which may hinder our ability to market our products in those states or
localities. Manufacturers in general are also subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control, and
disposal of hazardous or potentially hazardous substances. We may be required
to incur significant costs to comply with these laws and regulations in the
future, which could increase future losses or reduce future profitability. We have no demonstrated success in developing cellular analysis systems
and any future success in this area will be highly dependent upon Sysmex. We believe the future success of our business will also depend, in part, upon
Sysmex Corporation developing a satisfactory Cellular Analysis System to be
used to measure clinically useful cervical cancer proteins. Even if Sysmex
completes its product development efforts to its satisfaction, it is expected
to face significant obstacles (including but not limited to those set forth in
Factors That May Affect Future Results  Successful technical development of
our products does not guarantee successful commercialization.) in developing a
system which will be approved by the FDA and selling such systems to cervical
cancer smear laboratories at a satisfactory price. Our success in cervical
cancer Cellular Analysis Systems is almost completely dependent on the success
of Sysmex in utilizing our technology and on its ability to educate physicians,
patients, insurers and its distributors about the medical utility of the new
products. Even if Sysmex successfully educates the market, competing products
may prevent Sysmex from gaining wide market acceptance of its products. Our inability to develop and commercialize additional products may
adversely affect our ability to achieve profitability. We believe that our ability to achieve profitability in the future is
greatly dependent on producing additional revenue-generating products. Other
than the NMP22 products and allergy diagnostic products distributed by our
European subsidiary, none of our products is close enough to commercialization
to be expected to generate revenue in the foreseeable future, if at all. If we
are unable to successfully develop and commercialize other products, the future
prospects for our business, sales and profits will be materially impaired. In
addition, if we are unable to develop and commercialize additional products and
diversify our revenue streams, greater pressure will be placed on the
performance of existing products and our business success will be directly
related to success or failure of these few products. We may incur substantially greater costs and timing delays than we
currently expect in the development process. From time to time, we have encountered unexpected technical obstacles and
may encounter additional ones in the course of the development process that we
may not be able to overcome or may only overcome if we expend additional funds
and time. For example, in 1997 we elected to terminate development of a
blood-based Lab Test Kit for PC1, a candidate marker for prostate cancer, due
to unexpected difficulties. Despite encouraging initial results from an
earlier low throughput research testing method, we were unable to develop such
a kit for use in testing prostate cancer patients even when we employed 1997
state-of-the-art detection methods. We have subsequently announced that a
different set of proteins (NMP48), discovered using a different research
method, would be the primary candidates in our prostate cancer program. More
recently, we and others have observed that the testing methodologies of a low throughput
research mass spectrometry instrument are not readily reproducible or
transferable to high throughput mass spectrometry instruments. This has
required us to try a number of changes in our procedures to improve controls,
reproducibility and costs in order to measure these proteins. Such changes in
our technology and procedures may result in products or services that cannot
reproduce our original discovery results or that do not perform at all or do
not perform as well as the results reported using our discovery research
procedure. 25




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The research results we obtain in the laboratory frequently cannot be
replicated in clinical trials. Investors should not expect products that we commercialize to perform as
well as preliminary discovery research results in the small numbers of samples
reported by us. In large-scale clinical trials, such as those required by the
FDA, we expect to encounter greater variability and risks including but not
limited to:  
    
    obtaining acceptable specimens from patients and healthy
individuals;  
    
    testing a much larger population of individuals than we tested in
early discovery which will be likely to demonstrate the inherent
biologic variability;  
    
    preparing the specimens properly for testing using lower cost, high
throughput methods which may be less reliable than those used in early
discovery; and  
    
    developing an economic and reproducible test method for the
substance to be measured. We believe that testing the final product in a clinical setting will
result in product performance which may not be as accurate as the results
reported from the discovery phase. Therefore, the best comparative data to be
used in evaluating our product development programs are the results of
physician trials of commercial products such as those reported since 1996 for
products based on NMP22 proteins. We have no demonstrated success in developing Proprietary Laboratory
Procedures as a profitable service business and any future success will be
dependent upon satisfaction and approval of our clinical lab partners. We believe the future success of our business will depend not only on the
successful commercialization of our Lab Test Kits and Point-Of-Care Test
Devices, but also in part upon developing a service business based on
Proprietary Laboratory Procedures which will be custom designed to the
instrumentation and techniques of a specific clinical laboratory to measure
clinically useful proteins. We are currently working on development of such
Proprietary Laboratory Procedures using our technologies for breast cancer, but
we have no demonstrated success in this area. In addition, because we expect
that use of our Proprietary Laboratory Procedures will likely be confined to a
limited number of licensed clinical laboratories who would be expected to
invest in the development and marketing of a lab testing service specific to
their equipment, processes and personnel, the success of these procedures will
be dependent upon acceptance by the applicable laboratories. Although we may
complete our product development efforts to our satisfaction, we may not obtain
the agreement and approval from our clinical lab partner that the technology
works adequately in their laboratory environment or that it has the medical
performance and information value that they originally expected. Because
Proprietary Laboratory Procedures utilize technologies which are, by their
nature, more operator-dependent than the technologies involved in products such
as Lab Test Kits and Point-of-Care Test Devices, the risks regarding successful
commercial acceptance are increased in this area. Successful technical development of our products does not guarantee
successful commercialization. We may successfully complete technical development for one or all of our
product development programs, but still fail to develop a commercially
successful product for a number of other reasons, such as the following:  
    
    failure to obtain the required regulatory approvals for their use;  
    
    prohibitive production costs;  
    
    clinical trial results might differ from discovery phase data; and  
    
    variation of perceived value of products from physician to physician. Our success in the market for the diagnostic products we develop will also
depend greatly on our ability to educate physicians, patients, insurers and our
distributors on the medical utility of our new products. Even if we
successfully educate the market, competing products may prevent us from gaining
wide market acceptance of our products. 26




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If we are unable to manufacture the product volumes we need, we will be
unable to achieve profitability. We have been manufacturing and assembling our Lab Test Kits for commercial
sales since 1995 but have not yet manufactured these products in the large
volumes which will eventually be necessary for us to achieve profitability. We
may encounter difficulties in scaling up production of new products, including
problems involving:  
    
    production yields;  
    
    quality control and assurance;  
    
    component supply; and  
    
    shortages of qualified personnel. These problems could make it very difficult to produce sufficient product
to satisfy customer needs and could result in customer dissatisfaction. We may
not be able to achieve reliable, high-volume manufacturing at a commercially
reasonable cost. In addition, numerous governmental authorities extensively
regulate our manufacturing operations. Failure to satisfy our future
manufacturing needs could result in decreased sales, loss of market share and
potential loss of certain distribution rights. If we lose the services of our suppliers or assemblers for any reason it
may be difficult for us to find replacements,
we may be forced to modify or cease production of our products and we may be
unable to meet customer commitments. We currently manufacture our NMP22 Lab Test Kits and package our NMP22
BladderChek Tests in our Newton facility but we rely on subcontractors for
certain components and processes for each of these products. We do not
currently have alternative suppliers for certain key components and processes
which are provided by some subcontractors. If the units or components from
these suppliers or the services of these assemblers should become unavailable
for any reason, including their failure to comply with FDA regulations, we
would need to seek alternative sources of supply or assembly. In order to
maintain the FDA acceptance of our manufacturing process, we would have to
demonstrate to the FDA that these alternative sources of supply are equivalent
to our current sources. Although we attempt to maintain an adequate level of
inventory to provide for these and other contingencies, if our manufacturing
processes are disrupted because key components are unavailable, because new
components must be revalidated or because an assembler fails to meet our
requirements, we may be forced to modify our products to enable another
subcontractor to meet our sales requirements or we may be required to cease
production of such products altogether until we are able to establish an
adequate replacement supplier. Disruptive changes such as these may make us
unable to meet our sales commitments to customers. Our failure or delay in
meeting our sales commitments could cause sales to decrease and market share
to be lost permanently, and could result in significant expenses to obtain
alternative sources of supply or assembly with the necessary facilities and
know-how. If the products we distribute which are made by other companies should
become unavailable or not meet quality standards, we may lose revenues and
market share and may face liability claims. If the products we distribute, but do not manufacture, should become
unavailable for any reason, we would need to seek alternative sources of
supply. If we are unable to find alternative sources of an equivalent product
we may be required to cease distribution of this type of product, which could
cause revenues to decrease and market share to be lost permanently.
Furthermore, if products which we distribute, but do not manufacture, should be
found defective, we could be sued for product liability or other claims. During 2003, we received reports from customers that one of the products
we sell through our German subsidiary failed to perform correctly and provided
false readings on patients conditions. We believe the product performance
problems are being addressed by the manufacturer of the products and that the
manufacturer will accept responsibility for defective products. We have not
sought an alternate source of supply for this product line, but we have seen
decreased customer demand for these products during the first half of 2004
compared to the first half of 2003. Our revenues, profits and market share for
these products may be further adversely affected, and we may face product
liability and other claims if the manufacturer fails to satisfactorily address
all issues raised by our customers and the patients affected. If we are sued for product-related liabilities, the cost could be
prohibitive to us. The testing, marketing and sale of human healthcare products entail an
inherent exposure to product liability, and third parties may successfully
assert product liability claims against us. Although we currently have
insurance covering our products, we may not be able to maintain this insurance
at acceptable costs in the future, if at all. In addition, our insurance may
not be sufficient to cover large claims. Significant product liability claims
could result in large and unexpected expenses
as well as a costly distraction of management resources and potential
negative publicity and reduced demand for our product. 27




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Our activities involve the use of hazardous materials, and we may be held
liable for any accidental injury from these hazardous materials. Our research and development and assembly activities involve the
controlled use of hazardous materials, including carcinogenic compounds.
Although we believe that our safety procedures for handling and disposing of
our hazardous materials comply with the standards prescribed by federal, state
and local laws and regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages that result, and significant and
unexpected costs, including costs related to liabilities and clean-up, costs
from increased insurance premiums or inability to obtain adequate insurance at
a reasonable price and costs from loss of operations during clean-up. If our intellectual property is not adequately protected, we could lose
our ability to compete in the marketplace. Protection of our intellectual property is necessary for the success of
our products. Patent protection can be limited and not all intellectual
property is or can be patent protected. We rely on a combination of patent,
trade secret and trademark laws, nondisclosure and other contractual provisions
and technical measures to protect the proprietary rights in our current and
planned products. We have little protection where we must rely on trade
secrets and nondisclosure agreements and our competitors independently develop
technologies that are substantially equivalent or superior to our technology.
If our competitors develop such technology and are able to produce products
similar to or better than ours, our market share could be reduced and our
revenue potential may decrease. While we have obtained patents where advisable, patent law relating to the
scope of certain claims in the biotechnology field is still evolving. In some
instances we have taken an aggressive position in seeking patent protection for
our inventions and in those cases the degree of future protection for our
proprietary rights is uncertain. In addition, the laws of certain countries in
which our products are, or may be, licensed or sold do not protect our products
and intellectual property rights to the same extent as the laws of the United
States. If our intellectual property infringes on the rights of others, we may be
forced to modify or cease production of our products. We believe that the use of the patents for nuclear matrix protein
technology owned by us or licensed to us and the use of our trademarks and
other proprietary rights, do not infringe upon the proprietary rights of third
parties. However, we may not prevail in any challenge of third-party
intellectual property rights, and third parties may successfully assert
infringement claims against us in the future. In addition, we may be unable to
acquire licenses to any of these proprietary rights of third parties on
reasonable terms. If our intellectual property is found to infringe upon other
parties proprietary rights and we are unable to come to terms with such
parties, we may be forced to modify our products to make them non-infringing or
to cease production of such products altogether. We may need to stop selling our Point-of-Care Test Devices if we cannot
obtain a license or a waiver to use the test strip technology. Our NMP22 BladderChek Test uses test strips composed of an absorbent
material that will soak up urine from a small reservoir at one end of the
container housing the test strip and expose the urine to chemicals and
antibodies arranged on the surface of or imbedded in the test strip. After a
short period of time and after a reaction with our proprietary antibodies, a
test result will appear in a window located on the container housing the test
strip. The manufacture, use, sale, or import of point-of-care products which
include this test strip technology in certain jurisdictions will require us to
obtain patent licenses. We are currently selling NMP22 BladderChek Tests and
are attempting to obtain appropriate licenses or waivers. If we are unable to
obtain patent licenses to permit us to make, use, sell, or import such products
in the United States or in certain other jurisdictions, we will have to stop
selling our Point-of-Care Test Device until the expiration of the relevant
patents or until we are able to arrive at a design solution that uses a
different technology. In addition, we may also be subject to litigation that
seeks a percentage of the revenues we have received from the sale of our
Point-of-Care Test Device. We have accrued estimated royalties on sales of the
NMP22 BladderChek Test based on our estimates of customary royalty rates but
have received no assurances that such accruals will be adequate to pay any
royalties due if and when we complete a licensing agreement. 28




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If we lose or are unable to recruit and retain key management, scientific
and sales personnel, we may be unable to achieve our objectives in a timely
fashion. We need to attract and retain a highly qualified scientific and management
team. We have at any given time only about sixty employees. The loss of
multiple members of our key personnel, such as our scientists or our field
sales force, at the same time or within close proximity of each other, or the
failure to recruit the necessary additional personnel when needed with specific
qualifications and on acceptable terms might harm our research and development
efforts and/or our direct-to-the-urologist marketing strategy. We face intense
competition for qualified personnel from other companies, research and academic
institutions, government entities and other organizations. Our success is also greatly dependent on the efforts and abilities of our
management team. The simultaneous loss of multiple members of senior
management might delay achievement of our business objectives due to the time
that would be needed for their replacements to be recruited and become familiar
with our business. Market volatility and fluctuations in our stock price and trading volume
may cause sudden decreases in the value of an investment in our common stock. The market price of our common stock has historically been, and we expect
it to continue to be, volatile. This price has ranged between $1.14 and $2.56
in the fifty-two week period ended June 30, 2004. The stock market has from
time to time experienced extreme price and volume fluctuations, particularly in
the biotechnology sector, which have often been unrelated to the operating
performance of particular companies. Factors such as announcements of
technological innovations or new products by our competitors or disappointing
results by third parties, as well as market conditions in our industry, may
significantly influence the market price of our common stock. For example, in
the past our stock price has been affected by announcements of clinical trial
results and technical breakthroughs at other biotechnology companies. Our
stock price has also been affected by our own public announcements regarding
such things as quarterly earnings, regulatory agency actions and corporate
partnerships. Consequently, events both within and beyond our control, may
cause shares of our stock to lose their value rapidly. In addition, sales of a substantial number of shares of our common stock
by stockholders could adversely affect the market price of our shares. In the
second quarter of 2004, our shares had an average daily trading volume of only
approximately 123,000 shares. In connection with our March 2004 private
placement of common stock and accompanying warrants, we filed a resale
registration statement covering up to 7,121,031 shares for the benefit of our
investors. In 2003, we filed resale registration statements covering up to
5,371,332 shares for the benefit of our investors in connection with the sale
of convertible debentures and accompanying warrants and an additional
approximately 5,419,000 shares for the benefit of our investors in a private
placement of common stock and accompanying warrants. We have also filed resale
registration statements in connection with previous private placements. The
actual or anticipated resale by such investors under these registration
statements may depress the market price of our common stock. Bulk sales of
shares of our common stock in a short period of time could also cause the
market price for our shares to decline. Future financings will result in additional dilution of the ownership
interest of our existing investors and may have an adverse impact on the price
of our common stock. We will need to raise additional capital in the future to continue our
operations. The primary source of the additional capital we raised in 2002,
2003 and 2004 has been equity and convertible debt, and we expect that
equity-related instruments will continue to be our principal source of
additional capital. In June 2004, our stockholders approved an increase in our
authorized common stock from 60,000,000 to 90,000,000 shares. This approval
provides us with greater flexibility in undertaking an additional financing
without the expense and delay of obtaining stockholder approval other than as
required by state law or American Stock Exchange requirements for the
particular transaction. Any future equity financings will dilute the ownership
interest of our existing investors and may have an adverse impact on the price
of our common stock. In addition, the terms of the convertible debentures provide for
antidilution adjustments. On October 15, 2003 and on November 6, 2003 we
completed a sale of 3,893,295 shares of our common stock and warrants to
purchase 1,362,651 shares of our common stock at a price of $2.45 per share for
an aggregate consideration of $6,501,801 (before cash expenses of approximately
$855,000). This sale was deemed to be a dilutive issuance under the terms of
the convertible debentures and our March 2003 Warrants. On March 19, 2004 we
completed a sale of 4,858,887 shares of our common stock and warrants to
purchase 1,214,725 shares of our common stock at a price of $2.00 per share for
an aggregate consideration of $6,559,500 (before cash expenses of approximately
$713,000). This sale has also been deemed to be a dilutive issuance under the
terms of the convertible debentures and our March 2003 Warrants. As a result,
the convertible debentures are currently convertible into 3,183,902 shares of
our common stock at a price of $1.51 per share, representing an increase of
612,944 shares from the 29




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conversion terms of the debenture at November 6, 2003, and the March 2003
Warrants are exercisable to purchase shares of our common stock at a price of
$1.35 per share. If we do a future financing at a price less than $1.35 per common share
(the New Base Price), the conversion rate of the debentures will be adjusted
down to 112% of the New Base Price and additional shares of our common stock
would be issuable upon such conversion. The terms of the March 2003 Warrants
also provide for antidilution protection, so that the exercise price for such
warrants would be adjusted down to the New Base Price in the event of a
dilutive financing, or on a weighted-average basis if there are no longer any
convertible debentures outstanding. The issuance of additional shares upon
conversion of the debentures would result in further dilution of the ownership
interest of our other existing investors, and a decrease in the warrant
exercise price may cause a decline in our stock price. Conviction of our previous auditing firm means that we will not be able to
obtain a consent for inclusion of their auditor report in future SEC filings. Prior to July 17, 2002, Arthur Andersen LLP served as our independent
auditors. On March 14, 2002, Arthur Andersen was indicted on federal
obstruction of justice charges arising from the governments investigation of
Enron Corporation and on June 15, 2002, Arthur Andersen was found guilty and
subsequently has ceased practicing before the SEC. On July 17, 2002, we
dismissed Arthur Andersen and retained PricewaterhouseCoopers LLP as our
independent auditors for our fiscal year ended December 31, 2002. SEC rules
require us to present historical audited financial statements in various SEC
filings, such as registration statements, along with Arthur Andersens consent
to our inclusion of Arthur Andersens audit report in those filings. In light
of the cessation of Arthur Andersens practice, we will not be able to obtain
the consent of Arthur Andersen to the inclusion of Arthur Andersens audit
report in our future filings. The SEC has provided regulatory relief designed
to allow companies that file reports with the SEC to dispense with the
requirement to file a consent of Arthur Andersen in certain circumstances, but
purchasers of securities sold under our registration statements which were not
filed with the consent of Arthur Andersen to the inclusion of Arthur Andersens
audit report will not be able to sue Arthur Andersen pursuant to Section
11(a)(4) of the Securities Act of 1933 and therefore the purchasers right of
recovery under that section may be limited as a result of the lack of our
ability to obtain Arthur Andersens consent. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Investment Portfolio.We own financial instruments that are sensitive to
market and interest rate risks as part of our investment portfolio. The
investment portfolio is used to preserve our capital until it is required to
fund operations including our research and development activities. None of
these market risk sensitive instruments is held for trading purposes. Our
investment policy prohibits investing in derivatives, and we stringently adhere
to this policy. The interest rate on our
Convertible Debentures is fixed and therefore not subject to interest rate
risk. It is suggested that this paragraph be read in conjunction with Note 1
of Notes to the Consolidated Financial Statements  Operations and Significant
Accounting Policies of our Annual Report on Form 10-K for the year ended
December 31, 2003 filed with the SEC (File No. 001-12128). We invest our cash in securities classified as cash and cash equivalents.
At June 30, 2004, these securities totaled $9 million and included money market
accounts. Changes in
interest rates affect the investment income we earn on our investments and,
therefore, impact our cash flows and results of operations. A hypothetical 50
basis point decrease in interest rates would result in a decrease in annual
interest income and a corresponding increase in net loss of approximately
$21,000 for the period ended June 30, 2004. Foreign Exchange.The financial statements of Matritech GmbH are
translated in accordance with SFAS No. 52, Foreign Currency Translation. The
functional currency of our foreign subsidiary is the local currency (Euro), and
accordingly, all assets and liabilities of the foreign subsidiary are
translated using the exchange rate at the balance sheet date except for
intercompany receivables which are of long-term-investment nature, and capital
accounts which are translated at historical rates. Revenues and expenses are
translated monthly at the average rate for the month. Adjustments resulting
from the translation from the financial statements of the Matritech GmbH into
U.S. Dollars are excluded from the determination of net income and are
accumulated in a separate component of stockholders equity. Foreign currency
transaction gains and losses are reported in the accompanying consolidated
statements of operations and are immaterial to the results of operations. We
had sales denominated in foreign currency of approximately $992,000 and
$1,989,000, respectively, for the three month and six
month periods ended June 30, 2004. 
 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures.  Our
management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), as of the end of the period covered by this Quarterly Report
on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that as of such date, our disclosure controls
and procedures were designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms and were effective. 30




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Changes in Internal Control Over Financial Reporting.  There was no change in
our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that occurred during the period covered
by this Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 
 PART II. OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchased Equity Securities. (a) At our Annual Meeting of Stockholders held June 11, 2004, the
stockholders approved an increase in our authorized common stock, par value
$.01, from 60,000,000 to 90,000,000 shares. A Certificate of Amendment of our
Amended and Restated Certificate of Incorporation was filed with the Delaware
Secretary of States office on June 17, 2004. As a result of the approval of
this increase in authorized shares, we have available substantial additional
amounts of stock which may be issued for any valid corporate purpose that the
Board of Directors from time to time deems necessary or advisable, including,
without limitation, stock splits and stock dividends, continued financings in
furtherance of our research, product development and operations, acquisitions
and other transactions involving the use of common stock. Future issuances
could have a dilutive effect on existing stockholders and the issuance of
additional shares of common stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. (e) We did not repurchase any shares of our common stock during the second
quarter of 2004. 
 Item 4. Submission of Matters to a Vote of Security Holders  (a)
    
    The annual meeting of stockholders of Matritech (the Annual
Meeting) was held on June 11, 2004.(b)
    
    The following directors were elected at the Annual Meeting: VotesElection of Directors
    
    For
    
    WithheldStephen D. Chubb
    
    
    30,615,292
    
    
    
    1,749,036David L. Corbet
    
    
    30,630,892
    
    
    
    1,733,436Walter O. Fredericks
    
    
    30,732,437
    
    
    
    1,631,891Judith Kurland
    
    
    30,734,502
    
    
    
    1,629,826Richard A. Sandberg
    
    
    30,695,439
    
    
    
    1,668,889T. Stephen Thompson
    
    
    30,741,237
    
    
    
    1,623,091C. William Zadel
    
    
    30,616,266
    
    
    
    1,748,062
  (c)
    
    The following other matters were proposed and voted upon as indicated. To approve an amendment to the Companys Amended and Restated Certificate of
Incorporation, as amended, increasing the number of shares of the Companys
common stock, par value $.01 per share (Common Stock) authorized for issuance
from 60,000,000 to 90,000,000 shares. With 23,442,590 voting for, 8,742,211
against, and 179,527 abstaining, the proposal was passed. To ratify the selection of the firm PricewaterhouseCoopers LLP to serve as
auditors for the fiscal year ending December 31, 2004. With 32,016,434 voting
for, 269,590 voting against, and 78,304 abstaining, the proposal was passed. 31




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Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits: 3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant
(originally filed as Exhibits 3, 4.1 to our Registration Statement
No. 33-46158 on Form S-1 and re-filed in electronic form as Exhibit
3.1 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 and incorporated herein by reference).3.2
    
    Certificate of Amendment, dated June 16, 1994, of Amended and
Restated Certificate of Incorporation of the Registrant (originally
filed as Exhibit 3.2 of our Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1995 and re-filed in electronic form
as Exhibit 3.3 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and incorporated herein by reference).3.3
    
    Certificate of Amendment, dated June 5, 1995, of Amended and
Restated Certificate of Incorporation of the Registrant (originally
filed as Exhibit 3.3 of our Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1995 and re-filed in electronic form
as Exhibit 3.4 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and incorporated herein by reference).3.4
    
    Certificate of Amendment, dated June 26, 2002, of Amended and
Restated Certificate of Incorporation of the Company (filed as
Exhibit 4.6 to our Registration Statement No. 333-96701 on Form S-8,
filed on July 18, 2002 and incorporated herein by reference).3.5
    
    Certificate of Amendment, dated June 11, 2004, of Amended and
Restated Certificate of Incorporation of the Registrant.10.1
    
    Second Amendment to Agreement of
Lease, dated May 12, 2004, between
the Company and Francis L. Biotti as trustee of One Nevada Realty
Trust.10.3#
    
    2002 Employee Stock Purchase Plan as amended effective June 11, 2004.31.1
    
    Certification of Chief Executive
Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.#
    
    Indicates management contract or compensatory plan or arrangement.
  (b)
    
    Reports on Form 8-K:On April 7, 2004, we furnished a Current Report on Form 8-K reporting on Items 5 and 7.On May 4, 2004, we furnished a Current Report on Form 8-K reporting on Items 7 and 12. 32




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. MATRITECH, INC.Date: August 10, 2004
    
    By:
    
    /s/ Stephen D. ChubbStephen D. ChubbDirector, Chairman and Chief Executive Officer(principal executive officer)Date: August 10, 2004
    
    By:
    
    /s/ Richard A. SandbergRichard A. SandbergDirector, Vice President, Chief FinancialOfficer and Treasurer(principal accounting and financial officer)
 33