##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 For the quarterly period ended March 31, 2006
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 For the transition period from            to
 Commission file number: 001-12128
 Matritech, Inc.
 
  Delaware
    
    04-2985132(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 330 Nevada Street, Newton, Massachusetts 02460
 
  (617) 928-0820
 
  Indicate by check mark whether the registrant:
 þ o
 o þ
  Large Accelerated o
    
    Accelerated o
    
    Non-accelerated þ
 o þ




---



##### 



MATRITECH, INC.
 INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006
    
    
    5Condensed Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    29Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6.
    
    Exhibits
    
    
    41SIGNATURES
    
    
    
    
    41Ex-31.1 Section 302 Certification of the C.E.O.Ex-31.2 Section 302 Certification of the C.F.O.Ex-32.1 Section 906 Certification of the C.E.O.Ex-32.2 Section 906 Certification of the C.F.O.
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 MATRITECH, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,
    
    
    March 31,2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,789,792
    
    
    $
    6,147,357Accounts receivable less allowance of $110,059 in 2005 and $92,334 in 2006
    
    
    1,534,096
    
    
    
    1,402,781Inventories
    
    
    756,079
    
    
    
    905,236Prepaid expenses and other current assets
    
    
    323,660
    
    
    
    315,633Total current assets
    
    
    4,403,627
    
    
    
    8,771,007Property and equipment, net of accumulated depreciation of $2,211,618 in 2005 and $2,278,716 in 2006
    
    
    881,243
    
    
    
    908,561Goodwill
    
    
    132,615
    
    
    
    132,615Other assets
    
    
    206,948
    
    
    
    1,058,622Receivable from related party
    
    
    3,551
    
    
    
    Total assets
    
    $
    5,627,984
    
    
    $
    10,870,805LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of notes payable
    
    $
    13,571
    
    
    $
    19,511Current maturities of convertible debt
    
    
    634,971
    
    
    
    874,745Accounts payable
    
    
    523,742
    
    
    
    909,254Accrued expenses
    
    
    1,301,719
    
    
    
    1,619,452Deferred revenue
    
    
    286,186
    
    
    
    127,289Registration rights liability
    
    
    
    
    
    
    293,984Total current liabilities
    
    
    2,760,189
    
    
    
    3,844,235Notes payable, less current maturities
    
    
    9,979
    
    
    
    15,477Convertible debt, less current maturities
    
    
    
    
    
    
    1,335,615Deferred revenue
    
    
    641,725
    
    
    
    637,281Other long term liabilities
    
    
    132,852
    
    
    
    96,881Total liabilities
    
    
    3,544,745
    
    
    
    5,929,489Commitments and ContingenciesSeries A Convertible Preferred Stock, $1.00 par valueAuthorized  4,000,000 sharesDesignated as Series A Convertible Preferred  1,426,124 sharesIssued and
outstanding  569,251 shares in 2005 and 223,669 shares in 2006Liquidation preference of $5,009,409 and $1,968,287 for Series A as of December 31,
2005 and March 31, 2006, respectively
    
    
    729,495
    
    
    
    286,632729,495
    
    
    
    286,632Stockholders Equity:Common stock, $0.01 par valueAuthorized90,000,000 shares in 2005 and 2006Issued and outstanding47,498,008 shares in 2005 and 53,534,357 shares in 2006
    
    
    474,979
    
    
    
    535,343Additional paid-in capital
    
    
    98,800,393
    
    
    
    105,100,682Accumulated other comprehensive income
    
    
    65,367
    
    
    
    98,313Accumulated deficit
    
    
    (97,986,995
    )
    
    
    (101,079,654
    )Total stockholders equity
    
    
    1,353,744
    
    
    
    4,654,684Total liabilities, convertible preferred stock and stockholders equity
    
    $
    5,627,984
    
    
    $
    10,870,805
  3




---



##### Table of Contents



MATRITECH, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months EndedMarch 31,2005
    
    
    2006Revenue:Product sales, net of allowances
    
    $
    2,143,184
    
    
    $
    2,879,167Alliance and collaboration revenue
    
    
    30,685
    
    
    
    29,444Total revenue
    
    
    2,173,869
    
    
    
    2,908,611Expenses:Cost of product sales
    
    
    718,025
    
    
    
    790,075Research & development and clinical & regulatory expense
    
    
    729,750
    
    
    
    831,461Selling, general and administrative expense
    
    
    2,891,520
    
    
    
    3,484,353Total operating expenses
    
    
    4,339,295
    
    
    
    5,105,889Loss from operations
    
    
    (2,165,426
    )
    
    
    (2,197,278
    )Interest income
    
    
    27,375
    
    
    
    41,553Interest expense
    
    
    (671,650
    )
    
    
    (913,275
    )Mark-to-market adjustment from warrants
    
    
    714,304
    
    
    
    Other expense
    
    
    
    
    
    
    (23,659
    )Net loss
    
    $
    (2,095,397
    )
    
    $
    (3,092,659
    )Beneficial conversion feature related to series A convertible preferred stock
    
    
    (1,627,232
    )
    
    
    Net loss attributable to common shareholders
    
    $
    (3,722,629
    )
    
    $
    (3,092,659
    )Basic and diluted net loss attributable to common shareholders per common share
    
    $
    (0.09
    )
    
    $
    (0.06
    )Basic and diluted weighted average number of common shares outstanding
    
    
    43,467,499
    
    
    
    50,811,207
  4




---



##### Table of Contents



MATRITECH, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three Months EndedMarch 31,2005
    
    
    2006Cash Flows from Operating Activities:Net loss
    
    $
    (2,095,397
    )
    
    $
    (3,092,659
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    57,936
    
    
    
    62,969Amortization of debt discount
    
    
    483,916
    
    
    
    480,347Amortization of deferred charges
    
    
    39,106
    
    
    
    68,775Stock option expense
    
    
    
    
    
    
    28,825Restricted
stock & restricted stock unit expense
    
    
    
    
    
    
    13,416Issuance of common stock for interest on debt
    
    
    62,866
    
    
    
    12,811Noncash interest expense
    
    
    88,828
    
    
    
    355,605Mark-to-market adjustment on warrants
    
    
    (714,304
    )
    
    
    Mark-to-market adjustment on registration rights
    
    
    
    
    
    
    23,659Noncash expense related to bonus plan
    
    
    16,606
    
    
    
    12,130Provision for bad debts
    
    
    25,272
    
    
    
    48,610Changes in assets and liabilities:Accounts receivable
    
    
    69,608
    
    
    
    93,605Inventories
    
    
    76,771
    
    
    
    (140,857
    )Prepaid expenses and other assets
    
    
    (77,548
    )
    
    
    (19
    )Accounts payable
    
    
    (676
    )
    
    
    384,390Accrued expenses and other liabilities
    
    
    (335,944
    )
    
    
    39,394Deferred revenue
    
    
    (38,264
    )
    
    
    (163,341
    )Net cash used in operating activities
    
    
    (2,341,224
    )
    
    
    (1,772,340
    )Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (66,476
    )
    
    
    (69,493
    )Net cash used in investing activities
    
    
    (66,476
    )
    
    
    (69,493
    )Cash Flows from Financing Activities:Payments on notes payable
    
    
    
    
    
    
    (7,380
    )Proceeds from sale of preferred stock and warrants, net
    
    
    5,325,289
    
    
    
    Proceeds from convertible debentures and warrants, net
    
    
    
    
    
    
    6,184,053Proceeds from issuance of common stock under employee stock purchase plan
    
    
    6,226
    
    
    
    Net cash provided by financing activities
    
    
    5,331,515
    
    
    
    6,176,673Effect of foreign exchange on cash and cash equivalents
    
    
    4,095
    
    
    
    22,725Increase in cash and cash equivalents
    
    
    2,927,910
    
    
    
    4,357,565Cash and cash equivalents, beginning of period
    
    
    4,906,178
    
    
    
    1,789,792Cash and cash equivalents, end of period
    
    $
    7,834,088
    
    
    $
    6,147,357Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    540
    
    
    $
    19Supplemental Disclosure of Noncash Financing and Investing Activities:Non-cash dividends to preferred stockholders arising from the beneficial conversion feature
    
    $
    1,627,232
    
    
    $
    Beneficial conversion feature on convertible debt
    
    
    442,027
    
    
    
    2,974,992Issuance of common stock as payment on convertible debt:Number of shares issued
    
    
    697,743
    
    
    
    1,231,254Payment on debt in dollars
    
    $
    631,010
    
    
    $
    781,251Conversion of 345,582 shares of convertible preferred stock to 4,344,466 shares of common stock
    
    
    
    
    
    $
    442,863Registration rights liability recorded as a debt discount
    
    
    
    
    
    $
    305,829Allocation of $1,285,000 closing cost related to the convertible debt:
 5




---



##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2006Registration
rights liability
    
    

    
    
    $
    35,505Convertible
debt (recorded in other assets)
    
    

    
    
    $
    912,403Purchase
warrants (recorded in additional paid in capital)
    
    

    
    
    $
    337,712Payment of
closing cost related to the convertible debt with issuance of warrant to Placement Agent
    
    

    
    
    $
    471,700Warrants issued to stockholders and recorded as debt discount to the convertible debt
    
    
    
    
    
    $
    1,807,876Conversion of convertible secured debt into common stock
    
    
    
    
    
    $
    45,000Purchase of fixed assets through capital lease
    
    
    
    
    
    $
    18,730
  MATRITECH, INC.
 
 CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Basis of Presentation
   2. Summary of Significant Accounting Policies
 (a) Principles of Consolidation
  6




---



##### Table of Contents



(b) Inventories
  December 31,
    
    
    March 31,2005
    
    
    2006Raw materials
    
    $
    206,200
    
    
    $
    230,352Work-in-process
    
    
    22,117
    
    
    
    23,285Finished goods
    
    
    462,732
    
    
    
    643,757Consignment inventory
    
    
    65,030
    
    
    
    7,842$
    756,079
    
    
    $
    905,236
 (c) Revenue Recognition
  December 31,
    
    
    March 31,2005
    
    
    2006Collaboration fees
    
    $
    715,608
    
    
    $
    711,165Deferred product revenue
    
    
    212,303
    
    
    
    53,405$
    927,911
    
    
    $
    764,570
 d) Comprehensive Loss
  Three Months EndedMarch 31,2005
    
    
    2006Net loss
    
    $
    (2,095,397
    )
    
    $
    (3,092,659
    )Other comprehensive lossForeign currency translation adjustments
    
    
    (9,782
    )
    
    
    32,946Comprehensive loss
    
    $
    (2,105,179
    )
    
    $
    (3,059,713
    )
 (e) Stock-Based Compensation
 Share-Based Payment Accounting for
Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based CompensationTransition and Disclosure
  7




---



##### Table of Contents



Three MonthsEnded March 312006Cost of product sales
    
    $
    1,519Research & development and clinical & regulatory expense
    
    
    8,607Selling, general and administrative expense
    
    
    44,245Share-based compensation expense
    
    $
    54,371
    Three Months EndedMarch 31,2006Risk-free interest rate (1)
    
    
    4.58
    %Expected dividend yield
    
    
    Expected life (2)
    
    4.75 yearsExpected volatility (3)
    
    
    68
    %
 
 (1)
    
    The risk-free interest rate for
periods equal to the expected term of
the share option is based on the U.S.
Treasury yield curve in effect at the
time of grant.(2)
    
    The option term was calculated using
the simplified method for estimating
expected option life, in accordance
with Staff Accounting Bulletin No.
107, Share-Based Payment (SAB 107),
where the expected life is equal to
the sum of the vesting period and the
contractual term divided by two.(3)
    
    The stock volatility for each grant
is an estimate of volatility we
expect to experience over the term of
the option. Historical weekly price
changes of our common stock over the
most recent period equal to the
expected option term play an
important role in such estimates.
Such estimates have been and will
continue to be adjusted for stock
market activity.  Three Months EndedMarch 31,2005Net loss attributable to common shareholders
    
    $
    (3,722,629
    )Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (179,162
    )Pro forma net loss attributable to common shareholders
    
    $
    (3,901,791
    )Net loss attributable to common shareholders per common share:Basic and diluted  as reported
    
    $
    (0.09
    )Basic and diluted  pro forma
    
    $
    (0.09
    )
 8




---



##### Table of Contents



Three MonthsEndedMarch 31,2005Risk-free interest rate
    
    3.69  4.00%Expected dividend yield
    
    Expected life
    
    5 yearsExpected volatility
    
    85%
 Stock Incentive Plans
     WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Life
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in Years
    
    
    ValueOutstanding at December 31, 2005
    
    
    3,115,584
    
    
    $
    2.82
    
    
    
    

    
    
    
    Granted
    
    
    200,400
    
    
    
    0.76
    
    
    
    

    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    Terminated: Cancellation
    
    
    
    
    
    
    
    
    
    
    

    
    
    
     Forfeitures
    
    
    (3,625
    )
    
    
    0.95
    
    
    
    

    
    
    
     Expiration
    
    
    (16,954
    )
    
    
    3.34
    
    
    
    

    
    
    
    
 9




---



##### Table of Contents



WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Life
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in Years
    
    
    ValueOutstanding at March 31, 2006
    
    
    3,295,405
    

    
    $
    2.69
    
    
    
    5.8
    
    
    $
    37,812Options exercisable at March 31, 2006
    
    
    2,633,717
    
    
    $
    3.15
    
    
    
    5.3
    
    
    $
    4,500Weighted average fair value of options granted
    
    $
    0.45
   WeightedNumber of
    
    Average FairShares
    
    ValueNonvested at December 31, 2005
    
    
    592,153
    
    
    $
    0.59Granted
    
    
    200,400
    
    
    
    0.45Vested
    
    
    (127,240
    )
    
    
    0.62Cancelled
    
    
    
    
    
    
    Forfeited
    
    
    (3,625
    )
    
    
    0.72Expired
    
    
    
    
    
    
    Nonvested at March 31, 2006
    
    
    661,688
    
    
    $
    0.55
    Number ofSharesOutstanding at December 31, 2005
    
    
    Granted
    
    
    450,012Terminated
    
    
    Outstanding at March 31, 2006
    
    
    450,012Vested restricted stock and restricted stock units at March 31,
2006
    
    
    Weighted average fair value of restricted stock and restricted
stock units granted
    
    $
    0.76
  10




---



##### Table of Contents



(f) Net Loss per Common Share
 Earnings per Share
 (g) Recent Accounting Pronouncements
  Accounting for Certain Hybrid Financial
Instruments-an amendment of FASB Statements No. 133 and 140 (SFAS 155), Accounting for Derivative Instruments and Hedging Activities Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement No. 125),
 3. Stockholders Equity
    4. Convertible Debt
  11




---



##### Table of Contents



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
    )Additional beneficial conversion feature recorded in the first quarter of
2005 as debt discount
    
    
    (442,000
    )Cumulative principal payments made in stock
    
    
    (5,000,000
    )Add back:Cumulative amortization of debt discount and beneficial conversion features
    
    
    4,558,000Balance, March 31, 2006
    
    
    
     5. Secured Convertible Notes
   12




---



##### Table of Contents




    
    our failure to make payments as they become due;
    
    our failure to remain listed on any of the Nasdaq Capital Market, New York Stock
Exchange (NYSE), AMEX or the Nasdaq Global Market;
    
    our failure to have an effective registration statement available for resale of the shares;
    
    failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
    
    our written notice or public announcement of the intention not to issue shares upon conversion;
    
    our making an assignment for the benefit of creditors, or applying for or consenting
to the appointment of a receiver or trustee for a substantial portion of our property
or business or that of any subsidiary;
    
    bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
    
    a sale or disposition of substantially all our assets;
 13




---



##### Table of Contents




    
    our failure to pay our 2003 Convertible Debentures when due;
    
    our default on our existing or future liabilities in excess of $250,000; and
    
    a breach of any material term of any other transaction document we entered into with
the purchasers of the Secured Convertible Notes.
      Allocation of
    
    
    Allocation ofof
    
    
    AssociatedInstrument
    
    Proceeds
    
    
    CostsSecured Convertible Notes
    
    $
    4,884,000
    
    
    $
    912,000Purchaser Warrants
    
    
    1,808,000
    
    
    
    337,000Registration Rights Liability
    
    
    306,000
    
    
    
    36,000$
    6,998,000
    
    
    $
    1,285,000
  14




---



##### Table of Contents



Application of Issue No.
98-5 to Certain Convertible Instruments
 Face Value of Secured
    
    
    
    
    
    Value Allocated to SecuredConvertible Note
    
    $
    6,998,000
    
    
    Convertible Note
    
    $
    4,884,000Shares Upon Conversion
    
    
    10,766,092
    
    
    Shares Upon Conversion
    
    
    10,766,092Conversion Price
    
    $
    0.65
    
    
    Effective Conversion Price
    
    $
    0.454
  Closing Price January 13, 2006
    
    $
    0.73Effective Conversion Price
    
    $
    0.454Discount to Market per Share
    
    $
    0.276Shares Upon Conversion
    
    
    10,766,092Beneficial Conversion Feature
    
    $
    2,975,000
     Proceeds at closing in January 2006
    
    $
    6,998,000Less:Fair value ascribed to the Purchaser Warrants
    
    
    (1,808,000
    )Fair value of Registration Rights Liability
    
    
    (306,000
    )Beneficial conversion feature calculated on date of closing and recorded as debt discount
    
    
    (2,975,000
    )Carrying value at closing in January 2006
    
    
    1,909,000Add back:Cumulative principal payments made in stock
    
    
    (45,000
    )Cumulative amortization of debt discount and beneficial conversion features
    
    
    346,000Balance, March 31, 2006
    
    $
    2,210,000
 15




---



##### Table of Contents



Total payments
    
    $
    9,091,000Less: Portion related to periodic interest payments
    
    
    (2,138,000
    )Non-cash interest related to debt discount
    
    
    (4,743,000
    )Balance, March 31, 2006
    
    $
    2,210,000Less current portion
    
    
    875,000Long-term portion
    
    
    1,335,000
 6. Contingencies
 Intellectual Property Rights
 ® ®
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
  16




---



##### Table of Contents



Results of Operations
 Quarter Ended March 31, 2005 (Q1 2005) Compared with Quarter Ended March 31, 2006 (Q1
2006)
 Revenues
 Q1 2005
    
    
    Q1 2006
    
    
    $ Change
    
    
    % ChangeProduct Sales (net of allowances):NMP22 BladderChek Test Sales
    
    $
    1,478,000
    
    
    $
    2,387,000
    
    
    $
    909,000
    
    
    
    62
    %NMP22 Lab Test Kit Sales
    
    
    187,000
    
    
    
    252,000
    
    
    
    65,000
    
    
    
    35
    %Other Product Sales
    
    
    478,000
    
    
    
    240,000
    
    
    
    (238,000
    )
    
    
    (50
    %)Total Product Sales
    
    
    2,143,000
    
    
    
    2,879,000
    
    
    
    736,000
    
    
    
    34
    %Alliance and Collaboration Revenue
    
    
    31,000
    
    
    
    29,000
    
    
    
    (2,000
    )
    
    
    (6
    %)Total Revenue
    
    $
    2,174,000
    
    
    $
    2,908,000
    
    
    $
    734,000
    
    
    
    34
    %
   17




---



##### Table of Contents



December 31, 2005
    
    
    March 31, 2006
    
    
    $ Change
    
    
    % ChangeCollaboration fees
    
    $
    716,000
    
    
    $
    711,000
    
    
    $
    (5,000
    )
    
    
    (1
    %)Deferred product revenue
    
    
    212,000
    
    
    
    54,000
    
    
    
    (158,000
    )
    
    
    (75
    %)$
    928,000
    
    
    $
    765,000
    
    
    $
    (163,000
    )
    
    
    (18
    %)
  Cost of Product Sales
 Q1 2005
    
    
    Q1 2006
    
    
    $ Change
    
    
    % ChangeProduct Sales
    
    $
    2,143,000
    
    
    $
    2,879,000
    
    
    $
    736,000
    
    
    
    34
    %Cost of Product Sales
    
    
    718,000
    
    
    
    790,000
    
    
    
    72,000
    
    
    
    10
    %Gross Profit
    
    $
    1,425,000
    
    
    $
    2,089,000
    
    
    $
    664,000
    
    
    
    47
    %Gross Profit Margin
    
    
    66
    %
    
    
    73
    %
  Research & development and clinical & regulatory expenses
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeResearch &
development and
clinical &
regulatory expenses
    
    $
    730,000
    
    
    $
    831,000
    
    
    $
    101,000
    
    
    
    14
    %
  Selling, General and Administrative Expenses
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeGross Profit
    
    $
    1,425,000
    
    
    $
    2,089,000
    
    
    $
    664,000
    
    
    
    47
    %Selling, General and
Administrative Expenses
    
    
    2,892,000
    
    
    
    3,484,000
    
    
    
    592,000
    
    
    
    20
    %SG&A as % of Gross Profit
    
    
    203
    %
    
    
    167
    %
 18




---



##### Table of Contents



Operating Loss
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeOperating Loss
    
    $
    2,165,000
    
    
    $
    2,197,000
    
    
    $
    32,000
    
    
    
    2
    %
  Interest Income
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeInterest Income
    
    $
    27,000
    
    
    $
    42,000
    
    
    $
    15,000
    
    
    
    56
    %
  Interest Expense
 Q1 2005
    
    
    Q1 2006
    
    
    $ Change
    
    
    % ChangeInterest Related to Convertible Debt:Interest Paid (or to be Paid) in Stock
    
    $
    50,000
    
    
    $
    233,000
    
    
    $
    183,000
    
    
    
    366
    %Non-Cash Charges to Interest Expense
    
    
    621,000
    
    
    
    680,000
    
    
    
    59,000
    
    
    
    10
    %Total
    
    
    671,000
    
    
    
    913,000
    
    
    
    242,000
    
    
    
    36
    %Interest Related to Other Debt:Interest Paid in Cash
    
    
    1,000
    
    
    
    
    
    
    
    (1,000
    )
    
    
    (100
    %)Total Interest
    
    $
    672,000
    
    
    $
    913,000
    
    
    $
    241,000
    
    
    
    36
    %
 March 2003 Convertible Debentures
    
    
    $7,000 of amortized deferred financing costs, which contributed to reducing the
original $475,000 balance of deferred financing costs to $0 at March 31, 2006;
    
    $131,000 of non-cash charges to record the discount to valuation incurred when
making the principal and interest repayments in stock rather than cash; and
    
    $134,000 of amortized debt discount, which contributed to reducing the $4,558,000
of debt discount on our
 19




---



##### Table of Contents



$5,000,000 note to $0 at March 31, 2006.
  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
    
    
    2,150,000Payment in Stock
    
    
    (1,923,000
    )Carrying Value of Debt at 12/31/2004
    
    $
    1,755,000Discounts Recorded in 2005
    
    
    (442,000
    )2005 Amortization of Discounts
    
    
    1,630,000Payment in Stock
    
    
    (2,308,000
    )Carrying Value of Debt at 12/31/05
    
    $
    635,0002006 Amortization of Discounts
    
    
    134,000Payment in Stock
    
    
    (769,000
    )Carrying Value of Debt at 3/31/06
    
    $
    0
 January 2006 Secured Convertible Notes
   
    
    $62,000 of amortized deferred financing costs, which contributed to reducing the
original $912,000 balance of deferred financing costs to $850,000 at March 31, 2006;
and
    
    $346,000 of amortized debt discount, which contributed to reducing the $5,088,000
of debt discount to $4,742,000 at March 31, 2006.
  Value of NotesOriginal Value of Debt
    
    $
    6,998,000Discounts Recorded in 2006
    
    
    (5,089,000
    )2006 Amortization of Discounts
    
    
    346,000Payment in Stock
    
    
    (45,000
    )Carrying Value of Debt at 3/31/06
    
    $
    2,210,000
 Mark-to-Market Adjustment From Warrants
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeMark-to-market
Adjustment From
Warrants
    
    $
    714,000
    
    
    
    
    
    
    
    ($714,000
    )
    
    
    (100
    %)
 20




---



##### Table of Contents



Other Expense
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeOther Expense
    
    
    
    
    
    $
    24,000
    
    
    $
    24,000
    
    
    
    100
    %
 
 Net Loss
 Q1 2005
    
    Q1 2006
    
    $ Change
    
    % ChangeNet Loss
    
    $
    2,095,000
    
    
    $
    3,093,000
    
    
    $
    998,000
    
    
    
    48
    %Net Loss Attributable to Common Shareholders
    
    $
    3,723,000
    
    
    $
    3,093,000
    
    
    $
    (630,000
    )
    
    
    (17
    %)
  Stock-Based Compensation
  Share-Based Payment
   21




---



##### Table of Contents



Liquidity and Capital Resources
  Summary Cash Flow
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2005
    
    
    March 31, 2006Net Loss
    
    $
    (2,095,000
    )
    
    $
    (3,093,000
    )Non-cash Charges
    
    
    60,000
    
    
    
    1,107,000Changes in Assets and Liabilities
    
    
    (306,000
    )
    
    
    213,000Net Operating Uses
    
    
    (2,341,000
    )
    
    
    (1,773,000
    )Net Investment Uses
    
    
    (66,000
    )
    
    
    (69,000
    )Net Financing Sources
    
    
    5,331,000
    
    
    
    6,177,000Foreign exchange effect
    
    
    4,000
    
    
    
    23,000Change in cash and cash equivalents
    
    $
    2,928,000
    
    
    $
    4,358,000
     22




---



##### Table of Contents



ConversionCommon
    
    Or Exercise PriceSecurity
    
    Shares
    
    Low
    
    HighCommon stock outstanding
    
    
    53,534,000
    
    
    
    
    
    
    
    Stock reserved for converting debentures
    
    
    215,000
    
    
    $
    .73
    
    
    $
    .73Stock reserved for converting notes
    
    
    10,697,000
    
    
    
    .65
    
    
    
    .65Stock reserved for warrant exercises
    
    
    17,723,000
    
    
    
    .65
    
    
    
    2.70Stock reserved for outstanding stock
options and restricted stock units
    
    
    3,745,000
    
    
    
    .55
    
    
    
    13.13Stock
available for issuance under stock plans
    
    
    997,000
    
    
    
    
    
    
    
    Stock reserved for Series A Preferred Stock
    
    
    2,812,000
    
    
    
    .70
    
    
    
    .70Total
    
    
    89,723,000
 23




---



##### Table of Contents



Financings
    24




---



##### Table of Contents




    
    our failure to make payments as they become due;
    
    our failure to remain listed on any of the Nasdaq Capital Market, NYSE, AMEX or the
Nasdaq Global Market;
    
    our failure to have an effective registration statement available for resale of the
 shares upon conversion of the Secured Convertible Notes;
    
    failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
    
    our written notice or public announcement of the intention not to issue shares upon conversion;
    
    our making an assignment for the benefit of creditors, or applying for or consenting
to the appointment of a receiver or trustee for a substantial portion of our property
or business or that of any subsidiary;
    
    bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
    
    a sale or disposition of substantially all our assets;
    
    our failure to pay our 2003 Convertible Debentures when due;
    
    our default on our existing or future liabilities in excess of $250,000; and
    
    a breach of any material term of any other transaction document we entered into with
the purchasers of the Secured Convertible Notes.
  25




---



##### Table of Contents



Contractual Obligations
  Payment Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOperating Lease Arrangements
    
    $
    2,710,000
    
    
    $
    577,000
    
    
    $
    1,619,000
    
    
    $
    514,000
    
    
    $
    Capital Lease Arrangements
    
    
    28,000
    
    
    
    9,000
    
    
    
    19,000
    
    
    
    
    
    
    
    Debt Obligations
    
    
    9,104,000
    
    
    
    1,014,000
    
    
    
    4,328,000
    
    
    
    3,762,000
    
    
    
    Total
    
    $
    11,842,000
    
    
    $
    1,600,000
    
    
    $
    5,966,000
    
    
    $
    4,276,000
    
    
    $
    
   Off Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Stock-Based Compensation Expense
  Recent Accounting Pronouncements
  26




---



##### Table of Contents



Accounting for Certain Hybrid Financial
Instruments-an amendment of FASB Statements No. 133 and 140 (SFAS 155), Accounting for Derivative Instruments and Hedging Activities Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement No. 125),
 Research and Development
   Development Programs
  ClinicalTechnology
    
    Applica-
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationProgram
    
    Format
    
    tion
    
    Development
    
    Status
    
    Competitive Products (1)
    
    Arrangements (2)NMP22®
Bladder
    
    Lab Test Kit
    
    Monitoring
    
    Commercialized
    
    Approved (1996)
    
    BTA Trak
UroVysion
    
    (1) Matritech direct
marketing  Germany 
(2) Wampole
Laboratories  U.S. 
DistributorNMP22 Bladder
    
    Lab Test Kit
    
    Diagnosis
    
    Commercialized
    
    Approved (2000)
    
    UroVysion
    
    (1) Matritech direct
marketing  Germany 
(2) Wampole
Laboratories  U.S. 
Distributor 
(3) Konica Minolta 
Japan  DistributorNMP22 Bladder
    
    BladderChek® Point-Of-
Care Test
    
    Monitoring
    
    Commercialized
    
    Cleared(2002)
    
    BTA Stat
UroVysion
    
    (1) Matritech direct
marketing  U.S.
and Germany 
(2) Other Distributors
 Other TerritoriesNMP22 Bladder
    
    BladderChek®
    
    Diagnosis
    
    Commercialized
    
    Approved (2003)
    
    UroVysion
    
    (1) Matritech direct
marketing  U.S. and
Germany
 27




---



##### Table of Contents



ClinicalTechnology
    
    Applica-
    
    Stage of
    
    FDA Review
    
    Principal FDA Approved
    
    Major CommercializationProgram
    
    Format
    
    tion
    
    Development
    
    Status
    
    Competitive Products (1)
    
    Arrangements (2)Point-Of- Care Test
    
    
    
    
    
    
    
    
    
    (2) Medical and
Biological
Laboratories  Japan 
(3) Other Distributors
 Other TerritoriesNMP179® Cervical
    
    Automated Cellular
Analysis System
    
    Screening
    
    Sysmex,
our licensee,
is conducting
further
pre-clinical trials
    
    Not submitted
    
    Imaging-Directed
Cytology
(Cytyc)
FocalPoint 
slide profiler
(TriPath Imaging)
    
    (1) Sysmex  World 
Manufacturer and
Marketer for Non-
Slide-Based SystemNMP66
Breast
    
    To be determined
    
    Not Determined
    
    Research and
Development
    
    Not submitted
    
    Mammography,TRUQUANT®BR RIA
CA27.29, CA15.3
    
    (1) Mitsubishi Kagaku
Iastron  JapanNMP48 Prostate
    
    To be determined
    
    Not Determined
    
    Deferred
    
    Not submitted
    
    PSA
    
    NoneNMP35 Colon
    
    None
    
    Not Determined
    
    Inactive
    
    Not submitted
    
    CEA, CA19.9
    
    None
 
 1
    
    Each of the products listed as competitive to our NMP products may
compete for use in each indication for our NMP products, not simply
those specifically listed in a category. Those listed for each
category represent the competitive products most directly comparable
in technology or approach for the given indication.2
    
    Other distributors not listed under major commercialization
arrangements have paid less than $50,000 in upfront fees, do not have
cumulative sales in excess of $500,000 and do not have rights other
than those of a conventional distributor. Spending on Research and Development Projects.
 NMP22  Bladder.
 NMP179  Cervical.
 Breast Cancer.
 Prostate Cancer
 28




---



##### Table of Contents



Other existing programs
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Investment Portfolio.
  Foreign Exchange. Foreign Currency Translation
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 
 PART II. OTHER INFORMATION
 
 Item 1A. Risk Factors
  29




---



##### Table of Contents



We may be unable to comply with provisions of our Secured Convertible Notes and could suffer
significant consequences in the event of non-compliance.
  
    
    our failure to make payments as they become due;
    
    our failure to remain listed on any of the Nasdaq Capital Market, NYSE, AMEX or the
Nasdaq Global Market;
    
    our failure to have an effective registration statement available for resale of the shares;
    
    failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
    
    our written notice or public announcement of the intention not to issue shares upon conversion;
    
    our making an assignment for the benefit of creditors, or applying for or consenting
to the appointment of a receiver or trustee for a substantial portion of our property
or business or that of any subsidiary;
    
    bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
    
    a sale or disposition of substantially all our assets;
    
    our default on our existing or future liabilities in excess of $250,000; and
    
    a breach of any material term of any other transaction document we entered into with
the purchasers of the Secured Convertible Notes.
  We may not be able to meet our payment obligations on our outstanding debt if we are required
to make these payments in cash.
  30




---



##### Table of Contents



We may not be able to repay our outstanding debt in stock or raise sufficient additional
capital through the sale of equity or convertible securities unless we receive stockholder approval
of an increase in our authorized common stock.
  We have incurred substantial indebtedness and may be unable to service our debt.
  
    
    make it difficult for us to make payments on this debt and other obligations;
    
    make it difficult for us to obtain future financing;
    
    require us to redirect significant amounts of cash flow from operations to servicing 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.
 We have granted a security interest in our NMP22 product line to the purchasers of our Secured
Convertible Notes which restricts our operation of this product line and could result in the loss
of all assets related to this product line if we default on our obligations.
  We may fail to meet the standards for continued listing of our shares of common stock on the
American Stock Exchange or for listing of such shares on another national exchange.
  31




---



##### Table of Contents



We have a history of operating losses, are continuing to lose money and may never be
profitable.
  2003
    
    
    2004
    
    
    2005
    
    
    Q-1  2006Product Sales
    
    $
    4,018,000
    
    
    $
    7,275,000
    
    
    $
    10,290,000
    
    
    $
    2,879,000Net Losses
    
    $
    7,878,000
    
    
    $
    11,123,000
    
    
    $
    7,865,000
    
    
    $
    3,093,000
  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 operations.
    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.
  32




---



##### Table of Contents



Future equity or convertible debt 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.
     If we are unable to manufacture or otherwise obtain the product volumes we need, we may be
unable to achieve profitability.
  33




---



##### Table of Contents




    
    production yields;
    
    quality control and assurance;
    
    component supply; and
    
    shortages of qualified personnel.
  If we lose the services of our suppliers or assemblers, we may be unable to meet commitments
to our customers and our results of operations would suffer.
  We may need to stop selling our NMP22 BladderChek Tests if we cannot obtain necessary licenses
or waivers to use lateral flow technology, and we may need to stop selling other products if third
parties assert infringement claims against us.
   34




---



##### Table of Contents



We will not be able to significantly increase revenue or achieve profitability unless we
increase the number of urologists using our NMP22 BladderChek Test, increase the per-urologist
usage of our tests and/or successfully penetrate markets other than urologists.
  Our inability to develop and commercialize additional products may adversely affect our
ability to achieve profitability.
  We compete with other methods of diagnosing cancer that are already in existence or may be
successfully developed by others and our products may not prevail as the method of choice.
  ® TM TM
 Low reimbursement rates could limit the per-unit revenues for our products and make it
uneconomical to sell or distribute them, and limitations on the medical circumstances for which
reimbursement is provided could reduce the potential market for our products.
 35




---



##### Table of Contents



36




---



##### Table of Contents



We and our distributors are subject to extensive government regulation which adds to the cost
and complexity of our business, may result in unexpected delays and difficulties, may impose severe
penalties for violations and may prevent the ultimate sale or distribution of our products in
certain countries.
   
    
    keeping records and reporting adverse experiences with the use of the devices we
make and distribute;
    
    registering our establishments and listing our devices with the FDA. Manufacturing
establishments are subject to periodic inspections by the FDA and certain state
agencies; and
    
    requiring our products to be manufactured in accordance with complex regulations
known as Quality System Regulations which include procedural and documentation
requirements for our manufacturing and quality assurance activities.
  
    
    fines;
    
    injunctions;
    
    civil penalties;
    
    recall or seizure of products;
    
    total or partial suspension of production;
    
    delay or refusal of the agency to grant premarket clearance or premarket approval
for other devices in our development pipeline;
    
    withdrawal of marketing approvals; and
    
    criminal prosecution.
    37




---



##### Table of Contents



We may be unable to establish and maintain relationships with key distributors in
jurisdictions where we do not have a direct sales force.
  We may encounter insurmountable obstacles or incur substantially greater costs and delays
than anticipated in the development process.
  We often face challenges in replicating the research results we obtain in our laboratories in
clinical trials and, as a result, we may have difficulty commercializing our products.
  
    
    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 include more biologic variability;
    
    preparation methods for the specimens using lower cost, high throughput procedures
which might result in performance different from those used in early discovery; and
    
    inability to develop economic and reproducible test methods for the substance to be
measured.
  Successful technical development of our products does not guarantee successful
commercialization.
  
    
    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 clinical value of products from physician to physician.
 38




---



##### Table of Contents



We have no demonstrated success in developing cellular analysis systems and any future success
in this area will be highly dependent upon Sysmex Corporation.
  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.
  If our intellectual property is not adequately protected, we could lose our ability to compete
in the marketplace.
   If we are unable to recruit and retain key management, scientific and sales personnel, our
business would be negatively affected.
  39




---



##### Table of Contents



The operations of our European subsidiary involve currency exchange rate variability and other
risks that could negatively affect our results of operations .
   If we are sued for product-related liabilities, the cost could be prohibitive to us.
  If the products we distribute which are made by other companies become unavailable or do not
meet quality standards, we may lose revenues and may face liability claims.
  Our activities involve the use of hazardous materials and we may be held liable for any
accidental injury from these hazardous materials.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  40




---



##### Table of Contents



Item 6. Exhibits.
 Exhibit No:
    
    Description31.1
    
    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.
 
 SIGNATURES
  MATRITECH, INC.Date: May 15, 2006
    
    By:
    
    /s/ Stephen D. ChubbStephen D. Chubb
Director, Chairman and Chief Executive Officer
(principal executive officer)Date: May 15, 2006
    
    By:
    
    /s/ Richard A. SandbergRichard A. Sandberg
Director, Vice President, Chief Financial
Officer and Treasurer
(principal accounting and financial officer)
 41




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No:
    
    Description31.1
    
    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.