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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 March 31, 2003                                           

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.



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(Exact Name of Registrant as Specified in Its Charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of
Incorporation or Organization) |  | 04-2985132
(I.R.S. Employer
Identification No.)

330 Nevada Street, Newton, Massachusetts 02460



---

(Address of Principal Executive Offices) (Zip Code)


(617) 928-0820



---

(Registrants Telephone Number, Including Area Code)


Indicate by check mark whether the registrant:(1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes    x    No    o

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

As of May 1, 2003, there were 32,132,243 shares of the Registrants Common
Stock outstanding.





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                                       |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1. Financial Statements                                                                 
|                                                 |                                                                                               | CONSOLIDATED BALANCE SHEETS                          
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                
|                                                 |                                                                                               | NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                      
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                 | Item 5. Other Information                                                                    
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|CERTIFICATIONS                                  
|EX-99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|EX-99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER



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MATRITECH, INC.

INDEX

|        |                       |                                                                                          |  |    |    | 
|------- | --------------------- | ---------------------------------------------------------------------------------------- |  | -- | -- | 
|        |                       | Page                                                                                    
|        |                       |                                                                                          |  |   
|PART I  | FINANCIAL INFORMATION |                                                                                          |  |    |   
|        | Item 1.               | Financial Statements                                                                     |  |    |    | 
|        |                       | Consolidated Balance Sheets as of December 31, 2002
and March 31, 2003                   |  |    | 3  | 
|        |                       | Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2003 |  |    | 5  | 
|        |                       | Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2003 |  |    | 6  | 
|        |                       | Notes to Unaudited, Consolidated Financial Statements                                    |  |    | 7  | 
|        | Item 2.               | Managements Discussion and Analysis of
Financial Condition and Results of Operations    |  |    | 12 | 
|        | Item 3.               | Quantitative and Qualitative Disclosures About
Market Risk                               |  |    | 26 | 
|        | Item 4.               | Controls and Procedures                                                                  |  |    | 27 | 
|PART II | OTHER INFORMATION     |                                                                                          |  |    |   
|        | Item 1.               | Legal Proceedings                                                                        |  |    | 27 | 
|        | Item 2.               | Changes in Securities and Use of Proceeds                                                |  |    | 27 | 
|        | Item 5.               | Other Information                                                                        |  |    | 28 | 
|        | Item 6.               | Exhibits and Reports on Form 8-K                                                         |  |    | 28 | 
|        | SIGNATURES            |                                                                                          |  | 29 |   
|        | CERTIFICATIONS        |                                                                                          |  | 30 |   

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PART I.   FINANCIAL INFORMATION




Item 1. Financial Statements

MATRITECH, INC.




CONSOLIDATED BALANCE SHEETS

|                                     |                                                                |   |                           |           |  |              |           |           |  |             |  | 
|------------------------------------ | -------------------------------------------------------------- | - | ------------------------- | --------- |  | ------------ | --------- | --------- |  | ----------- |  | 
|                                     |                                                                |   |                           |           |  | December 31, |           | March 31,
|                                     |                                                                |   |                           |           |  | 2002         |           | 2003     
|                                     |                                                                |   |                           |           |  |              |           |          
|                                     |                                                                |   |                           |           |  |              |           |           |  | (unaudited)
|ASSETS                               |                                                                |   |                           |           |  |              |           |          
|CURRENT ASSETS:                      |                                                                |   |                           |           |  |              |           |          
|                                     | Cash and cash equivalents                                      |   | $                         | 4,172,013 |  |              | $         | 6,927,075 | 
|                                     | Accounts receivable less allowance of $23,591 in 2002 and 2003 |   |                           | 719,039   |  |              |           | 450,631   | 
|                                     | Inventories, net                                               |   |                           | 497,913   |  |              |           | 558,920   | 
|                                     | Prepaid expenses and other current assets                      |   |                           | 173,812   |  |              |           | 306,826   | 
|                                     |                                                                |   |                           |           |  |              |           |           | 
|                                     |                                                                |   | Total current assets      |           |  | 5,562,777    |           |           |  | 8,243,452   | 
|                                     |                                                                |   |                           |           |  |              |           |           | 
|Property and equipment, at cost:     |                                                                |   |                           |           |  |              |           |          
|                                     | Laboratory equipment                                           |   |                           | 2,287,360 |  |              |           | 2,387,592 | 
|                                     | Office equipment                                               |   |                           | 321,901   |  |              |           | 339,187   | 
|                                     | Laboratory furniture                                           |   |                           | 62,739    |  |              |           | 62,739    | 
|                                     | Leasehold improvements                                         |   |                           | 88,865    |  |              |           | 88,865    | 
|                                     | Automobiles                                                    |   |                           | 39,130    |  |              |           | 40,679    | 
|                                     |                                                                |   |                           |           |  |              |           |           | 
|                                     |                                                                |   | 2,799,995                 |           |  |              | 2,919,062 |          
|                                     | Less  Accumulated depreciation and amortization               |   |                           | 1,837,048 |  |              |           | 1,915,485 | 
|                                     |                                                                |   |                           |           |  |              |           |           | 
|                                     |                                                                |   | 962,947                   |           |  |              | 1,003,577 |          
|                                     |                                                                |   |                           |           |  |              |           |           | 
|Goodwill                             |                                                                |   | 132,615                   |           |  |              | 132,615   |          
|Other assets                         |                                                                |   | 114,337                   |           |  |              | 432,486   |          
|Receivable from related party        |                                                                |   | 45,497                    |           |  |              | 45,497    |          
|                                     |                                                                |   |                           |           |  |              |           |           | 
|                                     |                                                                | $ | 6,818,173                 |           |  | $            | 9,857,627 |          
|                                     |                                                                |   |                           |           |  |              |           |           | 
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                |   |                           |           |  |              |           |          
|CURRENT LIABILITIES:                 |                                                                |   |                           |           |  |              |           |          
|                                     | Current maturities of notes payable                            |   | $                         | 159,741   |  |              | $         | 352,899   | 
|                                     | Accounts payable                                               |   |                           | 433,080   |  |              |           | 349,426   | 
|                                     | Accrued expenses                                               |   |                           | 843,392   |  |              |           | 756,478   | 
|                                     | Deferred revenue                                               |   |                           | 462,783   |  |              |           | 536,796   | 
|                                     |                                                                |   |                           |           |  |              |           |           | 
|                                     |                                                                |   | Total current liabilities |           |  | 1,898,996    |           |           |  | 1,995,599   | 
|                                     |                                                                |   |                           |           |  |              |           |           | 

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|                                       |                                               |                                                                                  |           |                            |         |              |           |             |         |             |           | 
|-------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------------------- | --------- | -------------------------- | ------- | ------------ | --------- | ----------- | ------- | ----------- | --------- | 
|                                       |                                               |                                                                                  |           |                            |         | December 31, |           | March 31,  
|                                       |                                               |                                                                                  |           |                            |         | 2002         |           | 2003       
|                                       |                                               |                                                                                  |           |                            |         |              |           |            
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |         | (unaudited)
|Notes payable, less current maturities |                                               |                                                                                  | 316,433   |                            |         |              | 3,808,767 |            
|Deferred revenue                       |                                               |                                                                                  | 763,759   |                            |         |              | 784,845   |            
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |        
|Total liabilities                      |                                               |                                                                                  | 2,979,188 |                            |         |              | 6,589,211 |            
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |        
|Commitments and Contingencies (Note 5) |                                               |                                                                                  |           |                            |         |              |           |            
|STOCKHOLDERS 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                                                   |           |                            |         |              |           |             |         |            
|                                       |                                               | Issued and outstanding  32,128,243 shares in 2002 and 32,132,243 shares in 2003 |           |                            | 321,282 |              |           |             | 321,322 |            
|                                       | Additional paid-in capital                    |                                                                                  |           | 74,694,619                 |         |              |           | 76,012,735  |        
|                                       | Deferred compensation                         |                                                                                  |           | (35,710                    | )       |              |           | (17,852     | )      
|                                       | Accumulated other comprehensive income (loss) |                                                                                  |           | (20,619                    | )       |              |           | 27,398      |        
|                                       | Accumulated deficit                           |                                                                                  |           | (71,120,587                | )       |              |           | (73,075,187 | )      
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |        
|                                       |                                               |                                                                                  |           | Total stockholders equity |         |              | 3,838,985 |             |         |             | 3,268,416 | 
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |        
|                                       |                                               | $                                                                                | 6,818,173 |                            |         | $            | 9,857,627 |            
|                                       |                                               |                                                                                  |           |                            |         |              |           |             |        

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

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MATRITECH, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


|                                                                       |                                             |                          |            |                    |            |      |            |           |            |  
|---------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ---------- | ------------------ | ---------- | ---- | ---------- | --------- | ---------- | -
|                                                                       |                                             |                          |            | Three Months Ended
|                                                                       |                                             |                          |            | March 31,         
|                                                                       |                                             |                          |            |                   
|                                                                       |                                             |                          |            | 2002               |            | 2003
|                                                                       |                                             |                          |            |                    |            |     
|REVENUE:                                                               |                                             |                          |            |                    |            |      |            |          
|                                                                       | Product sales                               |                          | $          | 730,441            |            |      | $          | 864,554   |           
|                                                                       | Alliance and collaboration revenue          |                          |            | 68,955             |            |      |            | 50,973    |           
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|                                                                       | Total revenue                               |                          |            | 799,396            |            |      |            | 915,527   |           
|EXPENSES:                                                              |                                             |                          |            |                    |            |      |            |          
|                                                                       | Cost of product sales                       |                          |            | 483,900            |            |      |            | 546,731   |           
|                                                                       | Research, development and clinical expense  |                          |            | 1,003,076          |            |      |            | 731,682   |           
|                                                                       | Selling, general and administrative expense |                          |            | 1,415,989          |            |      |            | 1,606,606 |           
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|                                                                       |                                             | Total operating expenses |            |                    | 2,902,965  |      |            |           | 2,885,019  |  
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|                                                                       |                                             | Loss from operations     |            |                    | (2,103,569 | )    |            |           | (1,969,492 | )
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|                                                                       | Interest income                             |                          |            | 20,205             |            |      |            | 21,479    |           
|                                                                       | Interest expense                            |                          |            | 2,631              |            |      |            | 6,587     |           
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|                                                                       |                                             | Net loss                 |            | $                  | (2,085,995 | )    |            | $         | (1,954,600 | )
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|Basic and diluted net loss per common share                            |                                             | $                        | (0.07      | )                  |            | $    | (0.06      | )        
|                                                                       |                                             |                          |            |                    |            |      |            |           |           
|Basic and diluted weighted average number of common shares outstanding |                                             |                          | 29,437,149 |                    |            |      | 32,119,981 |          
|                                                                       |                                             |                          |            |                    |            |      |            |           |           

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

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MATRITECH, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |        |         |            |  
|------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ------------------ | ---------- | ---------- | ------ | ------- | ---------- | -
|                                                 |                                                                             |                                       |                                           |                                           |        | Three Months Ended
|                                                 |                                                                             |                                       |                                           |                                           |        | March 31,         
|                                                 |                                                                             |                                       |                                           |                                           |        |                   
|                                                 |                                                                             |                                       |                                           |                                           |        | 2002               |            | 2003      
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |           
|Cash Flows from Operating Activities:            |                                                                             |                                       |                                           |                                           |        |                    |            |           
|                                                 | Net loss                                                                    |                                       | $                                         | (2,085,995                                | )      |                    | $          | (1,954,600 | )     
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                       |                                           |                                           |        |                    |            |            |       
|                                                 |                                                                             | Depreciation and amortization         |                                           |                                           | 38,763 |                    |            |            | 64,093 |        
|                                                 |                                                                             | Amortization of deferred compensation |                                           |                                           | 17,859 |                    |            |            | 17,858 |        
|                                                 |                                                                             | Changes in assets and liabilities:    |                                           |                                           |        |                    |            |            |        |        
|                                                 |                                                                             |                                       | Accounts receivable                       |                                           |        | (305,719           | )          |            |        | 268,408 |           
|                                                 |                                                                             |                                       | Inventories                               |                                           |        | (32,582            | )          |            |        | (61,007 | )         
|                                                 |                                                                             |                                       | Prepaid expenses and other current assets |                                           |        | 29,673             |            |            |        | 25,360  |           
|                                                 |                                                                             |                                       | Other assets                              |                                           |        | 3,134              |            |            |        | (1,400  | )         
|                                                 |                                                                             |                                       | Accounts payable                          |                                           |        | 73,671             |            |            |        | (83,654 | )         
|                                                 |                                                                             |                                       | Accrued expenses                          |                                           |        | (123,300           | )          |            |        | (86,914 | )         
|                                                 |                                                                             |                                       | Deferred revenue                          |                                           |        | 224,616            |            |            |        | 95,099  |           
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|                                                 |                                                                             |                                       |                                           | Net cash used in operating activities     |        |                    | (2,159,880 | )          |        |         | (1,716,757 | )
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|Cash Flows from Investing Activities:            |                                                                             |                                       |                                           |                                           |        |                    |            |           
|                                                 | Purchases of property and equipment                                         |                                       |                                           | (21,051                                   | )      |                    |            | (100,971   | )     
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|                                                 |                                                                             |                                       |                                           | Net cash used in investing activities     |        |                    | (21,051    | )          |        |         | (100,971   | )
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|Cash Flows from Financing Activities:            |                                                                             |                                       |                                           |                                           |        |                    |            |           
|                                                 | Payments on notes payable                                                   |                                       |                                           | (14,555                                   | )      |                    |            | (38,752    | )     
|                                                 | Proceeds from convertible debentures and warrants, net                      |                                       |                                           |                                           |        |                    |            | 4,556,083  |       
|                                                 | Proceeds from sale of common stock and warrants                             |                                       |                                           | 4,139,910                                 |        |                    |            |           |       
|                                                 | Proceeds from exercise of common stock options                              |                                       |                                           | 9,254                                     |        |                    |            |           |       
|                                                 | Proceeds from issuance of common stock under employee stock purchase plan   |                                       |                                           | 13,305                                    |        |                    |            | 7,000      |       
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|                                                 |                                                                             |                                       |                                           | Net cash provided by financing activities |        |                    | 4,147,914  |            |        |         | 4,524,331  |  
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|                                                 | Effect of foreign exchange on cash and cash equivalents                     |                                       |                                           | (9,478                                    | )      |                    |            | 48,459     |       
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|Increase (decrease) in cash and cash equivalents |                                                                             |                                       | 1,957,505                                 |                                           |        |                    | 2,755,062  |           
|Cash and cash equivalents, beginning of period   |                                                                             |                                       | 4,819,733                                 |                                           |        |                    | 4,172,013  |           
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|Cash and cash equivalents, end of period         |                                                                             | $                                     | 6,777,238                                 |                                           |        | $                  | 6,927,075  |           
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       
|Supplemental Cash Flow Information:              |                                                                             |                                       |                                           |                                           |        |                    |            |           
|Cash paid during the period for interest         |                                                                             | $                                     | 2,631                                     |                                           |        | $                  | 6,587      |           
|                                                 |                                                                             |                                       |                                           |                                           |        |                    |            |            |       

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MATRITECH, INC.




NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS


1. Operations and Basis of Presentation

Matritech, Inc. was incorporated on October 29, 1987, to develop, produce
and distribute products for the diagnosis and potential treatment of cancer
based on its proprietary nuclear matrix protein technology. This technology was
licensed to us by the Massachusetts Institute of Technology (MIT).

We are devoting substantially all of our efforts toward product research
and development, raising capital, securing partners and marketing products. We
are subject to risks common to companies in similar stages of development,
including history of operating losses and anticipated future losses,
fluctuation in operating results, uncertainties associated with future
performance, near-term dependence on a limited number of products,
uncertainties around bringing new products to market, reliance on sole
suppliers, dependence on key individuals, competition from substitute products
and larger companies, the development of commercially usable products and the
need to obtain adequate additional financing necessary to fund our operations
and the development of future products.

We are currently seeking to raise additional capital and will consider
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. If we raise funds on
unfavorable terms, we may provide rights and preferences to new investors which
are not available to current shareholders. 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.

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 on a going-concern
basis. 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, 2002 filed with the SEC
(File No. 001-12128).

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of Matritech,
Inc. and our wholly-owned subsidiary, Matritech GmbH. All significant
intercompany balances and transactions have been eliminated at the
consolidation level.

(b) Revenue Recognition

We recognize revenue in accordance with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB 101). Revenue is recognized when the following
criteria have been met:

1. Persuasive evidence of an arrangement exists

2. Delivery has occurred and risk of loss has passed

3. The sellers price to the buyer is fixed or determinable

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4. Collectibility is reasonably assured

When determining whether risk of loss has transferred to customers on
product sales, we evaluate both the contractual terms and conditions of our
sales agreements as well as our business practices. Business practices such as
agreeing to product exchanges may indicate the existence of an implied right to
return the product even if there are no such contractual provisions
for product returns. We treat such practices, whether contractual or implied,
as conveying a right of return and will establish provisions for returns when
reasonable and reliable estimates can be made. In accordance with SAB 101,
where we do not have sufficient history to make reasonable and reliable
estimates of returns, revenue associated with such practices is deferred until
the return period lapses or a reasonable estimate can be made. This deferred
revenue will be recognized as revenue when the distributor reports to us that
it has either shipped or disposed of the units (indicating that the possibility
of return is remote).

Contract and license fee revenue is primarily generated through
collaborative license and development agreements with strategic partners for
the development and commercialization of our product candidates. The terms of
the agreements typically include non-refundable license fees, funding of
research and development, payments based upon achievement of certain
milestones, payments for product manufacturing and royalties on net product
sales. Revenue arrangements where multiple products or services are sold
together under one contract are evaluated to determine if each element
represents a separate earnings process. In the event that an element of such
multiple element arrangement does not represent a separate earnings process, we
recognize revenue from this element over the term of the related contract.

Where we have continuing performance obligations under the terms of a
collaborative arrangement, non-refundable license fees are recognized as
revenue over the period we complete our performance obligations. Revenues from
milestone payments related to arrangements under which we have no continuing
performance obligations are recognized upon achievement of the related
milestone. Revenues from milestone payments related to arrangements under which
we have continuing performance obligations are recognized as revenue upon
achievement of the milestone only if all of the following conditions are met:
the milestone payments are non-refundable; substantive effort is involved in
achieving the milestone; and the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with achievement of the
milestone. If any of these conditions are not met, the milestone payments are
deferred and recognized as revenue over the term of the arrangement as we
complete our performance obligations.

Payments received from collaborative partners for research and development
services performed by us are recognized as revenue on a straight line basis
(unless evidence indicates an alternative earnings pattern can be demonstrated)
over the term of the arrangement or the expected service period, whichever is
longer. Revenue from royalty payments is recognized when earned, upon the
receipt of data from the licensees in accordance with the related license
agreement supporting the amount of and basis for such royalty payments to us.

Deferred revenue consists of the following:

|                         |  |              |           |           |  |   |           | 
|------------------------ |  | ------------ | --------- | --------- |  | - | --------- | 
|                         |  | December 31, |           | March 31,
|                         |  | 2002         |           | 2003     
|                         |  |              |           |          
|Non-refundable fees      |  | $            | 866,676   |           |  | $ | 890,702   | 
|Deferred product revenue |  |              | 359,866   |           |  |   | 430,939   | 
|                         |  |              |           |           |  |   |           | 
|                         |  | $            | 1,226,542 |           |  | $ | 1,321,641 | 
|                         |  |              |           |           |  |   |           | 

(c)  Debt Issuance Costs

Costs to complete convertible debenture offerings are deferred as debt
issuance costs and included in other assets and other current assets on the
consolidated balance sheet. The costs are amortized based on the effective
interest method over the term of the related debt issuance. The amortization
of these costs is included in interest expense on the consolidated statement of
operations.

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(d)  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, |         | March 31,
|                                                         |  | 2002         |         | 2003     
|                                                         |  |              |         |          
|Raw materials                                            |  | $            | 160,862 |           |  | $ | 210,334 | 
|Work-in-process                                          |  |              | 3,667   |           |  |   | 3,584   | 
|Finished goods                                           |  |              | 270,205 |           |  |   | 278,814 | 
|Consignment inventory (associated with deferred revenue) |  |              | 63,179  |           |  |   | 66,188  | 
|                                                         |  |              |         |           |  |   |         | 
|                                                         |  | $            | 497,913 |           |  | $ | 558,920 | 
|                                                         |  |              |         |           |  |   |         | 

(e)  Net Loss Per Common Share

We compute earnings per share in accordance with Statement of Financial
Accounting Standards (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 are
antidilutive. Potential common stock consists of stock options, warrants, and
convertible debentures as well as 22,914 and 12,262 contingently issuable
shares of common stock held in escrow in connection with the Matritech GmbH
acquisition at March 31, 2002 and 2003, respectively. The number of
antidilutive securities excluded from the computation of diluted loss per share
were 3,650,391, and 5,880,804 for the periods ended March 31, 2002 and 2003,
respectively.

(f)  Comprehensive Income (Loss)

We adopted SFAS No. 130, Reporting Comprehensive Income, which requires
that all items recognized under accounting standards as components of
comprehensive income or loss (e.g., foreign currency translation adjustments
and unrealized gains and losses on certain marketable securities) be reported
in the annual financial statements. The composition of accumulated other
comprehensive loss is as follows:

|                                  |                                          |   |                    |        |      |   |            |        | 
|--------------------------------- | ---------------------------------------- | - | ------------------ | ------ | ---- | - | ---------- | ------ | 
|                                  |                                          |   | Three Months Ended
|                                  |                                          |   | March 31,         
|                                  |                                          |   | 2002               |        | 2003
|                                  |                                          |   |                    |        |     
|Reported net income (loss)        |                                          | $ | (2,085,995         | )      |      | $ | (1,954,600 | )     
|Other comprehensive income (loss) |                                          |   |                    |        |      |   |            |       
|                                  | Foreign currency translation adjustments |   |                    | (9,478 | )    |   |            | 48,017 | 
|                                  |                                          |   |                    |        |      |   |            |       
|Comprehensive income (loss)       |                                          | $ | (2,095,473         | )      |      | $ | (1,906,583 | )     
|                                  |                                          |   |                    |        |      |   |            |       

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(g)  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 SFAS No.
123, Accounting for Stock-Based Compensation, (SFAS No. 123). Under APB 25,
when the exercise price of options granted under these plans equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. 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 income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation:

|                                                                                                                 |  |                    |            |      |  |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                                                                                                 |  | Three Months Ended
|                                                                                                                 |  | March 31,         
|                                                                                                                 |  | 2002               |            | 2003
|                                                                                                                 |  |                    |            |     
|Net loss attributable to common stockholders                                                                     |  | $                  | (2,085,995 | )    |  | $ | (1,954,600 | )
|Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all rewards |  |                    | (232,550   | )    |  |   | (267,854   | )
|                                                                                                                 |  |                    |            |      |  |   |            |  
|Pro forma net loss                                                                                               |  | $                  | (2,318,545 | )    |  | $ | (2,222,454 | )
|                                                                                                                 |  |                    |            |      |  |   |            |  
|Amounts per common share:                                                                                        |  |                    |            |      |  |   |            |  
|Basic and diluted  as reported                                                                                  |  | $                  | (0.07      | )    |  | $ | (0.06      | )
|                                                                                                                 |  |                    |            |      |  |   |            |  
|Basic and diluted  pro forma                                                                                    |  | $                  | (0.08      | )    |  | $ | (0.07      | )
|                                                                                                                 |  |                    |            |      |  |   |            |  

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:

|                        |  |         |             |         |  |  |      |  
|----------------------- |  | ------- | ----------- | ------- |  |  | ---- | -
|                        |  | 2002    |             | 2003   
|                        |  |         |             |        
|Risk-free interest rate |  |         | 1.35 - 3.28 | %       |  |  | 3.58 | %
|Expected dividend yield |  |         |            |         |  |  |     |  
|Expected life           |  | 7 years |             | 7 years
|Expected volatility     |  |         | 110         | %       |  |  | 110  | %

The effects on 2002 and 2003 pro forma net loss and net loss per share of
expensing the estimated fair value of stock options and common shares issued
pursuant to the stock option and stock purchase plans are not necessarily
representative of the effects on reported results of operations for future
years as options vest over several years and we intend to grant varying levels
of stock options in future periods.

(h)  Recent Accounting Pronouncements

In November 2002, the EITF published Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables(EITF Issue No. 00-21), which addresses how to determine whether a revenue arrangement involving multiple

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deliverables contains more than one unit of accounting for the purposes of
revenue recognition and how the revenue arrangement consideration should be
measured and allocated to the separate units of accounting. EITF Issue No.
00-21 applies to all revenue arrangements that we enter into after June 30,
2003. We do not expect the adoption of EITF Issue No. 00-21 to have a material
impact on our financial condition or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure
requirements related to variable interest entities. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.

3. Convertible Debt

On March 31, 2003, we completed a private placement of 7.5% Convertible
Debentures (the Convertible Debentures) in an aggregate subscription amount
equal to $5 million and accompanying Warrants for an aggregate of 784,314
shares of our common stock, including a Warrant for 98,039 shares issued to a
placement agent in connection with this transaction (the Private Placement).
The Convertible Debentures are convertible into shares of our common stock at a
conversion price initially equal to $2.55, but which will be adjusted downward
(subject to certain limited exceptions) upon any dilutive issuances of our
securities to an amount equal to 112% of the price at which such dilutive
issuance is made, resulting in the potential for issuance of additional shares
of our common stock upon conversion of the Convertible Debentures. The
Convertible Debentures bear interest at the rate of 7.5% per annum, payable
quarterly, and permit us, in certain circumstances, to make such interest
payments in shares of common stock based on a 5% discount to the valuation of
the common stock. The Convertible Debentures are redeemable in monthly
installments equal to 1/26th of the aggregate subscription amounts paid for
such Convertible Debentures, such monthly payments to commence on the first of
the month after the 11 month anniversary of the closing date. The monthly
redemption payments, subject to certain conditions, may also be made in shares
of common stock based on a 10% discount to valuation. The Warrants are
immediately exercisable for a period of five years at an initial exercise price
of $2.278. The exercise price of the Warrants will initially be adjustable down
to the issuance price of any subsequent dilutive issuances (subject to certain
limited exceptions), and after the Convertible Debentures are no longer
outstanding, the exercise price of the Warrants will be adjustable based on a
weighted-average basis upon any such subsequent dilutive issuance.

The aggregate number of shares of common stock issuable upon exercise of
the Warrants and conversion of the Convertible Debentures (including shares
issued as a result of any anti-dilution adjustments) and in connection with any
payment of interest on or redemption of such Convertible Debentures, is capped
at an aggregate of 6,426,127 shares unless shareholder approval is subsequently
obtained. In addition, in the event shareholder approval is obtained, our stock
price meets certain levels and there is an effective registration statement
covering the shares of common stock underlying the Convertible Debentures and
Warrants issued in connection with the first closing, a second closing may be
held with the same purchasers for the issuance of additional Convertible
Debentures in an aggregate subscription amount of $3 million and additional
Warrants for an amount of shares equal to 35% of the number of shares for which
such additional Convertible Debentures are initially convertible. We have
filed a registration statement for such shares and will seek such shareholder
approval at our annual meeting to be held on June 13, 2003.

The Convertible Debentures may become immediately due and payable at a
premium of 120% of the outstanding principal amount plus accrued interest and
damages in the event of default by us of certain covenants and also obligate us
to pay damages and interest upon certain events. Events of default under the
Convertible Debentures include, among other things, 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. In addition, the terms of the Private Placement prohibit us from
entering into obligations that are senior to the Convertible Debentures and
place certain restrictions on our ability to raise additional capital through
equity issuances, including a prohibition on such activity (with certain
limited exceptions) for a period of 90 days from the effective date of the
registration statement filed with respect to the shares underlying the
Convertible Debentures and Warrants, and an ability to match any additional
funds raised on the same terms.

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The proceeds of $5 million, less closing costs, were allocated between the
Convertible Debentures (approximately $3,450,000) and the warrants
(approximately $950,000) based on their relative fair values. The value of
the warrants was calculated using the Black-Scholes pricing model with the
following assumptions: dividend yield of zero percent; expected volatility of
110%; risk free interest rate of approximately 3% and a term of five years.
The initial carrying value of the Convertible Debentures is being accreted
ratably, over the term of the notes, to the $5 million amount due at maturity
using the effective interest method. Total closing costs were approximately
$600,000 and included a warrant issued to the placement agent valued at
approximately $162,000 using the Black-Scholes pricing model with the same
assumptions as the warrants above. Debt issuance costs attributable to the
Convertible Debenture element, which totaled approximately $475,000, have
been capitalized as other assets and other current assets on the consolidated
balance sheet and will be amortized over the life of the debt. In addition,
the difference between the effective conversion price of the debentures into
common stock and the fair value of our common stock on the date of issuance of
the debentures resulted in a beneficial conversion feature totaling
approximately $198,000, which was calculated in accordance with EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments. This
beneficial conversion feature was recorded as a debt discount and will be
amortized using the effective interest rate over the life of the debt. Certain
terms of the debentures might require us to calculate and record additional
beneficial conversion charges in future periods.




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, other reports and communications to
securityholders, as well as oral statements made by the
Companys 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, the Companys future revenue, operating income, EBITDA
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 the Companys other reports
filed with the Securities and Exchange Commission (the Commission).

The Company was incorporated in 1987 to develop, manufacture and market
innovative cancer diagnostic products based on its proprietary nuclear matrix
protein (NMP) technology. The Company has been unprofitable since inception
and expects to incur significant operating losses for at least the next several
years. For the period from inception through March 31, 2003, the Company
incurred a cumulative net loss of approximately $73 million.

The results of operations for the periods ended March 31, 2002 and 2003
include the activities of our European subsidiary, Matritech GmbH. Matritech
GmbH distributes our products and third-party products in Europe.

We are engaged in the research, production and marketing of cancer
diagnostic products. Our primary research focus is on the identification of
proteins in the body which are associated with or created by cancerous
processes and which, when measured, can provide useful medical information to
physicians. In the last five years, our research has focused on discovering
these substances using low-throughput research mass spectrometry. Because
low-throughput research mass spectrometry technology was determined to be
inadequately controllable and reproducible and too costly to create
commercially viable products or services, in the last two years our research
has been focused on applying high-throughput mass spectrometry methods to
measure the proteins characterized as clinical candidates during discovery
research and to improve the controls and reproducibility of our mass
spectrometry technology.

To develop products which will provide physicians medically useful
information, we can develop our technology in three different ways: Lab Test
Kits, Point-of-Care Test Devices and Proprietary Laboratory Procedures. For
technological and marketing reasons, we have decided initially to launch our
newer technologies  NMP66, NMP48 and NMP35  as Proprietary
Laboratory Procedures using high-throughput mass spectrometry technology.

Results of Operations

Three Months Ended March 31, 2003 Compared with the Three Months Ended March 31, 2002

Total revenue increased to $916,000 from $799,000 for the quarters ended
March 31, 2003 and 2002, respectively. Alliance and collaboration revenue for
the quarters ended March 31, 2003 and 2002 totaled $51,000 and $69,000,
respectively. Sales of our NMP22® bladder cancer product line totaled
approximately $362,000 and $259,000 for the quarters ended March 31, 2003 and
2002, respectively. This increase is primarily due to a 19% sales increase in
the U.S., Europe and the Far East and a 20% favorable exchange rate impact.
During the first quarter of 2003, we shipped approximately $89,000 of our NMP22
BladderChek device to distributors for which we did not have sufficient history
to estimate returns. Accordingly, these

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amounts are included in deferred revenue at March 31, 2003, 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 return period has lapsed). Product sales of the allergy
products distributed by Matritech GmbH totaled approximately $503,000 and
$464,000 for the quarters ended March 31, 2003 and 2002, respectively. This
increase is primarily due to foreign exchange rate changes.

We recognize alliance revenue and prepaid marketing fees over the lives of
the respective contracts. Deferred revenue related to various alliances and
prepaid marketing fees increased to $891,000 at March 31, 2003 from $867,000 at
December 31, 2002.

Cost of product sales increased to $547,000 from $484,000 for the quarters
ended March 31, 2003 and 2002, respectively. As a percentage of product sales,
cost of sales decreased to 63% from 66% for the quarters ended March 31, 2003
and 2002, respectively. The decrease in cost of sales on a percentage basis is
largely the result of increased revenue due to foreign exchange rate changes.

Research, development, clinical and regulatory expenses decreased to
$732,000 from $1,003,000 for the quarters ended March 31, 2003 and 2002,
respectively. This decrease was largely due to decreased payments to clinical
sites involved in collecting specimens for testing and supplies.

Selling, general and administrative expenses increased to $1,607,000 from
$1,416,000 for the quarters ended March 31, 2003 and 2002, respectively. This
increase is primarily due to increased salary-related costs due to higher
headcount in sales and marketing.

Interest income increased to $21,000 from $20,000 for the quarters ended
March 31, 2003 and 2002, respectively.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through
private and public offerings of our securities and through funded development
and marketing agreements. At March 31, 2003, we had cash and cash equivalents
of $6,927,000, working capital of $6,248,000, and an accumulated deficit of
$73,075,000. We believe that our existing cash resources, plans for equity
financings, product sales and corporate partnerships will be sufficient to
satisfy our capital needs through 2003. 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.

We are devoting substantially all of our efforts toward product research
and development, raising capital, securing partners and marketing products. We
are subject to risks common to companies in similar stages of development,
including history of operating losses and anticipated future losses,
fluctuation in operating results, uncertainties associated with future
performance, near-term dependence on a limited number of products,
uncertainties around bringing new products to market, reliance on sole
suppliers, dependence on key individuals, competition from substitute products
and larger companies, the development of commercially usable products and the
need to obtain adequate additional financing necessary to fund our operations
and the development of future products.

We are currently seeking to raise additional capital and will consider
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. If we raise funds on
unfavorable terms, we may provide rights and preferences to new investors which
are not available to current shareholders. 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.

Our operating activities used cash of approximately $1,717,000 and
$2,160,000 for the three months ended March 31, 2003 and 2002, respectively,
primarily to fund our operating loss.

Our investing activities used cash of approximately $101,000 and $21,000
for the three months ended March 31, 2003 and 2002, respectively, primarily for
the purchase of laboratory equipment.

Our financing activities provided cash of approximately $4,524,000 and
$4,148,000 for the three months ended March 31, 2003 and 2002, respectively.
The activity in the 2003 period resulted primarily from proceeds
from the sale of convertible debentures and warrants, offset by payments on notes payable.
The activity in the 2002 period resulted primarily from proceeds

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received from
the sale of common stock under an equity financing agreement as well as
proceeds received from the exercise of common stock warrants, net of payments
on notes payable.

Our future commitments are as follows:

|                                            |  |       |           |      |  |      |         |      |  |      |           |  |  |   |           |  |  |   |         | 
|------------------------------------------- |  | ----- | --------- | ---- |  | ---- | ------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                                            |  | Total |           | 2003 |  | 2004 |         | 2005 |  | 2006
|                                            |  |       |           |      |  |      |         |      |  |     
|Facility and equipment leases               |  | $     | 1,571,000 |      |  | $    | 543,000 |      |  | $    | 519,000   |  |  | $ | 500,000   |  |  | $ | 9,000   | 
|Maturities of 7 1/2% Convertible Debentures |  |       | 5,000,000 |      |  |      |        |      |  |      | 1,923,000 |  |  |   | 2,308,000 |  |  |   | 769,000 | 
|Maturities of other debt obligations        |  |       | 476,000   |      |  |      | 160,000 |      |  |      | 133,000   |  |  |   | 113,000   |  |  |   | 70,000  | 
|Purchase commitments                        |  |       | 95,000    |      |  |      | 95,000  |      |  |      |          |  |  |   |          |  |  |   |        | 
|                                            |  |       |           |      |  |      |         |      |  |      |           |  |  |   |           |  |  |   |         | 
|Total                                       |  | $     | 7,142,000 |      |  | $    | 798,000 |      |  | $    | 2,575,000 |  |  | $ | 2,921,000 |  |  | $ | 848,000 | 
|                                            |  |       |           |      |  |      |         |      |  |      |           |  |  |   |           |  |  |   |         | 



In March 2003, we completed a private placement of $5 million of 7.5%
Convertible Debentures and Warrants to purchase 784,313 shares of Common Stock
at an initial exercise price of $2.278 and including a Warrant for 98,039
shares issued to a placement agent in connection with the transaction. The
Convertible Debentures are convertible into shares of our common stock and
interest and redemption payments may, subject to certain circumstances, be made
in shares of common stock at a discount to valuation. The Warrants are
exercisable until March 31, 2008. We received net proceeds of approximately
$4.5 million. A second closing may be held for an additional aggregate
subscription amount of $3 million based on the share price
of our common stock reaching a certain level, but only if shareholder approval
has already been obtained and there is an effective registration statement
covering the shares of common stock underlying the Convertible Debentures and
Warrants issued in connection with the first closing. See Recent Developments
and Factors That May Affect Future Results  We have substantially increased
our indebtedness and may not be able to meet our payment obligations, 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 and If a decline in our share price causes the total market value of
our stock to drop below $35 million, we may be delisted from the Nasdaq
SmallCap Market which will affect your ability to buy or sell shares of our
stock and might place us in default under the terms of our convertible
debentures.

Our future capital requirements will depend on many factors, including,
but not limited to: continued scientific progress in our research and
development programs; the magnitude of our research and development programs;
progress with clinical trials for our diagnostic products; the magnitude of
product sales; the time involved in obtaining regulatory approvals; the costs
involved in filing, prosecuting and enforcing patent claims; the competing
technological and market developments; and the ability of the Company to
establish additional development and marketing arrangements to provide funding
for research and development and to conduct clinical trials, obtain regulatory
approvals, and manufacture and market certain of our products.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related footnotes. In
preparing these financial statements, we have made our best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality and assuming that we will continue as a going
concern. We do not believe it is likely that materially different amounts would
be reported related to the accounting policies described below. However,
application of these accounting policies involves the exercise of judgment and
use of assumptions as to future uncertainties and, as a result, actual results
could differ from these estimates.

Revenue Recognition

We recognize revenue in accordance with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB 101). Revenue is recognized when the following
criteria have been met:



| | 1. |  | Persuasive evidence of an arrangement exists            
| | -- |  | --------------------------------------------------------
|
| | 2. |  | Delivery has occurred and risk of loss has passed       
|
| | 3. |  | The sellers price to the buyer is fixed or determinable
|
| | 4. |  | Collectibility is reasonably assured                    

When determining whether risk of loss has transferred to customers on
product sales, we evaluate both the contractual terms and conditions of our
sales agreements as well as our business practices. Business practices such as
agreeing to product exchanges may indicate the existence of an implied right to
return the product even if there are no such contractual provisions for product
returns. We treat such practices, whether contractual or implied, as conveying
a right of return and will establish provisions for returns when reasonable and
reliable estimates can be made. In accordance with SAB 101, where we do not
have sufficient history to make reasonable and reliable estimates of returns,
revenue associated with such practices is deferred until the return period
lapses or a reasonable estimate can be made. This deferred revenue will be
recognized as revenue when the distributor reports to us that it has either
shipped or disposed of the units (indicating that the possibility of return is
remote).

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Contract and license fee revenue is primarily generated through
collaborative license and development agreements with strategic partners for
the development and commercialization of our product candidates. The terms of
the agreements typically include non-refundable license fees, funding of
research and development, payments based upon achievement of certain
milestones, payments for product manufacturing and royalties on net product
sales. Revenue arrangements where multiple products or services are sold
together under one contract are evaluated to determine if each element
represents a separate earnings process. In the event that an element of such
multiple element arrangement does not represent a separate earnings process, we
recognize revenue from this element over the term of the related contract.

Where we have continuing performance obligations under the terms of a
collaborative arrangement, non-refundable license fees are recognized as
revenue over the period we complete our performance obligations. Revenues from
milestone payments related to arrangements under which we have no continuing
performance obligations are recognized upon achievement of the related
milestone. Revenues from milestone payments related to arrangements under which
we have continuing performance obligations are recognized as revenue upon
achievement of the milestone only if all of the following conditions are met:
the milestone payments are non-refundable; substantive effort is involved in
achieving the milestone; and the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with achievement of the
milestone. If any of these conditions are not met, the milestone payments are
deferred and recognized as revenue over the term of the arrangement as we
complete our performance obligations.

Payments received from collaborative partners for research and development
services performed by us are recognized as revenue on a straight line basis
(unless evidence indicates an alternative earnings pattern can be demonstrated)
over the term of the arrangement or the expected service period, whichever is
longer. Revenue from royalty payments is recognized when earned, upon the
receipt of data from the licensees in accordance with the related license
agreement supporting the amount of and basis for such royalty payments to us.

Valuation Allowances

Inventory.We value our inventory account balances at lower of cost or net
realizable value. We analyze inventory levels quarterly, review inventory
account balances and compare such amounts with sales forecasts and projections,
historical revenue trends and shelf life of items in inventory. This analysis
involves our estimates of future cash flows which are highly judgmental and may
differ from actual cash flows. Inventory with a life in excess of its shelf
life is disposed of and the related costs are written off. If actual market
conditions are less favorable than those we project, additional inventory
writedowns may be required.

Accounts Receivable.We periodically review outstanding balances in
accounts receivable to determine future collections. Based on our historical
experience, current business conditions and expected future collections,
management established an allowance for uncollectible accounts. In the event
circumstances change to affect the assumptions underlying this allowance, we
might be required to take additional write-offs of our accounts receivable
balances.

Impairment of Long-Lived Assets and Goodwill.Our policy regarding
long-lived assets is to evaluate the recoverability or usefulness of these
assets when the facts and circumstances suggest that these assets may be
impaired. This analysis relies on a number of factors, including changes in
strategic direction, business plans, regulatory developments, economic and
budget projections, technological improvements, and operating results. The test
of recoverability or usefulness is a comparison of the asset value to the
undiscounted cash flow of its expected cumulative net operating cash flow over
the assets remaining useful life. Any write-downs would be treated as
permanent reductions in the carrying amount of the asset and an operating loss
would be recognized. To date, we have had recurring operating losses and the
recoverability of our long-lived assets is contingent upon executing our
business plan that includes, among other factors, significantly increasing
sales. If we are unable to execute our business plan, we may be required to
write down the value of our long-lived assets in future periods.

Recent Accounting Pronouncements

In November 2002, the EITF published Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables(EITF Issue No. 00-21), which
addresses how to determine whether a revenue arrangement involving multiple
deliverables contains more than one unit of accounting for the purposes of
revenue recognition and how the revenue arrangement consideration should be
measured and allocated to the separate units of accounting. EITF Issue No.
00-21 applies to all revenue arrangements that we enter into after June 30,
2003. We do not expect the adoption of EITF Issue No. 00-21 to have a material
impact on our financial condition or results of operations.

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In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure
requirements related to variable interest entities. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.

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
$40.7 million dollars for the period since our inception in October of 1987
through March 31, 2003. 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.

Our research and development scientists typically are assigned to lead 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.

Discovery Research

Our primary research focus is on the identification of proteins in the
body which are associated with or created by cancerous processes and which,
when measured, can provide useful medical information to physicians. Since 1998
our research has focused on discovering these substances using low-throughput
research mass spectrometry. Because the cost of research mass spectrometry
technology was determined to be too high to create commercially viable products
or services, in the last two years our research has been focused on applying
high-throughput mass spectrometry methods to measure the proteins characterized
as clinical candidates during discovery research and to improving the controls
and reproducibility of our mass spectrometry technology. Since the development
of core test methods applicable to all cancer types has been a major activity
of our staff, we have not tried to track spending by product or to allocate our
total research costs to individual products.

Product and Service Development

To develop products which will provide physicians medically useful
information, we can develop our technology in three different ways: Lab Test
Kits, Point-of-Care Test Devices and Proprietary Laboratory Procedures
described below:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lab Test Kits, such as the NMP22 Test Kit, which are generally sold for use in
appropriately licensed clinical laboratories or doctors office laboratories to
perform lab testing services. These laboratories perform a service, only upon a
physicians prescription, which uses our products to test patient specimens.
After testing, the laboratory provides the data it generated using the Lab Test
Kit in a written report. The information in the report helps the physician
determine the presence or absence of cancer.          
|
| | Point-of-Care Test Devices, such as the NMP22 BladderChek Device, which are
generally sold for use in a medical facility or physicians office by medical
personnel who need not be licensed to perform laboratory tests. Point-of-Care
Test Devices are similar to the urine-based pregnancy test devices and the
blood-based glucose test strips sold in pharmacies, but they are sold for use
only pursuant to a physicians order. These devices generate information which
helps physicians determine the presence or absence of cancer.
|
| | Proprietary Laboratory Procedures, which are under development using our
technologies for prostate and breast cancer. Proprietary Laboratory Procedures
are laboratory analytical procedures to measure clinically useful proteins
which are custom designed to the instrumentation and techniques of a specific
clinical laboratory. Proprietary Laboratory Procedures will help us gain early
market exposure and enable physicians and laboratories to gain preliminary
clinical experience with our technologies                         

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| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | prior to our developing Lab Test Kits
or Point-of-Care Test Devices. Proprietary Lab Procedures are likely to 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.

For technological and marketing reasons, we have decided initially to
launch our newer technologies  NMP66, NMP48 and NMP35  as Proprietary
Laboratory Procedures using high throughput mass spectrometry technology. Since
Proprietary Lab Services must be adapted to the skills and technology of a
clinical laboratory partner (lab partner), we cannot be certain
that a lab partner will find our current methods economical and
reproducible in their laboratory processing environment. Furthermore, the
ability of this technology to generate useful medical information cannot be
assessed until we have transferred it to our lab partner and such partner has
conducted a successful clinical trial. We do not intend to launch development
of a service for NMP35 until at least one of the others has been successfully
launched. See Factors That May Affect Future Results  We have no demonstrated
success in developing proprietary lab procedures as a profitable service
business and any future success will be dependent upon satisfaction and
approval of our clinical lab partners. It is our plan to complete agreements
with lab partners to develop a Proprietary Lab Service for NMP66 and NMP48 in
2003 and to implement a Proprietary Laboratory Procedure that works for either
NMP48 or NMP66 during 2003 and to implement the other in 2004.

We also intend to develop Lab Test Kits and Point-of-Care Test Devices
based upon our new technologies. While we have successfully configured NMP22 in
these formats, there are always uncertainties involved in successfully creating
products which perform reproducibly in every laboratory. Because our newer
technologies employ different proteins and because they are measured in blood
not in urine, we plan not only to apply several of the techniques used in
developing NMP22 products but also to employ additional outside resources to
complete the development of these products successfully. See Factors That May
Affect Future Results  The research results we obtain in the laboratory
frequently cannot be replicated in clinical trials.We have a goal to complete
development of a Lab Test Kit and a Point-of-Care Test Device for one of the
new products in 2005 and for the other in 2006. We do not intend to begin
development of a product for NMP35 until at least one of the others has been
successfully completed.

Product development can also involve activities which resemble discovery
research because it may be necessary to identify a fraction of the target
protein (such as an antibody binding site) or to separate two similar proteins
(or two forms of the same protein), or to select an alternative protein in
order to complete this stage. Therefore, the risks of discovery may extend into
product development in completing a service or a product which delivers useful
information to physicians.

Clinical Trials

After a product or service has been developed, the information it
generates must be validated in one or more clinical trials. These activities
are designed to confirm the most appropriate and useful ways to use the data
generated by our products and services to help physicians diagnose and manage
disease. As indicated by our NMP22 products, different clinical applications
have different FDA approvals required. While NMP22 has demonstrated an ability
to generate information useful in more than one indication, the demonstrated
success in one indication will not necessarily ensure success in another. The
differences in the proteins themselves combined with the variability in the
disease and the performance of other diagnostic technologies make this process
subject to numerous uncertainties which can only be overcome by large,
successful clinical trial studies. For each product or service, we expect to
develop a claim for aiding in the diagnosis of the disease for patients who
have no prior history of the disease and for monitoring the course of the
disease. The order in which these claims are developed may be different for
each product.

The table below summarizes our development programs, including stage of
development and current FDA status.

|                |  |                         |  |                             |  |                                                           |  |           
|--------------- |  | ----------------------- |  | --------------------------- |  | --------------------------------------------------------- |  | ----------
|                |  |                         |  | Clinical                    |  |                                                           |  |           
|Protein         |  | Form of Technology      |  | Application                 |  | Stage of Development                                      |  | FDA Status
|                |  |                         |  |                             |  |                                                           |  |           
|NMP22 Bladder   |  | Lab Test Kit            |  | Monitoring                  |  | Commercialized                                            |  | Approved  
|NMP22 Bladder   |  | Lab Test Kit            |  | Diagnosis                   |  | Commercialized                                            |  | Approved  
|NMP22 Bladder   |  | POC Test Device         |  | Monitoring                  |  | Commercialized                                            |  | Approved  
|NMP22 Bladder   |  | POC Test Device         |  | Diagnosis                   |  | Commercialized                                            |  | Approved  
|NMP179 Cervical |  | Non-Slide-Based System  |  | Identifying High Risk
Cases |  | Licensee Sysmex is
conducting further product
development |  | *         
|NMP48 Prostate  |  | Proprietary Lab Service |  | To Be Determined            |  | Product/ Service Development                              |  | **        

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|               |  |                         |  |                  |  |                                              |  |           
|-------------- |  | ----------------------- |  | ---------------- |  | -------------------------------------------- |  | ----------
|               |  |                         |  | Clinical         |  |                                              |  |           
|Protein        |  | Form of Technology      |  | Application      |  | Stage of Development                         |  | FDA Status
|               |  |                         |  |                  |  |                                              |  |           
|NMP48 Prostate |  | Lab Test Kit            |  | To Be Determined |  | Product/ Service Development                 |  | *         
|NMP48 Prostate |  | POC Test Device         |  | To Be Determined |  | Product/ Service Development                 |  | *         
|NMP66 Breast   |  | Proprietary Lab Service |  | To Be Determined |  | Clinical Service Development with Mitsubishi |  | **        
|NMP66 Breast   |  | Lab Test Kit            |  | To Be Determined |  | Product/ Service Development                 |  | *         
|NMP66 Breast   |  | POC Test Device         |  | To Be Determined |  | Product/ Service Development                 |  | *         
|NMP35 Colon    |  | All                     |  | To Be Determined |  | Discovery Research Completed                 |  | ** *      



|*  |  | If submitted for a screening or diagnosis application, FDA will 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, no FDA submission is likely to 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 requires an Analyte Specific Reagent
notification.

Spending on Research and Development Projects.Total research and
development spending in 2002 was approximately $3.8 million dollars. Total
research and development spending in the first quarter of 2003 was
approximately $700,000 dollars. We expect research and development
expenditures to be less than $7 million dollars over the next two years and to
be devoted to our various programs as discussed below.

NMP22  Bladder.Expenditures on the various NMP22-based products are
virtually complete. Except for sponsoring additional clinical trials to
demonstrate different ways to use the information generated by the products, we
do not expect to incur any significant additional R&D spending on any of these
products.

NMP179  Cervical.Discovery research on this product was completed prior
to 2000 and our expenditures in 2002 and 2003 have been principally for
technical support of the licensing activity. In 2002 we licensed the worldwide
rights for non-slide-based applications to Sysmex, Inc. as discussed more
thoroughly in Item 1 of our 2002 Form 10-K. 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 paid in connection with an effort to
license this technology to a company with a slide-based cervical cancer
detection system.

NMP48, NMP66 & NMP35.Over the next two years, research and development
funds will be spent principally to develop both products and services for
NMP48, NMP66 and NMP35 and to improve the controls, reproducibility and costs
of our mass spectrometry research 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 the 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. Our accumulated deficit from inception until the end
of the last fiscal year is $71,120,587. Our revenue and losses for each of the
past three fiscal years are:

|              |  |      |           |      |  |      |           |  |  |   |           | 
|------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|              |  | 2002 |           | 2001 |  | 2000
|              |  |      |           |      |  |     
|Product Sales |  | $    | 3,093,729 |      |  | $    | 2,340,940 |  |  | $ | 1,245,611 | 
|Losses        |  | $    | 8,278,274 |      |  | $    | 8,730,827 |  |  | $ | 6,836,254 | 

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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 fiscal year
ended December 31, 2002, we had a net loss of $8.3 million, but as of March 31,
2003, we only had $6.9 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 long-term. We recently completed a sale of
convertible debentures and accompanying warrants and are currently seeking 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.

The terms of our recent sale of convertible debentures greatly restrict
our ability to raise capital. Under those terms, we are prohibited from
entering into obligations that are senior to the debentures and are prohibited
from selling equity (with limited exceptions) for a period of 90 days from the
effective date of the registration statement to be filed with respect to the
shares underlying the convertible debentures and warrants. The purchasers of
those debentures also have a right, under the terms of the sale, to match on
the same terms any additional funds we raise through 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 the 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 our payment obligations under 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 substantially increased our indebtedness and may not be able to
meet our payment obligations.

As a result of the recent sale of convertible debentures, we have
substantially increased our indebtedness from approximately $475,000 to
approximately $4.2 million. In addition, the terms of the sale of the
convertible debentures provide for the issuance of up to an additional $3
million in aggregate principal amount of convertible debentures if the volume
weighted average price of our stock is at least $2.75 over a period of 15
consecutive trading days, there is an effective registration statement covering
the shares underlying the convertible debentures and accompanying warrants
already issued, and if we receive shareholder approval for such issuance. We
have filed a registration statement for such shares and will seek such
shareholder approval at our annual meeting to be held on June 13, 2003. If our
stock price meets the required threshold and the shareholders give the
necessary approval, we intend to sell the additional convertible debentures,
which would increase our indebtedness to approximately $7.2 million in
principal.

The convertible debentures permit us to make interest and principal
payments in shares of common stock instead of cash, but only if we are not in
default under the terms of the debentures, if there is an effective
registration statement covering such shares, if the issuance of such shares
would not cause the holders to own more than 9.999% of the outstanding shares
of our common stock, and if such issuance would not violate Nasdaq marketplace
rules. If we are not able to make interest and redemption 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.

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 register for resale the shares of common stock
underlying the debentures and accompanying warrants within set
timeframes;          
|
| |  |  | failure to remain listed on any of the Nasdaq SmallCap Market,
New York Stock Exchange, American Stock Exchange or the Nasdaq
National Market;

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| |  |  | 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 in the event of a
downturn in our business.                                                                               

The operations of our European subsidiary involve currency exchange and
other risks.

Matritech GmbH, our European subsidiary, accounted for approximately 74%
of our sales for the fiscal year ended December 31, 2002. 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 continued financial risk.

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.

We rely heavily on distributors for sales of our NMP22 products and if
such sales do not increase enough to cover our operating costs, we will
continue to lose money.

While 61% of our 2002 revenues are attributable to sales of allergy
products by our European subsidiary, we expect that our near-term revenue
growth will come from sales of our NMP22 Lab Test Kit and NMP22 BladderChek
Device. Marketing of our NMP22 products is done primarily through our own
salesforce in Europe and through distributors in the rest of the world,
including the United States. NMP22 sales made by our own salesforce represent
54% of 2002 NMP22 revenues and distributors account for the rest. Many of
these distributors have exclusive or co-exclusive rights to sell our NMP22
products in various geographical areas. Because we generally do not deal
directly with customers when selling through distributors, our ability to reach
profitability depends in great part on increased sales by these principal
distributors.

We have minimal control over our distributors, and these distributors are
under no contractual obligation to purchase our products (although in some
cases the agreement may be terminable by us if the distributor does not make
specified minimum purchases). The failure or delay by a distributor in selling
our products or any material breach of their agreements with us could have
significant adverse effects on our future revenues. In addition, we may be
unable to enter into additional distribution relationships on favorable terms,
if at all.

Although we have hired a five-person sales force to support sales of our
NMP22 BladderChek Device to urologists in the U.S. and, where appropriate, to
general practitioners, our internal marketing and sales resources are not
presently capable of assuming all of our distributors responsibilities. We
may find it necessary in the future to use our own resources in territories
where we have lost, do not have, or do not intend to use third-party
distributors. Any such increased internal sales effort will take a
considerable amount of time, may not meet with success and may result in
excessive expense.

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

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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, including tests known as BTA,
UroVysion and ImmunoCyt bladder cancer tests, which have been approved for
monitoring 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; and tests
known as TRUQUANT® BR RIA, CA15.3 and CA27.29, which are used
for monitoring breast cancer. 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 obsolete or
non-competitive.

Healthcare reform measures and third-party reimbursement policies could
limit the per-product revenues for our products.

Our ability to commercialize our planned products successfully will depend
in part on the extent to which reimbursement for the cost of our products will
be available from government health administration authorities, private health
insurers and other third-party payors. In the case of private insurers, the
reimbursement of any medical device approved either solely for investigational
use or for research use is at the discretion of the patients individual
carrier. Even if use of a device has been previously approved for
reimbursement, the insurance carrier may decide not to continue to reimburse
such use or decrease the reimbursement amount. In addition, even if we are
able to successfully sell our products to managed care providers, it is
possible that these sales will involve significant pricing pressure and keep
our per-product revenues low. If we develop a proprietary lab service we do
not expect third-party reimbursement until we obtain FDA approval for a similar
device.

Healthcare reform is an area of continuing attention and a priority of
many governmental officials. Certain reform proposals, if adopted, could impose
additional 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 of these
legislative or regulatory proposals will be adopted or the effect that these
proposals may have on our business, the announcement or adoption of these
proposals could hurt our business by reducing demand for our products and could
hurt our stock price because of investor reactions.

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, in some instances, 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. 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 Good Manufacturing Practices
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;

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| |  |  | total or partial suspension of production;                                               
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | failure of the government to grant premarket clearance or premarket approval for devices;
|
| |  |  | withdrawal of marketing approvals; and                                                   
|
| |  |  | criminal prosecution.                                                                    

The FDA also has the authority to request the repair, replacement or refund of
the cost of any device that we manufacture or distribute.

Labeling and promotional activities are also subject to scrutiny in the
United States by the FDA and, in certain instances, by the Federal Trade
Commission. For example, our NMP22 Lab Test Kit has received FDA approval and
may be promoted by us only as aid in 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, 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.

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, Matritech GmbH, all of our products are under development
and are not expected to generate revenue for some time, 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 protein (NMP48), discovered using a different research method, would
be the primary candidate in our prostate cancer program. More recently, we and
others have observed that the testing methodologies of a low throughput
research instrument are not readily reproducible or transferable to high
throughput instrument. 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 using a high throughput instrument. Such unanticipated changes
in our technology and procedures may result in products or services that do not
perform at all or do not perform as well as the results reported using our
discovery research procedure.

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;
| | - |  | ---------------------------------------------------------------------

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| |  |  | 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.

We have no demonstrated success in developing proprietary lab 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 devices,
but also in part upon developing a service business based on proprietary
laboratory procedures which will be used to measure clinically useful proteins
custom designed to the instrumentation and techniques of a specific clinical
laboratory. We are currently working on development of such proprietary
laboratory procedures using our technologies for prostate and breast cancer,
but we have no demonstrated success in this area. In addition, because we
expect that use of our proprietary lab 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 sensitive and 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.

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 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

23



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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 and we may be unable to meet
customer commitments.

We currently assemble our NMP22 Lab Test Kits ourselves in our Newton
facility but we rely on subcontractors for certain components and processes for
these lab test kits. A contract manufacturer produces and assembles our NMP22
BladderChek Device for us. We do not have alternative suppliers for units of
the NMP22 BladderChek Device or for those key NMP22 Lab Test Kit components and
processes provided by 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 as a result of a shortage of key components, a revalidation of new
components or the failure of an assembler to meet our requirements, we may be
unable to meet our commitments to customers. Our failure or delay in meeting
our commitments could cause sales to decrease, 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.

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 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.

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

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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 all together.

We may need to stop selling our point-of-care devices if we cannot obtain
a license or a waiver to use the test strip technology.

We have developed a point-of-care product which 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 point-of-care tests and are
attempting to obtain an appropriate license or a waiver. 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 the point-of-care product until the expiration of the relevant patents
or until we are able to arrive at a design solution that uses a different
technology and we may also be subject to litigation that seeks a percentage of
the profit we have made from the sale of our point-of-care tests. We have
accrued royalties on sales of the point-of-care device 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.

If we lose or are unable to recruit and retain key management and
scientific 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 fifty employees. While no
individual is irreplaceable, the loss of multiple members of our key
personnel, such as our scientists, at the same time or within close proximity
of each other, or the failure to recruit the necessary additional personnel
when needed with specific scientific qualifications and on acceptable terms
might harm our product and research and development efforts and impede our
business objectives. We face intense competition for qualified scientific
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 $3.28 and $1.35
in the fifty-two week period prior to April 28, 2003. 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 Matritech 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
fiscal year 2002, our shares had an average daily trading volume of only
approximately 71,000 shares. In connection with our recent sale of convertible
debentures and accompanying warrants, we have recently filed a resale
registration statement covering up to 5,371,332 shares for the benefit of our
investors. 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.

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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. 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. We are currently seeking shareholder approval to conduct a
second closing of the sale of our convertible debentures and accompanying warrants in the event specified stock price levels are obtained. If we
proceed with the second closing or issue any other equity securities, our
existing stockholders percentage ownership will proportionately decrease and
our stock price may decline as a result of the increase in the number of total
outstanding shares.

In addition, the terms of the convertible debentures provide for
anti-dilution adjustments, so that if we do a future financing at a price less
than $2.27, the conversion rate of the debentures will be adjusted down to 112%
of that decreased price and additional shares of our common stock would be
issuable upon such conversion. The terms of the warrants sold in connection
with the convertible debentures also provide for anti-dilution protection, so
that the exercise price for such warrants would be adjusted down to the
decreased 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
that and the decrease in the warrant exercise price may cause a decline in our
stock price.

If a decline in our share price causes the total market value of our stock
to drop below $35 million, we may be delisted from the Nasdaq SmallCap Market
which will affect your ability to buy or sell shares of our stock and might
place us in default under the terms of our convertible debentures.

Our common stock is currently listed on the Nasdaq SmallCap Market. In
order to remain listed on the Nasdaq SmallCap Market, we must, among other
things have a market value of listed securities of $35 million. As of April
28, 2003, we had 32,132,243 shares outstanding, so we would need to maintain a
minimum share price of at least $1.09 in order to meet the market value
requirement and, in any event, a minimum bid price of $1.00 in order to meet
another Nasdaq listing requirement. Although our last reported share price as
of April 28, 2003 was $2.22, it was briefly below $1.00 on September 28, 2001,
was only $1.68 (average of high and low) as recently as February 19, 2003 and
may drop below $1.00 again. If this happens for an extended period of time,
our shares may be delisted from the Nasdaq SmallCap Market.

If our stock is not listed on at least one of the Nasdaq SmallCap Market,
the Nasdaq National Market, the New York Stock Exchange or the American Stock
Exchange for a period of more than ten trading days it may trigger an event of
default under the terms of our convertible debentures. An event of default
would result in our having to pay 120% of the remaining principal plus accrued
interest and damages and, unless we obtained additional financing from another
source, it is unlikely that we would have sufficient capital to make such
payments.

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.

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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 are 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, 2002 filed with the SEC (File No. 001-12128).

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 at average rates during the period. 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 $739,000 for the quarter ended
March 31, 2003.




Item 4.   Controls and Procedures

Within the 90 days prior to the date of this report, the Chief Executive
Officer and Chief Financial Officer performed an evaluation of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective in ensuring
the reporting of material information required to be included in the Companys
periodic filings with the Securities and Exchange Commission.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation.




PART II.   OTHER INFORMATION




Item 1.   Legal Proceedings.

A former employee and their spouse filed a claim for damages in December
2003, against One Nevada Realty Trust, Joseph Biotti, Trustee, care of Francis
Biotti, in Superior Court, Middlesex County, Cambridge, Massachusetts. The
Company is not a named party in the litigation. However, the Company leases
its offices and laboratory space from One Nevada Realty Trust and the complaint
alleges that the employee slipped and fell on the Companys premises while
employed by the Company.

The lawsuit is seeking damages, including loss of consortium, of
approximately $1.1 million from One Nevada Realty Trust alleging that One
Nevada Realty Trust was negligent in maintaining its property. On April 7,
2003, One Nevada Realty Trust informed the Company of the litigation and
invoked an indemnification clause in the lease between One Nevada Realty Trust
and the Company. The lease provides that the Company hold One Nevada Realty
Trust harmless and indemnified for injuries to persons on the premises in
connection with the Companys use of the premises. Under its lease with One
Nevada Realty Trust, the Company is responsible for maintenance of the leased
premises.

The Company has referred the litigation to its insurance carrier. The
Company successfully resolved the employees Workmans Compensation Claim with
respect to this incident in May of 2002.




Item 2.   Changes in Securities and Use of Proceeds.

During the fiscal quarter ended March 31, 2003, we issued the following
securities that were not registered under the Securities Act of 1933, as
amended (the Securities Act):

On March 31, 2003, we completed a private placement of 7.5% Convertible
Debentures (the Convertible Debentures) in an aggregate subscription amount
equal to $5 million and accompanying Warrants (the Warrants) for an aggregate
of 784,314 shares of our common stock, including a Warrant for 98,039 shares
issued to a placement agent in connection with this transaction. The
Convertible Debentures are convertible into shares of our common stock at a
conversion price initially equal to $2.55, but which will be adjusted downward
(subject to certain limited exceptions) upon any dilutive issuances of our
securities to an amount equal to 112% of the price at which such dilutive
issuance is made, resulting in the potential for

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issuance of additional shares
of our common stock upon conversion of the Convertible Debentures. The
Convertible Debentures bear interest at the rate of 7.5% per annum, payable
quarterly, and permit us, in certain circumstances, to make such interest
payments in shares of common stock based on a 5% discount to the valuation of
the common stock.

The Warrants are immediately exercisable for a period of five years at an
initial exercise price of $2.278. The terms of the Warrants provide for
anti-dilution protection, so that the exercise price for such Warrants would be
adjusted down to the decreased price in the event of a dilutive issuance, or on
a weighted-average basis if there are no longer any Convertible Debentures
outstanding. None of the Warrants have been exercised.

The offer and sale of securities in the transaction described above was
exempt from registration under the Securities Act in reliance upon Section 4(2)
of the Securities Act and Regulation D promulgated thereunder, as a transaction
by an issuer not involving any public offering. The recipients of securities
in this transaction were accredited investors and represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the securities issued in this transaction




Item 5.   Other Information

In accordance with Section 10A of the Securities Exchange Act of 1934, as
amended by Section 202 of the Sarbanes-Oxley Act of 2002 (the Exchange Act),
non-audit services were approved by the Companys Audit Committee to be
performed by PricewaterhouseCoopers LLP, the Companys independent auditors,
principally relating to the following: 1) assurance services including (a)
review of, and assistance with filings made by the Company with the SEC, (b)
accounting and reporting research and consultations, and (c) review of the
Companys unaudited quarterly and other interim financial statements filed with
the SEC under the Exchange Act and any services related thereto; and 2) tax
related services including: (a) tax advisory services relating to
international, federal, state and local taxes, including but not limited to,
the preparation of tax returns for the Company and any subsidiaries; (b)
assistance with the processing of such tax returns, tax audits, and refund
claims associated therewith; and (c) tax advisory services relating to issues
impacting the Company, including but not limited to, stock option and
compensation matters and business transactions.




Item 6.   Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

|     |  |                                                                                                                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Securities Purchase Agreement, dated as of March 31,
2003, between the Company and several investors (filed
as Exhibit 4.1 to our Form 8-K, filed on April 1, 2003
and incorporated herein by reference)  
|    
|4.2  |  | 7.5% Convertible Debenture , dated as of March 31,
2003, between the Company and several investors (filed
as Exhibit 4.3 to our Form 8-K, filed on April 1, 2003
and incorporated herein by reference)    
|    
|4.3  |  | Form of Stock Purchase Warrant , dated as of March 31,
2003, between the Company and several investors (filed
as Exhibit 4.4 to our Form 8-K, filed on April 1, 2003
and incorporated herein by reference)
|    
|4.4  |  | Registration Rights Agreement , dated as of March 31,
2003, between the Company and several investors (filed
as Exhibit 4.2 to our Form 8-K, filed on April 1, 2003
and incorporated herein by reference) 
|    
|99.1 |  | 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.                                                        
|    
|99.2 |  | 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.                                                        



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

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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: May 15, 2003 |  | By:             |  | /s/ Stephen D.
Chubb
Stephen D. Chubb
Director, Chairman and Chief Executive Officer
(principal executive officer)                                      
|                   |  |                 |  |                                                                                                                                                         
|Date: May 15, 2003 |  | By:             |  | /s/ Richard A.
Sandberg
Richard A. Sandberg
Director, Vice President, Chief Financial Officer and
Treasurer
(principal accounting and financial officer)

29



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##### Table of Contents






CERTIFICATIONS

Certifications:

I, Stephen D. Chubb, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Matritech, Inc. (the registrant):                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:                                                                                                        



| | a. |  | designed such disclosure
controls and procedures to
ensure that material
information relating to the
registrant, including its
consolidated subsidiaries, is
made known to us by others
within those entities,
particularly during the
period in which this
quarterly report is being
prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness
of the registrants
disclosure controls and
procedures as of a date
within 90 days prior to the
filing date of this quarterly
report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly
report our conclusions about
the effectiveness of the
disclosure controls and
procedures based on our
evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies
in the design or operation of
internal controls which could
adversely affect the
registrants ability to
record, process, summarize
and report financial data and
have identified for the
registrants auditors any
material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not
material, that involves
management or other employees
who have a significant role
in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

/s/ Stephen D. Chubb

Stephen D. Chubb
Chief Executive Officer

30



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##### Table of Contents



CERTIFICATIONS

Certifications:

I, Richard A. Sandberg, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Matritech, Inc. (the registrant):                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:                                                                                                        



| | a. |  | designed such disclosure
controls and procedures to
ensure that material
information relating to the
registrant, including its
consolidated subsidiaries, is
made known to us by others
within those entities,
particularly during the
period in which this
quarterly report is being
prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness
of the registrants
disclosure controls and
procedures as of a date
within 90 days prior to the
filing date of this quarterly
report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly
report our conclusions about
the effectiveness of the
disclosure controls and
procedures based on our
evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies
in the design or operation of
internal controls which could
adversely affect the
registrants ability to
record, process, summarize
and report financial data and
have identified for the
registrants auditors any
material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not
material, that involves
management or other employees
who have a significant role
in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

/s/ Richard A. Sandberg

Richard A. Sandberg
Chief Financial Officer

31