UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 0-12128

MATRITECH, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:

(617) 928-0820

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      Aggregate market value, as of June 30, 2004 of Common Stock held by non-affiliates of the registrant: $53,447,306 based on the last reported sale price on the NASDAQ SmallCap Market.

      Number of shares of Common Stock outstanding on March 2, 2005: 43,718,512

PART I

Overview

      Matritech, Inc. is a biotechnology company principally engaged in the development, manufacture, marketing, distribution and licensing of cancer diagnostic technologies, products and services. We are focused primarily on the early detection of various types of cancer because treatment options may be greater and/or more successful and treatment costs may be lower when tumors are detected in their early stages. Our revenues are derived from product sales, milestone payments for development work, and royalties from licensing.

      The products we have developed are based on our proprietary nuclear matrix protein (“NMP”) technology. The nuclear matrix, a three-dimensional protein framework within the nucleus of cells, plays a fundamental role in determining cell type by physically organizing the contents of the nucleus, including DNA. We focus our research on finding differences in the types and amounts of proteins found in the tissue, blood and urine in patients with and without cancer. We design our products to detect these differences and to generate medically useful information in order to assist physicians in their diagnosis and treatment of patients.

      We currently manufacture products for detecting bladder cancer utilizing our NMP22(1) technology and sell them through our own direct sales forces in the United States and Germany and through distributors in other countries. In Europe we also sell diagnostic products manufactured by Hitachi and others to laboratories and physicians, principally in Germany. Sysmex Corporation (“Sysmex”), a leading manufacturer of automated laboratory instruments based in Kobe, Japan, has licensed our NMP179 technology for detecting cervical cancer and is proceeding to develop a cellular analysis system to detect cervical cancer and other cervical cell abnormalities. For a number of years, we have been engaged in ongoing research and development work, at Matritech and through collaborations with others, to develop technologies for the detection of cancer of the breast, prostate and colon.

      Matritech, Inc. was incorporated in Delaware in October 1987. Our headquarters are located at 330 Nevada Street, Newton, Massachusetts 02460, and our telephone number is (617) 928-0820.

Cancer Diagnostic Market

      The principal role of any diagnostic product is to generate information that physicians or patients find useful in managing a patient’s health. Whether testing urine, blood, tissue or the entire body, the output of a diagnostic product or procedure is information that may help in making a diagnosis or in guiding therapeutic choices. The products of our own research and development are intended to help physicians and patients detect cancer at an early stage when treatment options may be greater and/or more successful and treatment costs may be lower.

      The size of the cancer diagnostic market can be measured at two different levels: the patient or insurer payments for test results generated by diagnostic products (the “Service Market”) and the payments made for the diagnostic products themselves (the “Product Market”). Generally laboratories and physicians performing tests in their offices receive patient or insurer payments in the Service Market and buy the products needed to perform these tests. In the United States, we estimate that the current size of the Service Market for urine and blood testing for bladder, prostate, and colon cancer exceeds $1.5 billion per year, the Service Market for breast cancer mammograms exceeds $2 billion per year and the Service Market for cervical cancer testing exceeds $1.5 billion per year. We also believe that the Service Market for these tests in the rest of the world is roughly equal to that of the United States. For any given testing

      (1) NMP22®, NMP179®, BladderChek® and Matritech® are registered trademarks and NMP35^tm, NMP48^tm and NMP66^tm are trademarks of Matritech, Inc. All other trademarks, service marks or trade names used in this report are the property of their respective owners.

service, cancer testing products used to perform the service can comprise as little as 10% to more than 50% of the patient payment or insurer reimbursement for such service. As a result, we estimate that the worldwide potential product market for blood, urine and cervical cellular testing for bladder, cervical, breast, prostate and colon cancer testing could exceed $1 billion.

Cancer Diagnostic Product Development

      Our diagnostic product development program seeks to identify technologies which can be offered as a product or service to deliver medically useful information to physicians. Two important variables influence our technology development for the marketplace — first, the different ways that our technology can be formatted or configured to generate medical information and second, the types of information provided and medical indications targeted by our tests.

Technology Packaging — the Approach to Generating Medical Information

      Our current technologies have been formatted in three different “product” forms to generate useful medical information: Lab Test Kits, Point Of Care Tests and Cellular Analysis Systems. We anticipated that our principal “service” format would be to create a Proprietary Laboratory Procedure implemented jointly with a well established clinical laboratory.

      Each “product” or “service” format for our technology provides testing technology at a modest cost which can be used on blood, urine or other specimens obtained with minimal invasion into the body. These tests are generally less expensive and involve less patient discomfort than the more invasive procedures for detecting and managing cancer, such as biopsy, surgery, bone scans and other in vivo imaging procedures. As discussed below, each test format uses our technology in a number of different ways to generate useful information.

      Point Of Care Tests, such as our NMP22 BladderChek Test for bladder cancer, are generally sold for use in a physician’s office by medical personnel who are not required to be licensed to perform laboratory tests. Point Of Care Tests are similar to the qualitative urine-based pregnancy test devices and the blood-based glucose test strips sold in pharmacies, but ours are sold for use only pursuant to a physician’s order. Sales of these devices receive our greatest attention because they generate the highest revenue per test for us, they are sold directly to the physician and they enable the physician to earn money each time he performs the test.

      Lab Test Kits, such as our NMP22 Lab Test Kit, 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 treating physician’s request, using our products to test patient specimens. After testing, the laboratory provides test results from the Lab Test Kit in a written report. Until 2003 the principal product format for delivering our technology was the Lab Test Kit. Our revenue per test for Lab Test Kits is less than for our Point Of Care Tests but the laboratory using our product reaches treating physicians who are required or prefer to send their specimens to an outside lab facility.

      Cellular Analysis Systems, such as the cervical cancer system under development by Sysmex Corporation, employ our technologies to identify markers such as the NMP179 protein in cells. We expect the Sysmex system will utilize imaging analysis techniques to verify abnormal cells by examining thousands of cells in a short period of time (“flow cytometry”) and will include NMP179 technology to detect abnormal cell proteins indicating the presence of cancerous or precancerous conditions. If aberrations from normal are found, the cells will be further examined visually by a pathologist to make the actual diagnosis of disease. Systems like these rely on our reagents as a critical component to enhance instrument performance. If Sysmex is successful in commercializing its system, we will receive a royalty on the NMP179 reagents they sell to users of their systems.

      Proprietary Laboratory Procedures, which would be limited to introductions of our breast cancer and prostate cancer technologies, are laboratory analytical procedures which are custom designed to the instrumentation and techniques of a specific clinical laboratory to measure clinically useful proteins. Proprietary Laboratory Procedures are likely to be confined to a limited number of licensed clinical laboratories which would be expected to invest in the development and marketing of a lab testing service specific to their equipment, processes and personnel. If such a procedure were developed in compliance with appropriate regulations, it may not require FDA approval prior to launch. Proprietary Laboratory Procedures are not expected to be very profitable for us but instead are intended to help us gain early market exposure and to enable physicians and laboratories to gain preliminary clinical experience with our technologies prior to our introducing Lab Test Kits or Point Of Care Tests.

Medical Indications — the Medically Useful Information

      The medical diagnostics market covers more medical activities than just the diagnosis of disease. The cancer diagnostics market, for example, is composed of several overlapping categories, each corresponding to a different stage in the identification and management of cancer. The major categories include screening, diagnosing, staging, selecting therapies, monitoring and evaluating prognosis. The three for which our technologies are best suited are screening, diagnosis and monitoring.

      Screening: Cancer screening tests and procedures are used to identify asymptomatic disease in individuals who may (or may not) have risk factors for the disease, but who have no specific evidence of the disease. Screening tests such as mammograms for breast cancer, PSA tests for prostate cancer and Pap smears for cervical cancer are widely used but do not yield a final diagnosis. Instead they prompt a physician to perform additional tests and procedures in order to make a diagnosis.

      Diagnosis: While a definitive diagnosis of cancer is usually made after microscopic examination of the suspected cancerous cells by a specially trained physician, numerous tests may be used to indicate the presence and/or location of disease even though the specific cells cannot be immediately identified.

      Monitoring: Following diagnosis and treatment, additional tests can be used to monitor the course of the disease and the patient’s response to treatment. These monitoring tests may be repeated at regular intervals (often every three months) and may be continued for the life of an individual in order to detect possible recurrence of cancer. In addition, monitoring tests are also used to evaluate a patient’s prognosis and to select appropriate therapy. Patients identified as having a high risk of recurrence will be monitored more closely and may receive more aggressive treatment.

      In the United States, blood-based or urine-based cancer detection assays have generally been approved by the FDA for monitoring patients with known history of disease. Only two such protein marker tests have been approved for use in detecting cancer in previously undiagnosed individuals — the PSA test for prostate cancer and our NMP22 test for bladder cancer.

Summary of Matritech’s Product Development Programs

      The following table summarizes some of the important aspects of each of our product development programs as discussed in more detail below. The data in the table are qualified and expanded in the detailed sections following the table.

Commercial Products

      Our first cancer program to reach commercialization is a product line of diagnostic devices designed to detect bladder cancer. This program is based on discoveries made by the Company’s scientists that utilize certain proteins (“NMP22”) present in the urine of bladder cancer patients which are generally present at much lower levels or completely absent in the urine of individuals free of the disease.

      In recent years bladder cancer typically has the 3^rd highest prevalence and the 4^th highest incidence in U.S. males, and we believe its risks are not adequately recognized. New cases of bladder cancer are almost as common in men as colon cancer, and it tends to be concentrated in

      Our NMP22 program has created two complementary products designed to detect bladder cancer — the Point Of Care NMP22 BladderChek Test (“NMP22 BladderChek Test”) and our NMP22 Test Kit (“NMP22 Lab Test Kit”) — each of which has been approved by the FDA to generate medically useful information for both diagnosing and monitoring bladder cancer.

      We have concentrated our efforts on the United States and Germany because we believe there are major revenue opportunities in four different, but related, patient category applications.

Urologist Market

      To achieve rapid product introduction and adoption in the United States and Germany, we have established our own sales forces to sell our products directly to urologists. This direct selling activity to

urologists began in Germany at the end of 2001 and in the United States in November, 2003. Our principal product is our NMP22 BladderChek Test which is sold to the urologist, can be run in his office during the patient’s visit and generates income for him from the patient or the patient’s insurer. Our NMP22 Lab Test Kit, which is sold by our sales force in Germany and by distributors in the United States and elsewhere, is principally distributed to clinical laboratories, which run the test pursuant to a physician’s order and which are the sole recipient of any reimbursement provided by the patient or the patient’s insurer.

      In independent clinical studies urologists performing invasive cystoscopy together with our new NMP22 BladderChek Test detected over 90% of all cases of bladder cancers and virtually all of the invasive, life-threatening bladder cancers. In over 40 presentations and peer-reviewed papers, urologists have reported NMP22 products to generally be accurate, convenient and inexpensive tests that, when used with other detection and monitoring methods, improve patient management. Some of these papers reported that NMP22 products can reduce costs and identify patients with cancer which was missed during the cystoscopic examination.

Primary Care Market

      As NMP22 products become more widely accepted by urologists, we believe that their growing use will create opportunities to sell the test to gynecologists and general practitioners. We believe these primary care physicians would like a test providing better cancer detection, particularly for those individuals with traditional bladder cancer symptoms (such as microscopic blood in the urine [also known as asymptomatic microscopic hematuria or “AMH”] ) and risk factors (such as a history of smoking, dangerous occupations or other factors). It is estimated that over 20 million people in Germany and the United States have AMH each year. The American Urological Association recommends that an appropriate renal or urologic evaluation be performed in all patients with AMH who are at risk for urologic disease or primary renal disease. We believe that such an evaluation may include a urine-based test like NMP22 and if so, that this application could represent a major opportunity for our NMP22 products. We expect to begin a formal marketing program to gynecologists in Germany during 2005 but do not expect sales to gynecologists to be a significant revenue factor until 2006 or beyond.

      A recently published study in the Journal of the American Medical Association reported that the NMP22 BladderChek Test identified patients with invasive, life threatening cancers that were missed by a urologist’s cystoscopic exam. We believe that physicians who have similar clinical needs as the authors of this paper will provide an additional opportunity to generate useful information for their patients and additional revenue for us by testing patients who are at risk of developing bladder cancer.

Other Private and Public Sector Markets

      Firefighters and certain other public and private sector employees are at an increased risk for bladder cancer due to the toxic fumes they inhale in the course of their work. In 1999 the Michigan Environmental Science Board reported that the incidence of bladder cancer in firefighters is more than twice as high as in non-firefighters. A number of states already recognize that firefighter disability and mortality are caused by occupational exposure to carcinogens, and they have passed laws setting aside funds for dealing with these problems. In 2004 legislation was introduced in both the House and Senate of the Massachusetts legislature which, if passed, would mandate routine testing of similar groups in Massachusetts. At the national level, a proposed Federal Firefighter’s Fairness Act, which included provisions aimed at firefighter health and testing services, has been introduced but not voted upon in the United States Congress during the 2003-2004 session.

      It is widely recognized that other workers such as truck drivers, petrochemical and rubber workers, hairdressers, painters, and textile workers are among those at higher risk due to exposure to toxic substances during the course of their employment. We believe that industrial or government testing for these occupations may become another source of potential growth for NMP22 products.

      Point of Care NMP22 BladderChek Test. Over 80% of our NMP22 product sales in the fourth quarter of 2004 came from the NMP22 BladderChek Test (the “NMP22 BladderChek Test”). The NMP22 BladderChek Test was initially sold in Europe in 2001 and was cleared for sale in the United States by the FDA in 2002 for use in monitoring bladder cancer, particularly in identifying the recurrence of bladder cancer in patients with previously diagnosed disease. In April 2003, the FDA also approved the NMP22 BladderChek Test for diagnosis of bladder cancer, particularly in individuals who have no previous diagnosis of the disease but who have symptoms of or are at risk for bladder cancer.

      In this format, our reagents to detect the NMP22 protein are configured in a device similar to a urine-based Point Of Care Test for pregnancy and measure NMP22 protein in patient urine specimens. Because the device delivers a completed test result in about 30 minutes, physicians or the staff in their offices can perform the NMP22 BladderChek Test during a patient’s visit. Because the physician performs this test in his own office, he is able to earn money by using our product to create medical information (a test result) which is paid for by the patient or his insurer. Because the NMP22 BladderChek Test is reimbursed by many payors at rates which are 50% or less than cytology, the most commonly used urine based assay to detect bladder cancer, we are confident about obtaining BladderChek reimbursement coverage by virtually all payors.

      Approach to Market: In the United States and Germany we sell the NMP22 BladderChek Test directly to urologists. We began selling directly to physicians in Germany in 2001 and began selling directly to physicians in the United States in November 2003. At the end of 2004 we had 5 sales territories in Germany and 17 sales territories in the United States. In 2002 we signed a five-year exclusive agreement (subject to certain minimum purchase requirements) with Cytogen Corporation (“Cytogen”)(NASDAQ: CYTO), a manufacturer and marketer of cancer diagnostic products, providing for the distribution of the NMP22 BladderChek Test to urologists and oncologists in the United States. That agreement was amended in November, 2003 to permit Cytogen to sell the NMP22 BladderChek Test to oncologists exclusively and to permit the Company to sell NMP22 BladderChek Tests directly to urologists. Since then, the Company has expanded its U.S. field sales force to call directly on urologists in major metropolitan markets around the country. The agreement with Cytogen expired in December 2004.

      In Germany the NMP22 BladderChek Test is not reimbursed by the national or regional health plans but is instead paid for directly by the patient (or, in some instances, by private supplemental insurance that some German patients carry). In the United States, the NMP22 Lab Test is reimbursed by all 50 Medicare insurers and the NMP22 BladderChek Test is reimbursed by 49 of the 50 Medicare insurers. In addition, we believe that a majority of the private insurers in the United States also reimburse patient test results derived from either the NMP22 Lab Test Kit or the NMP22 BladderChek Test. See “Third-Party Reimbursement” below.

      We have NMP22 BladderChek Test distribution arrangements in other parts of the world. Several distributors market the NMP22 BladderChek Test in Southeast Asia and in the People’s Republic of China. In March 2002 we signed a seven-year agreement with Medical and Biological Laboratories Group (“MBL”) of Nagoya, Japan for the exclusive (subject to certain minimum purchase requirements) distribution of the NMP22 BladderChek Test in Japan. MBL has conducted clinical trials and submitted data to the Japanese Ministry of Health and Welfare (“Koseisho”) for regulatory approval in Japan. The NMP22 BladderChek Test has been commercially available in Europe since December 2001 and is distributed to countries other than Germany through our European subsidiary, Matritech GmbH, and other distributors throughout Europe.

      NMP22 Lab Test Kit for Bladder Cancer. Our first product, the NMP22 Lab Test Kit for bladder cancer, was approved for sale in the United States by the FDA in 1996 for use in monitoring bladder cancer, particularly in detecting occult or rapidly recurring bladder cancer in patients with previously diagnosed disease. In this product, our proprietary reagents detect NMP22 in a semi-automated 96-well microtiter plate format used by licensed clinical laboratories to test urine specimens. Exclusive of the time to transport the specimen to the lab and the time to deliver the test report to the physician, the test requires about four hours to provide a completed result. In 2000, the FDA approved the NMP22 Lab Test

Kit for use in diagnosing bladder cancer in individuals who have had no previous diagnosis of bladder cancer but who have symptoms of or are at risk for the disease.

      Approach to Market: We have direct marketing and sales activities in the United States and Germany for the NMP22 Lab Test Kit. Currently, we and Wampole Laboratories, Inc. (“Wampole”) both sell the NMP22 Lab Test Kit in the United States. In 2000 we acquired our German distributor, ADL GmbH (now called Matritech GmbH), and since then Matritech GmbH has been selling the NMP22 Lab Test Kit directly to hospital, clinic and physician office laboratories in Germany and to distributors in other parts of Europe.

      As noted above, in Germany the NMP22 Test is not reimbursed by the national health plan but is instead paid for directly by the patient (or, in some instances, by private supplemental insurance that some German patients carry). In the United States, the NMP22 Lab Test is reimbursed by all 50 Medicare insurers. A majority of the private insurers in the United States also reimburse patient test results derived from the NMP22 Lab Test Kit. See “Third-Party Reimbursement” below.

      We have several product distribution arrangements in other parts of the world. In 1994, we entered into an exclusive agreement with Konica Corporation (now Konica Minolta Medical and Graphic, Inc. “Konica”) to distribute our NMP22 Lab Test Kit in Japan. In 1998, Koseisho approved the NMP22 Lab Test Kit for sale in Japan for use in diagnosing previously undiagnosed patients for bladder cancer. The NMP22 Lab Test Kit is currently being marketed in Southeast Asia and China by other distributors. In 1999, the State Drug Administration in the People’s Republic of China approved the NMP22 Lab Test Kit for sale for the detection and management of bladder cancer. We have retained substantially all worldwide manufacturing rights for the NMP22 Lab Test Kit.

      Fully-Automated Format of NMP22 Lab Test Kit: In 2001 we entered into an eight-year, non-exclusive product supply and marketing agreement with Diagnostic Products Corporation (“DPC”) (NYSE:DP) enabling DPC to develop and market an automated format of our NMP22 Lab Test Kit (the “Automated NMP22 Lab Test Kit”). While DPC has rights to sell this product worldwide, they are currently concentrating their efforts in Germany and have indicated that for the foreseeable future, their efforts will remain focused on that market.

      In 2000, we acquired ADL GmbH, now called Matritech GmbH, a European distributor of diagnostic testing products, including our NMP22 Lab Test Kit for bladder cancer. In addition to our products, Matritech GmbH distributes allergy and other diagnostic testing products on behalf of several manufacturers with which it holds distribution agreements. The most significant of such distribution agreements is with Hitachi Chemical Diagnostics (“Hitachi”), entered into in 1997. This agreement grants Matritech GmbH an exclusive right to market and distribute Hitachi’s CLA Allergy Test System in Germany, subject to minimum annual purchase commitments. In 2000, Matritech GmbH entered into a 5-year extension of the distribution agreement with Hitachi providing for exclusive rights to market and distribute the product in Germany and Austria subject to minimum purchase commitments.

Research and Development Programs

      Our scientists have also identified a nuclear matrix protein associated with cervical cancer and cervical precancerous conditions (“NMP179”). We conducted three preclinical studies comparing the accuracy of this protein to conventional cervical (“Pap”) testing. Pap smears, the principal diagnostic test for cervical cancer, analyze cervical cells visually using a microscope. Our NMP179 technology was developed to reduce the time and increase the accuracy of identifying cervical cells which need further visual inspection by a pathologist.

      Approach to Market: In 2002 we granted an exclusive world-wide license for the use of NMP179 technology for automated, non-slide-based laboratory instruments to Sysmex. As a part of this transaction,

Sysmex purchased shares of our common stock at a premium, agreed to pay us milestone payments based on reaching certain research and product development goals, committed to make minimum quarterly payments to support our research, contracted to purchase all NMP179 reagents from us and agreed to pay us a royalty on all reagent sales related to their cervical cancer screening system.

      Sysmex is developing new systems which will automate the process of screening cervical cell specimens by combining our NMP179 technology with Sysmex’s expertise in flow cytometry, image analysis and laboratory automation. Sysmex believes that such automation will reduce errors arising from human review procedures and reduce the overall cost of screening cervical specimens. In the spring of 2004, Sysmex commenced pre-clinical trials in Europe of their new cellular analysis system incorporating our NMP179 technology. Following completion of clinical trials, we expect Sysmex will file an FDA submission for a Class III device subject to a premarket approval (“PMA”) regulatory process. Sysmex has included the status of this product development project on its web site www.sysmex.com and has reflected that its goal is to obtain FDA approval for this new cervical cancer detection system in 2006.

      In 1999 our scientists, using a research configured, low-throughput mass spectrometer instrument (“research mass spectrometry”), discovered some characteristics of a distinct set of proteins (“NMP66”) in the blood of breast cancer patients that were generally not present in the blood of women without known breast malignancy. We believe that measurement of certain NMP66 proteins and/or nucleic acids associated with the NMP66 protein complex may enable physicians to obtain breast cancer diagnostic information that is more accurate than the blood testing services that are currently available and could complement and supplement mammography. Our current scientific goal is to develop sample preparation and testing methods including high-throughput mass spectrometers (“high-throughput mass spec”), reverse transcriptase polymerase chain reaction (“RT-PCR”) and conventional immunoassay techniques that will be more reproducible, controlled and cost effective than the methods we used in making the initial discovery.

      Approach to Market: We have entered into an agreement with MKI whereby they or their designees will serve as our Japanese clinical laboratory partner for further validation of our NMP66 technology and development of a Proprietary Laboratory Procedure. Pursuant to this agreement we and MKI may negotiate the terms for distribution rights for the Japanese market for products and services incorporating the NMP66 technology. Our goal is to conclude an agreement with US clinical laboratory when our Proprietary Laboratory Procedure has been optimized.

      We have collected over 800 blood specimens according to an IRB (Institutional Review Board)-approved protocol for use in generating reproducible and controlled clinical data. Like all blood-based research specimens at Matritech, these specimens have been stored in freezers at -80 degrees Celsius since they were collected and are available for immediate evaluation as soon as appropriate tests are developed. We believe that these specimens will be sufficient to demonstrate the clinical utility of tests based on the NMP66 protein complex. The timing of the launch of a testing service using our NMP66 breast cancer technology will depend, in Japan, upon developing a satisfactory Proprietary Laboratory Procedure with MKI and in the U.S. and elsewhere, concluding satisfactory agreements with appropriate clinical lab partners, developing a satisfactory Proprietary Laboratory Procedure with each partner and obtaining any required regulatory approval.

      We do not yet have any NMP66 breast cancer technology distribution arrangements for NMP66 Lab Test Kits or for NMP66 Point Of Care Tests other than our agreement with MKI.

      In 1999, we entered into collaboration with Alan Partin, M.D., Ph.D., Professor of Urology at Johns Hopkins University School of Medicine, to develop an improved, blood-based prostate cancer test. During 1999, our scientists, using a research mass spectrometer, discovered some characteristics of a distinct set of

proteins (“NMP48”) in the blood of prostate cancer patients that were generally not present in the blood of individuals without known prostate malignancy.

      We have collected over 600 blood specimens according to an IRB-approved protocol for use in generating reproducible and controlled clinical data prior to launching a Proprietary Laboratory Procedure. We believe that these specimens will be sufficient to demonstrate the clinical utility of an NMP48 protein based test, when developed, for the differential diagnosis of individuals exhibiting symptoms such as enlarged prostates or for screening elderly men.

      In 2004 we chose to focus virtually all our research and development resources on our NMP66 program and deferred further development of our NMP48 technology. We do not yet have any distribution arrangements for potential NMP48 Lab Test Kits or NMP48 Point Of Care Tests. We intend to utilize our own urology sales force in the United States and Germany to sell such products, if successfully developed, and would consider some of our NMP22 distributors in other parts of the world when we are in the final stages of product development.

      During 1999, our scientists, using research mass spectrometry, discovered some characteristics of a distinct set of proteins (“NMP35”) in the blood of patients with colon cancer, which were generally not present in the blood of individuals without cancer or in the blood of patients with certain benign conditions of the lower digestive tract. After developing Proprietary Laboratory Procedures or products for NMP48 proteins and NMP66 proteins, we intend to develop blood-based colon cancer tests based on the NMP35 marker.

      Blood specimens for use in generating reproducible and controlled clinical data prior to launching a Proprietary Laboratory Procedure have been collected pursuant to an IRB-approved protocol. We believe that these specimens will be sufficient to demonstrate the clinical utility of an NMP35 protein based test, when developed, for the differential diagnosis of individuals exhibiting symptoms such as rectal bleeding.

Technology

      The nuclear matrix, a three-dimensional protein framework within the nucleus of cells, helps organize active genes in the nucleus. In this way, the nuclear matrix plays a fundamental role in determining cell type and cell function. Although the specific mechanisms of action are not yet fully understood, our scientists and independent scientists have demonstrated that there are differences in the types and amounts of nuclear matrix proteins found in cancerous and normal tissues and also among different types of normal cells. These differences create opportunities to develop tests which may be not only specific for cancer but also specific for a certain organ or type of tissue, thus providing greater information to physicians and patients. Independent academic investigators have reported the cell type specificity of nuclear matrix proteins in papers published in scientific journals which reported nuclear matrix proteins specific to bone, kidney, prostate, breast and colon cancer tissues. Matritech also has demonstrated that cell death, including cell death related to early tumor development, results in the release of nuclear matrix proteins into bodily fluids. As a result, elevated levels of certain nuclear matrix proteins have been found in the bodily fluids of cancer patients. We are not aware of any other cancer protein, or class of proteins, which exhibit this level of clinical specificity and sensitivity.

      Mass spectrometry (both research mass spectrometry and high-throughput mass spectrometry) activates proteins (both nuclear matrix proteins and others) from a specially prepared serum or urine sample and detects the molecular weight of those proteins present by measuring the time it takes for them to reach a detector in the instrument with an opposite electrical charge. In general, the laser in a mass spectrometer imparts energy in a non-destructive way to the proteins in a specimen. Fragments from these energized proteins bear a charge adequate to cause them to reach the detector. Preparing samples according to a reproducible and controlled protocol is a critical technical step required to eliminate substances which may interfere with the detection of targeted proteins. Mass spectrometry technology

enables us to characterize useful proteins by their molecular weight and then begin the process of identifying and isolating them and developing antibodies to the most useful of those identified.

      Developing products from promising proteins (nuclear matrix proteins as well as others) discovered using our original two-dimensional gel procedure and, more recently, mass spectrometry has invariably involved serious reproducibility problems. In our early history, independent research scientists using the methods disclosed in our patents and two-dimensional gels reported different cancer-related nuclear matrix proteins than our own scientists. In recent years, other scientists and we, using the procedures and equipment provided by mass spectrometry manufacturers, have generated different test results than earlier stage research. We believe that our experience in reducing variability and making reproducible, controlled tests and test protocols is an important strength of ours. However, as has been the case in the development of all our products, we expect to encounter technical challenges during product development. We will continue to make investments in attempting to overcome these challenges in order to achieve the reproducibility needed to provide medically useful products.

      We have developed medically useful diagnostic products for bladder cancer using our nuclear matrix protein technology and are striving to make similar developments for detecting other forms of cancer using research mass spectrometry and high-throughput mass spec technology. However, the economic value of our technology or any other diagnostic technology is based on the clinical utility of the information generated, not on the fundamental biochemistry of the technology or on its performance in discovery research. Therefore, while we are basing our research programs on the data we have generated during discovery research, our physician customers will base their long-term purchase decisions on the clinical information they obtain and whether such information helps them make medical decisions. One of the most important roles of the FDA is to require manufacturers like us to conduct reproducible and controlled clinical trials to demonstrate that our products generate information which is, among other things, limited in variability from one lab to another and likely to be of value to physicians. The data generated by our FDA clinical trials, not the data reported during the discovery phase, are the only basis upon which physicians can appraise clinical value. However, it should also be understood that the perceived value of this clinical information (even if generated by an FDA-approved test) is likely to differ from physician to physician.

      Our nuclear matrix protein technology is licensed from the Massachusetts Institute of Technology (“MIT”). Under the current terms of our license from MIT, our worldwide license is exclusive until the expiration of all claims contained in these patents in 2006. We have made additional discoveries related to nuclear matrix proteins and other useful proteins discovered using mass spectrometry technology and have filed our own patent applications on such advances in the United States, as well as corresponding applications and patent rights in selected foreign countries. Matritech currently has seventeen additional United States patents relating to such discoveries.

      While minimally invasive laboratory tests can reduce the need for more invasive or expensive procedures, the information they provide, just like that from the more expensive and invasive tests, is not perfect. Ideally, the results from any medical test should be both sensitive and specific. Clinical sensitivity refers to the percentage of cases in which the assay correctly identifies the presence of disease. Clinical specificity refers to the percentage of cases in which the assay correctly identifies the absence of disease.

      Clinical sensitivity and specificity percentages reported from studies and trials of cancer diagnostic products may not be directly comparable, as results may be affected by laboratory-to-laboratory variation, differences in specimen handling, the number of subjects studied, variability in the stages of disease present in the subject population and the demographic composition of the subject population, among other factors.

Marketing and Sales

      Distribution of diagnostic tests poses challenging sales and marketing issues to their developers and manufacturers, especially for new devices. These challenges arise because the purchasers of diagnostic Lab Test Kits (i.e., the clinical laboratories) are not typically the orderers of the test (i.e., the treating

physicians). It is not unusual for the sales person offering a new diagnostic test to be told by the laboratory manager that the lab will not buy the new test, no matter how well it performs, until treating physicians start to order the test. On the other hand, tests which are purchased by physician office laboratories (where the ordering physician owns all or part of the purchasing laboratory) or devices which can be sold directly to the treating physician (like our NMP22 BladderChek Test) do not encounter these challenges because the purchase by a treating physician requires no second sale to a clinical laboratory.

      Developing greater demand for our NMP22 BladderChek Test among urologists is the principal goal of our sales and marketing activity in 2005. We believe that in major markets such as the U.S. and Germany, a dedicated sales force is extremely effective to address the issues involved in making a new diagnostic test part of a physician’s standard of care. Our prior experiences with distributors in those markets and others have demonstrated the value of our own dedicated sales force which is why we invested significant funds to build such a group during 2004.

      Before deciding to build our own U.S. sales force, we signed in October 2002 an approximately five-year exclusive agreement with Cytogen for NMP22 BladderChek Test sales to urologists and oncologists and concurrently agreed with Endocare to terminate our original BladderChek distribution agreement. The Cytogen agreement was amended in November 2003 to permit Cytogen to continue to sell NMP22 BladderChek Tests directly to oncologists with our taking over selling the product directly to urologists. For sales of NMP22 BladderChek Tests to oncologists prior to the end of 2004 and, prior to November 2003 to urologists, all sales are deemed to have been made by Cytogen. Since January 2004, we have received all revenue from sales of this product to urologists. The agreement with Cytogen expired in December 2004.

      As for our NMP22 Lab Test Kit in the United States, both Wampole and we distribute product to hospitals and commercial laboratories within the United States. For our direct sales of the NMP22 Lab Test Kit to laboratories, we receive all revenue. All other sales of the NMP22 Lab Test Kit are deemed to be made by Wampole. Prior to 2004, we had a similar distribution arrangement with Fisher Scientific, LLC and Fisher Scientific remains a distributor of our NMP22 Lab Test Kit even though it acquires the product from Wampole.

      Our European subsidiary, Matritech GmbH, which we acquired in 2000, has a direct sales force that is principally devoted to selling our NMP22 products in Germany to urologists and laboratories. Matritech GmbH also manages the distribution of all NMP22 products to distributors in other European countries.

      In 1994, we entered into an agreement with Konica to distribute the NMP22 Lab Test Kit in Japan. Several distributors currently market the NMP22 BladderChek Test in Southeast Asia and in the People’s Republic of China. In the rest of the world, we sell the NMP22 Lab Test Kit through distributors. In March 2002 we signed a seven-year agreement with MBL of Nagoya, Japan for the exclusive (subject to certain minimum purchase requirements) distribution of the NMP22 BladderChek Test in Japan. MBL has conducted clinical trials and submitted data to Koseisho for regulatory approval in Japan, but as of the end of December 2004, Koseisho had not yet approved the test.

      We have retained rights to sell all of our products in the United States except for the Automated NMP22 Lab Test Kit which has been developed and launched internationally by DPC using proprietary antibodies sold by Matritech to DPC and any flow-based products developed by Sysmex based on NMP179.

      No company accounted for more than 10% of our total revenues in fiscal 2003 or fiscal 2004. One customer, Institut Fur Klinische Chemie, accounted for 12% of our revenues in fiscal 2002.

      During the years ended December 31, 2002 and 2003 and 2004, 11%, 15% and 33%, respectively, of our total product sales were from customers in the United States and 89%, 85% and 67%, respectively, were from customers in foreign countries. Product sales generated outside the United States during the years ended December 31, 2002, 2003 and 2004, were primarily in Europe. See Note 10 of Notes to Consolidated Financial Statements — “Segment and Geographic Information.”

Foreign Operations

      In 2000, we acquired all of the outstanding shares of capital stock of Gesellschaft fur Allergie, Diagnostika und Laborkonzepte (“ADL”), now called Matritech GmbH, a European distributor of diagnostic testing products, including our NMP22 Lab Test Kit and the NMP22 BladderChek Test. Matritech GmbH is located in Freiburg, Germany. This acquisition was accounted for as a purchase, and accordingly the results of operations of Matritech GmbH from June  28, 2000 forward are included in our consolidated statements of operations.

      At December 31, 2004, approximately 11% of our total assets were located at the German subsidiary, and approximately 58% of our revenue and 27% of our expenses, including cost of product sales, for fiscal year 2004 were related to this European operation.

Third-Party Reimbursement

      Our ability to successfully commercialize our products will depend in part on the extent to which reimbursement will be available from government health administration authorities, private health insurers and other third-party payors. We believe that FDA approval of a diagnostic product facilitates third-party reimbursement for the testing service based on that diagnostic product, but reimbursement for services based on FDA approved products may not be available or, if available, may be inadequate.

      In the case of private insurance, the reimbursement of any medical test, whether it is FDA approved or for investigational use only or for research use only, is at the sole discretion of the patient’s individual carrier. The decision to reimburse can be made on a case-by-case basis (as is done for research therapies) or on a system-wide basis (such as screening mammography). Historically, the decision to reimburse for a new medical procedure or test is made by the carrier’s medical director or review committee. This group will base its reimbursement decision on published clinical data and information provided by treating physicians. Even if a procedure has been approved for reimbursement, the insurance carrier may elect in the future to discontinue reimbursement for the procedure.

      Health care reform is an area of continuing national and international attention and a priority of many government officials. Future changes could impose limitations on the prices we will be able to charge in the United States and elsewhere for our products or the amount of reimbursement available for tests based on our products from government agencies or third-party payors.

      Currently we believe that U.S. laboratories performing NMP22 tests using the NMP22 Lab Test Kit and physicians performing such tests using the NMP22 BladderChek Test are being reimbursed by most insurance carriers, including the carriers managing Medicare reimbursement programs. However, as with all new medical products, reimbursement is not universal, and we are working, on a case-by-case basis, with individual physicians and laboratories to obtain reimbursement where requested. In Germany we believe that most patients receiving a test result from either the NMP22 Lab Test Kit or the NMP22 BladderChek Test are not reimbursed by insurance carriers or federal healthcare reimbursement programs and are paying for the test themselves (or in some instances by private supplemental insurance that German patients carry).

Manufacturing and Facilities

      We currently assemble our NMP22 Lab Test Kits in a portion of our 22,500 square-foot facility in Newton, Massachusetts and rely on subcontractors for certain components and processes. Our NMP22 BladderChek Test is produced by a contract manufacturer experienced in the assembly of Point Of Care Test Devices. Our lease for our Newton facility requires annual base rental payments of $414,360 and expires on December 31, 2010. We have an option to extend the lease for an additional five years at a base rent to be agreed upon with the lessor consistent with market rates in 2010.

      We have retained all manufacturing rights for our products and products under development, except for (1) the Automated NMP22 Lab Test Kit which is being developed by DPC using proprietary antibodies sold by Matritech to DPC, (2) any flow-based products developed by Sysmex based on our

NMP179 technology and (3) rights that could be granted to Konica, our NMP22 Lab Test Kit distribution partner in Japan, if we fail to perform under our agreement with Konica.

      We currently rely on sole suppliers for certain key components for the NMP22 Test Kit and the NMP22 BladderChek Test. In the event that these suppliers are unable to supply these components or assemblies for any reason, we would seek alternative sources of supply or assembly, which could require reapproval by the FDA for such alternate suppliers. Although we attempt to maintain adequate levels of inventory to provide for these and other contingencies, should our manufacturing process be disrupted as a result of a shortage of key components or a revalidation of new components or the failure of an assembler to meet our requirements, we may not be able to meet our commitments to customers. We are also subject to the FDA’s Good Manufacturing Practice (“GMP”) requirements. See “Government Regulation” below.

Competition

      We are not aware of any other company selling diagnostic or therapeutic products based on nuclear matrix protein technology. We have notified one company that its announced intention to develop certain products is likely to infringe certain claims contained in patents owned by or licensed to us. In addition, competition in the development and marketing of cancer diagnostics and therapeutics, using a variety of technologies, is intense.

      There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of cancer diagnostic testing products. Many of these organizations have financial, manufacturing, marketing and human resources greater than ours. We expect that our diagnostic products will compete largely on the basis of clinical utility, accuracy (sensitivity and specificity), ease of use and other performance characteristics, price, patent position as well as on the effectiveness of our marketing partners and us.

      We expect that our Lab Test Kits and our Point Of Care Tests will compete with existing FDA-approved clinical tests, including a test known as BTA bladder cancer test, which has 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.

      In the market for urine-based diagnostic tests, our Lab Test Kits and our Point of Care Tests are also competing with existing cellular-based tests such as the microscopic examination of suspicious cells (cytology) or a test known as UroVysion, which is a fluorescent in-situ hybridization test (FISH). In addition to the fact that these tests are generally done by laboratories, not physicians, we believe that each of these has important drawbacks in the markets for screening and monitoring information — cytology because it is less sensitive and twice the cost of NMP22 tests, FISH because of its accuracy is comparable to NMP22 tests but can be ten times more expensive.

      In a larger sense, our diagnostic products also compete with more invasive or expensive procedures such as surgery, bone scans, magnetic resonance imaging and other in vivo imaging techniques. We believe that our products, if successfully commercialized, will improve patient management and lower overall costs by providing useful information and, in some cases, by providing alternatives to these invasive or costly procedures.

      A number of companies are attempting to develop automated instruments for Pap smear screening that would compete with the instruments and systems which Sysmex intends to develop using NMP179 technology. These companies are developing computerized image analysis techniques to automate much of the work currently done by cytotechnologists. To date, two of these instruments have been approved by the FDA for primary screening of Pap smear slides and for rescreening a percentage of slides previously

identified by a cytotechnologist as normal, and more companies are expected to submit applications for similar systems within two to three years.

      The FDA approved a diagnostic product, Hybrid Capture II (“HCII”), for use in detecting HPV, the viral infection believed to be the cause of most cervical cancer. Although many women, especially those under 35 years of age, are infected with this virus and test positive for HPV, most do not progress to cervical cancer. Nevertheless, the test for HPV may be selected by some gynecologists and clinical pathologists to identify women at higher risk of developing cervical cancer.

      In addition, competing diagnostic products based on other technologies may be introduced by other companies and could adversely affect our competitive position. As a result, our products may become obsolete or non-competitive. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results — We face intense competition and our technology may become obsolete” below.

Patents, Licenses and Trade Secrets

      Matritech’s diagnostic technology is protected by claims contained in patents owned by MIT and licensed to us and by patents owned by us. The MIT license relates to three United States patents owned by MIT which expire in 2006 and corresponding foreign patents granted in Japan, Canada and selected countries in Europe, as well as a patent application allowed in Canada. MIT has licensed exclusively to us worldwide rights to the nuclear matrix protein technology contained in these patents in exchange for royalties payable until expiration of the underlying patent rights. The protection offered by these patents extends to the detection and measurement of nuclear matrix proteins, or their associated nucleic acids, using antibody or gene probe formats, as well as to certain assay methods exploiting nuclear matrix proteins.

      We have filed additional United States patent applications and, in certain circumstances, foreign counterparts in other countries including Australia, Canada and selected countries in Europe and Asia on additional developments relating to the nuclear matrix protein technology and to other cancer marker related technologies. We currently have seventeen additional United States patents and three pending patent applications and one provisional application on file in the United States relating to these additional developments. Certain of our United States patents provide additional protection for our NMP22 Lab Test Kit and for our NMP22 BladderChek Test until 2015. It is our practice to file additional patent applications when we believe our scientists have made commercially significant discoveries whether they relate to nuclear matrix proteins or not. We believe that patents that may issue from our applications can provide competitive protection for our products after expiration of our license from MIT. We also will continue to rely on our unpatented proprietary information and trade secrets to maintain our commercial position.

      Our NMP22 BladderChek Test uses lateral-flow absorbent test strips having antibodies located at different positions along the test strips. 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 our NMP22 BladderChek Test and are attempting to obtain appropriate licenses or waivers. In August, 2004, we entered into a license agreement, effective as of April 1, 2004, with one holder of patent rights, Abbott Laboratories, and we are continuing to explore other licensing arrangements covering our BladderChek Tests. There is no guarantee that we will be able to obtain the appropriate patent licenses to permit us to make, use, sell, or import such products in the United States or in other countries.

Government Regulation

      The products we market and manufacture, and those we intend to market and manufacture, are subject to extensive regulation by the FDA, and, in some instances, by foreign governments. Proprietary

Laboratory Procedures, being services rather than products, do not generally require FDA review before being made commercially available. If such a procedure involves the use of an antibody or similar reagent, an FDA submission is typically required for the analyte specific reagent which requires a 30 day review.

      Pursuant to the Federal Food, Drug and Cosmetic Act of 1976, as amended, and the regulations promulgated thereunder (the “FDC Act”), the FDA regulates clinical testing, manufacturing, labeling, distribution, and promotion of medical devices such as our products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket approval for devices, withdrawal of marketing approvals, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by us.

      In the United States, medical devices and diagnostics are classified into one of three classes (class I, II, or III) on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Under FDA regulations, class I devices are subject to general controls such as labeling, premarket notification and adherence to GMPs. Class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance and FDA guidelines). Generally, class III devices are those which must receive premarket approval (“PMA”) by the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices). Lab Test Kits for the diagnosis of cancer are class III devices and are submitted as PMAs to the FDA. Point Of Care Tests for diagnosis of cancer are also class III devices for which PMAs or PMA supplements must be submitted if a Lab Test Kit version has not been previously approved.

      Before a new device can be introduced into the U.S. market, the manufacturer must generally obtain marketing approval through the filing of either a 510(k) notification or a PMA. 510(k) clearance will be granted if the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed class I or II medical device, or to a class III medical device for which the FDA has not called for a PMA. This is often the route of approval for tests used in monitoring for disease. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information or data is needed before a substantial equivalence determination can be made. A request for additional data may require that clinical studies of the safety and efficacy of the device be performed.

      Commercial distribution of a device in the U.S. for which a 510(k) notification is required can begin only after the FDA issues an order finding the device to be “substantially equivalent” to a predicate device. It generally takes from three to twelve months from submission to obtain a 510(k) clearance, but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information is needed before a substantial equivalence determination can be made.

      A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence which typically includes clinical trial data to demonstrate safety and the effectiveness of the device. The PMA application must also contain the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device, as well as proposed labeling.

      Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. An FDA review of a PMA application can take up to a year from the date the PMA application is accepted for filing, and occasionally longer. The review time is often significantly extended as a result of the FDA requiring more information or clarification of information already provided in the submission. During the

review period, an advisory committee, typically a panel of clinicians and/or other appropriate experts in the relevant fields, may be convened to review and evaluate the application and recommend to the FDA whether to approve or disapprove the device. The FDA is not bound by the recommendations of the advisory committee but generally follows them. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer’s facilities to ensure that the facilities are in compliance with applicable GMP requirements.

      If the FDA’s evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions which must be met in order to secure final approval for sale of the device. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA’s evaluations of the PMA application or manufacturing facilities are not favorable, the FDA will delay or deny approval of the PMA application or issue a “not approvable letter.” The FDA may also determine that additional clinical trials are necessary, in which case approval may be substantially delayed while additional clinical trials are conducted and submitted. The PMA process can be expensive, uncertain and lengthy. A number of devices for which FDA approval has been sought by other companies have never been approved for marketing.

      Once a device has been approved, modifications to the device, its labeling, or manufacturing process may require review by the FDA using PMA supplements. PMA supplements often require the submission of the same type of information required for an initial PMA submission, except that the supplement generally is limited to that information needed to support the proposed change from the product approved in the original PMA.

      Although clinical investigations of most devices are subject to the investigational device exemption (“IDE”) requirements, clinical investigations of in vitro diagnostic tests (“IVD”) are exempt from the IDE requirements, including FDA approval of investigations, provided the testing is non-invasive, does not require an invasive sampling procedure that presents significant risk, does not introduce energy into a subject, and the tests are not used as a diagnostic procedure without confirmation of the diagnosis by another medically established diagnostic product or procedure. IVD manufacturers must also establish distribution controls to ensure that IVDs distributed for the purposes of conducting clinical investigations are used only for that purpose. Pursuant to current FDA policy, manufacturers of IVDs labeled for investigational use only (“IUO”) or research use only (“RUO”) are encouraged by the FDA to establish a certification program under which investigational IVDs are distributed to or utilized only by individuals, laboratories, or health care facilities that have provided the manufacturer with a written certification of compliance indicating that (1) the device will be used for investigational or research purposes only, and (2) results will not be used for diagnostic purposes without confirmation of the diagnosis under another medically established diagnostic device or procedure. In addition, the certification program requirements for IUO products should include assurances that all investigations or studies will be conducted with approval from an institutional review board (“IRB”), using an IRB-approved study protocol and patient informed consent and that the device will be labeled in accordance with the applicable labeling regulations. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling.

      In 1996, the FDA approved our NMP22 Lab Test Kit for bladder cancer for sale in the United States as a predictor of occult or rapidly recurring bladder cancer following therapy, such as surgical excision of cancerous tissue. In 2000 the FDA approved the expanded claim of our NMP22 Lab Test Kit for the additional use of diagnosing previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer. In 2002, the FDA approved our NMP22 BladderChek Test for sale in the United States as an aid in monitoring the recurrence of bladder cancer following therapy, such as surgical excision of cancerous tissue. In 2003 the FDA approved the expanded claim of our NMP22 BladderChek Test for the additional use of diagnosing previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer.

      Any products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register their establishments and list their devices with the FDA, and are subject to periodic inspections by the FDA and certain state agencies. The FDC Act requires devices to be manufactured in accordance with GMP regulations which impose certain procedural and documentation requirements upon us with respect to manufacturing and quality assurance activities.

      Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. 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, in the United States we cannot promote the NMP22 Tests for any unapproved use. Failure to comply with these requirements can result in regulatory enforcement action by the FDA that would adversely affect our ability to conduct testing necessary to obtain market approval for these new uses and, in addition, could have a material adverse effect on our business, financial condition and results of operations.

      Our products are also subject to a variety of state laws and regulations in those states or localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those states or localities. Manufacturers 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. Compliance with such laws and regulations now or in the future could result in significant additional expense or result in material adverse effects upon our ability to do business.

      Export of unapproved products subject to the PMA requirements must be approved in advance by the FDA for export unless they are approved for use by the regulatory authorities in any member state of the European Union and certain other countries, in which case they may be exported to any such country without FDA approval. To obtain FDA export approval, when it is required, certain requirements must be met and information must be provided to the FDA, including, with some exceptions, documentation demonstrating that the product is approved for import into a country to which it is to be exported and safety data from animal or human studies. In some cases the FDA may not grant export approval when such approval is necessary, and some countries to which the devices are to be exported may not approve the devices for import. Failure on our part to obtain export approvals, when required, could significantly delay and impair our ability to continue exports of our devices and could have a material adverse effect on our business, financial condition or results of operations.

      The introduction of our developmental-stage and FDA-approved cancer diagnostic products in foreign markets will also subject us to foreign regulatory registrations and/or approvals which may impose additional substantial costs and burdens. International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country. Many countries also impose product standards, packaging requirements, labeling requirements and import restrictions on devices. For example, member countries of the European Union require that products bear the CE mark. This necessitates the creation and maintenance of dossiers documenting quality systems and standards for manufacturing, labeling and testing. Further, for some types of diagnostic tests the European Union also requires audits of the manufacturing site by a Notified Body. In addition, each country has its own tariff regulations, duties and tax requirements. In 1998, Koseisho approved the NMP22 Lab Test Kit for sale in Japan for use in screening previously undiagnosed patients. In 1999, the State Drug Administration in the People’s Republic of China approved the NMP22 Lab Test Kit for sale in the People’s Republic of China for the detection and management of bladder cancer. Our NMP22 BladderChek Test has been registered for sale, if required, in most of the major markets where we currently have sales. The approval by the FDA and foreign government authorities is unpredictable and uncertain. Delays in receipt of, or a failure to receive, such approvals, or the loss of any previously received

approvals, could have a material adverse effect on our business, financial condition and results of operations.

      Changes in existing requirements or adoption of new requirements or policies could adversely affect our ability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. We may be required to incur significant costs to comply with laws and regulations in the future which could have a material adverse effect upon our business, financial condition or results of operations.

      Pursuant to the Clinical Laboratory Improvement Amendments (“CLIA”), the FDA assigns a complexity category to each new in vitro diagnostic test. This category will determine the rigor of quality control that must be followed by purchasers and users of the device, including qualifications of technicians, and thus can affect purchasing decisions of laboratories and hospitals. The review period for in vitro diagnostic tests may be extended due to these CLIA requirements. The NMP22 Lab Test Kit has been designated as a high complexity device. The NMP22 BladderChek Test has been CLIA-waived by the FDA which means it can be performed in the physician’s office by staff who do not need specialized certification.

      In order for us to conduct preliminary studies or clinical trials at a hospital or other health care facility, our research collaborators must first obtain approval from the Institutional Review Board (“IRB”) of the hospital or health care facility. In each case, a written protocol must be submitted to the IRB describing the study or trial, which is reviewed by the IRB with a view to protecting the safety and privacy of the institution’s patients.

      In addition to the regulatory framework for clinical trials and product approvals, we are subject to regulation under federal, state and local law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation.

Employees

      As of March 1, 2005, we had 75 full-time employees, 15 of whom were engaged in research and development. Our future success depends in part on our ability to recruit and retain talented and trained scientific, technical, marketing and business personnel and competition for these kinds of personnel is intense. None of our employees is represented by a labor union, and we consider our relations with our employees to be good.

Research and Development

      Our future success will depend in large part on our ability to develop and bring to market new products based on our proprietary technology. Accordingly, we devote substantial resources to research and development. We have assembled a scientific staff with a variety of complementary skills in several advanced research disciplines, including molecular biology, immunology and protein chemistry. In addition, we maintain consulting and advisory relationships with a number of prominent researchers.

      During 2002, 2003 and 2004, Matritech spent approximately $3.8 million, $2.6 million and $2.7 million, respectively, on research, development and clinical affairs. Substantially all of these expenditures were related to the development of diagnostic products and conducting clinical trials.

      Our expenditures and strategy for research and development are set out in greater detail in Item 7, Management’s Discussion and Analysis, Research and Development, and Clinical Expenses.

Recent Developments

      On March 4, 2005, we entered into a purchase agreement (the “Purchase Agreement”) which provides for the sale through a Private Placement of an aggregate of 1,426,124 shares of our Series A Convertible Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”) and the issuance to the investors of warrants to purchase 4,991,434 shares of our common stock at a price of $1.47 per share. Each share of our Series A Preferred Stock is convertible into ten shares of our common stock. We cannot issue all shares of the Series A Preferred Stock that we have agreed to sell without obtaining stockholder approval because the shares into which the Series A Preferred Stock are convertible would exceed 20% of our outstanding common stock.

      The table below provides highlights of the Private Placement including of the First Closing which has occurred and the Second Closing which is subject to stockholder approval.

      On March 4, 2005, we completed a private placement of 670,272 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”), with accompanying investor warrants to purchase 4,991,434 shares of our common stock, for an aggregate consideration of $5,898,394 (before cash commissions and expenses of approximately $500,000). In addition, we issued warrants to a placement agent for a total of 656,920 shares of common stock. All of the warrants have an exercise price of $1.47 per share, become exercisable on September 5, 2005 and expire on March 4, 2010. Each share of Series A Preferred Stock is convertible into ten shares of our common stock, which equates to a price of $0.88 per share of common stock. This conversion price and the exercise price of the warrants are subject to adjustment in the event of subsequent dilutive issuances. The holders of Series A Preferred Stock are entitled to a liquidation preference and have the benefit of covenants of the Company not to liquidate, merge, sell control or substantially all assets, issue debt or senior equity securities, or amend the charter in any way adverse to the holders. We have committed to file registration statements covering the shares of our common stock into which the Series A Preferred Stock is convertible and the shares for which the Warrants may be exercised. If we fail to timely register the shares we have committed to register, we may be subject to penalties, including payment of 1.5% of the consideration paid for the Series A Preferred Stock for each thirty day period of delay in registration. We are also obligated not to issue other securities that would be senior to the Series A Preferred Stock, not to incur indebtedness in excess of $2,000,000 except in limited forms, and not to enter into or consummate a transaction which would result in the holders of all the voting power of the our outstanding capital stock having less than a majority of voting power of a surviving entity after a merger, consolidation, share exchange or sale. We are further required to reserve sufficient shares of common stock for issuance upon conversion of the Series A Preferred Stock and exercise of the Warrants and to list the common shares into which the Series A Preferred Stock may be converted or which may result from exercise of the Warrants with the American Stock Exchange.

      We will seek stockholder approval of this transaction at our Annual Meeting of Stockholders to be held on May 25, 2005 or such other date to which such meeting may be adjourned. Under the Purchase Agreement and under American Stock Exchange Rule 713, we need stockholder approval to sell additional shares of Series A Preferred Stock. Stockholder approval is also necessary to enable us issue more shares of common stock upon conversion of the Series A Preferred Stock or to issue shares of common stock at a lower exercise price for the Warrants if the anti-dilution provisions that we have agreed to take effect.

      If stockholder approval is received, we intend to complete a second closing for the sale of an additional 755,852 shares of Series A Preferred Stock for an aggregate consideration of $6,651,498 (before cash commissions and expenses), and will issue additional five year placement agent warrants for a further 740,796 shares of common stock at an exercise price of $1.47 per share.

      This sale has been deemed to be a dilutive issuance under the terms of our Convertible Debentures and our March 2003 Warrants. As a result, as of March  4, 2005, the Convertible Debentures are currently exercisable into 2,525,523 shares of our common stock at a price of $0.99 per share, representing an increase of 869,623 shares from the conversion terms of the Debentures at December 31, 2004, and the March Warrants are exercisable to purchase shares of our common stock at a price of $0.88 per share. We have calculated an additional beneficial conversion charge totaling approximately $442,000 which will be recorded as a debt discount in the first quarter of 2005 and amortized over the remaining life of the Debentures.

Available Information

      We are subject to the informational requirements of the Securities Exchange Act, and in accordance with those requirements file reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the reports, proxy statements and other information that we file with the Commission under the informational requirements of the Securities Exchange Act at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call 1-800-SEC-0330 for information about the Commission’s Public Reference Room. The Commission also maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission’s website is www.sec.gov. Our website is www.matritech.com. We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. Information contained on our website is not a part of this report.

      Our corporate headquarters in Newton, Massachusetts which houses our research and development and manufacturing facilities comprise approximately 22,500 square feet. Our lease expires on December 31, 2010, with the right to renew for an additional five-year period at the then market rate. The annual base rent for each year of the present term is $414,360. These facilities are adequate to meet our expected growth for at least the next two years and would not require any substantial modification or expansion if we were to start manufacturing any additional products or components used in our products. Additionally, we lease approximately 5,700 square feet of sales office space in Freiburg, Germany. The German lease is for a term of five years and expires on January 31, 2006, with the right to renew for an additional three-year period. The annual base rent for each year of the term is approximately $70,000. These facilities are adequate to meet our expected growth for at least the next year.

      In December 2003, a third party complaint was filed against us by the lessor of the property we occupy in Newton, Massachusetts in a suit brought against the lessor by a former employee of ours. The action was filed in Middlesex County Superior Court, Massachusetts under the caption Kira Shapiro et al v. Francis Biotti as Trustee of One Nevada Street Realty Trust, Civil Action No. 02-05439. In the underlying action, the plaintiff sought damages for personal injuries allegedly sustained as a result of the negligence of the lessor in maintaining the interior of the leased premises. Our lessor sought reimbursement from us for any amounts for which he may be held liable. The plaintiffs’ action was dismissed by the court on January 25, 2005, and a stipulation of dismissal covering the third party claims against us was filed with the court on January 28, 2005. These dismissals conclude the case.

      In the course of conducting our business we are, from time to time, involved in litigation and other disputes. We do not currently anticipate that any pending litigation or dispute will have a materially adverse affect on the Company.

      No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

      Since January 6, 2004, our common stock has been listed on the American Stock Exchange under the symbol “MZT”. From January 27, 2003 through January  5, 2004, our common stock was traded on The NASDAQ SmallCap Market under the symbol: “NMPS.” Prior to January 27, 2003, our common stock was traded on the NASDAQ National Market. The following table sets forth the range of quarterly high and low bid price information for the common stock as reported by the American Stock Exchange, NASDAQ SmallCap Market and NASDAQ National Market.

      As of March 1, 2005, there were approximately 370 shareholders of record. We believe that shares of our common stock held in bank, money management, institution and brokerage house “nominee” names may account for an estimated 9,500 additional beneficial holders.

      We have never paid cash dividends on our common stock. We currently intend to retain any earnings to finance future growth and therefore do not anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

      During the fiscal year ended December 31, 2004, we issued the following securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

      On March 19, 2004 we completed a private placement of 4,858,887 shares of our common stock at a price of $1.35 and warrants to purchase 1,214,725 shares of our common stock at a price of $2.00 per share for an aggregate consideration of $6,559,500 (before cash commissions and expenses of approximately $713,000). In addition we issued warrants to various placement agents for a total of 434,475 shares at an exercise price of $2.00 per share. These warrants are valued at approximately $560,000. The warrants issued as part of this private placement are exercisable until March 19, 2009.

      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 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.

      On March 4, 2005, we completed a private placement of 670,272 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”), with accompanying investor warrants to purchase 4,991,434 shares of our common stock, for an aggregate consideration of $5,898,394 (before cash commissions and expenses of approximately $500,000). In addition, we issued warrants to a placement agent for a total of 656,920 shares of common stock. All of the warrants have an exercise price of $1.47 per share, become exercisable on September 5, 2005 and expire on March 4, 2010. Each share of Series A Preferred Stock is convertible into ten shares of our common stock, which equates to a price of $0.88 per share of common stock. This conversion price and the exercise price of the warrants are subject to adjustment in the event of subsequent dilutive issuances. The holders of Series A Preferred Stock are entitled to a liquidation preference and have the benefit of covenants of the Company not to liquidate, merge, sell control or substantially all assets, issue debt or senior equity securities, or amend the charter in any way adverse to the holders. We have committed to file registration statements covering the shares of our common stock into which the Series A Preferred Stock is convertible and the shares for which the Warrants may be exercised. If we fail to timely register the shares we have committed to register, we may be subject to penalties, including payment of 1.5% of the consideration paid for the Series A Preferred Stock for each thirty day period of delay in registration. We are also obligated not to issue other securities that would be senior to the Series A Preferred Stock, not to incur indebtedness in excess of $2,000,000 except in limited forms, and not to enter into or consummate a transaction which would result in the holders of all the voting power of the our outstanding capital stock having less than a majority of voting power of a surviving entity after a merger, consolidation, share exchange or sale. We are further required to reserve sufficient shares of common stock for issuance upon conversion of the Series A Preferred Stock and exercise of the Warrants and to list the common shares into which the Series A Preferred Stock may be converted or which may result from exercise of the Warrants with the American Stock Exchange.

      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 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.

      We did not repurchase any shares of our common stock during the fourth quarter of 2004.

      The selected financial data presented below for each year in the five-year period ended December 31, 2004 have been derived from our consolidated financial statements. This data should be read in conjunction with the financial statements, related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this Form 10-K.

      The results of operations for the years ended December 31, 2001, 2002, 2003 and 2004 include the activities of our European subsidiary, Matritech GmbH. The results of operations for the year ended December 31, 2000 include the activities of Matritech GmbH, from June 28, 2000 (the date of acquisition) to December 31, 2000.

      This Annual Report, other reports and communications to security holders, as well as oral statements made by our officers or agents may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, our future revenues, operating income and the plans and objectives of management. In particular, certain statements contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Factors That May Affect Future Results” constitute forward-looking statements. Actual events or results may differ materially from those stated in any forward-looking statement. Factors that may cause such differences are discussed below and in our other reports filed with the Securities and Exchange Commission ( “SEC”).

Overview

      Our most important source of revenue and revenue growth are our NMP22 products developed by our scientists and based upon our proprietary NMP technology. NMP22 product sales exceeded sales from other products for the first time in 2003, increased substantially in 2004 and we expect them to be our largest and most important source of revenue for the foreseeable future. We continue to distribute allergy and other diagnostic products for a variety of third parties in Europe. Revenues from these products in 2004 increased in dollars due to favorable exchange rates but decreased in Euros. We expect revenues measured in Euros to continue to decline. Prior to 2003, our revenues were derived primarily from selling products made by others and through licensing fees and other payments from strategic partnerships or alliances.

      Effective November 2003, we changed our U.S. distributor arrangement with Cytogen for our most important product, our NMP22 BladderChek Test, to permit us to sell it directly to urologists as we have done in Germany since 2001. This change resulted in increased sales, increased revenue per test, improvement in our gross profit margin and increased sales, general and administrative (“SG&A”) expenses in 2004 compared to 2003. Effective December 31, 2004 all remaining terms of our distribution contract with Cytogen expired. As a result, since any potential risk of product returns lapsed, we recognized the remaining deferred revenue from Cytogen’s purchases which resulted in approximately $60,000 of non-recurring income.

      SG&A expenses substantially increased in 2004 over 2003. This increase was caused primarily by the higher costs needed to support the direct distribution of the NMP22 BladderChek Tests by adding to our direct sales force. The increased selling expenditures will likely increase our losses in the short term (See “Results of Operations” below), but our goal is to generate sufficient additional gross profit from sales growth to cover our increased selling expenses and achieve our goal of profitability. In addition, because the financial future of Matritech is so closely related to increasing the sales of NMP22 BladderChek Tests, we are taking steps to ensure we can meet anticipated demand for these devices in the future.

      We are continuing our collaboration with Sysmex Corporation, a leading manufacturer of automated laboratory instruments based in Kobe, Japan, in the field of cervical sample testing. We are also continuing the development of our core diagnostic technology in breast cancer. We measure our progress in such programs by achievements such as entering into new strategic partnerships or alliances (See “Agreements” below), obtaining positive clinical trial results (See “Products”), and ultimately securing regulatory approvals such as our four FDA approvals for NMP22 products. If we can successfully leverage our strategic partnerships, we expect to meet our goal of limiting the increase in our own annual research and development expenditures to less than 20% per year over the next few years. Research and development expenditures were 3% higher in 2004 than comparable expenses in 2003.

      We have been unprofitable since inception and expect to incur significant additional operating losses for at least the next few years. For the period from inception to December 31, 2004, we incurred a cumulative net loss of approximately $90 million. To provide funds to support our new direct sales force and our ongoing research and development efforts, we raised additional capital in 2004 and in March 2005 as we have in past years. A failure to adequately finance the company could have a material adverse

impact on our ability to achieve our objectives. Success in raising equity to fund the cost of these product distribution and development programs is an important element of our strategy.

Results of Operations

      The NMP22 product revenue increase is due to a $2,956,000 sales increase, primarily in the U.S. and Europe, and a $237,000 favorable exchange rate impact. BladderChek Test sales accounted for approximately 83% of sales in the NMP22 product line in 2004, compared to 63% in 2003. The BladderChek Test sales growth is the result of increased selling efforts applied to the test, principally through initiating a direct-to-the-doctor selling effort in the United States in the fourth quarter of 2003, continuing our direct-to-the-doctor selling activity in Germany and obtaining additional reimbursement coverage by Medicare and other health plan insurance payors throughout the United States. We announced in April 2004 that Medicare reimbursement programs in 49 states cover the BladderChek Test for both monitoring and diagnosis of bladder cancer, giving our customers reimbursement coverage for nearly all 39 million Medicare-eligible lives in the United States. Since most people who suffer from bladder cancer are over the age of 65, the majority of those in the U.S. being treated or at risk for bladder cancer are Medicare insured. We include in the category of Lab Test Kit sales the sale by Diagnostic Products Corporation (“DPC”) of a fully automated laboratory test incorporating our NMP22 technology that DPC manufactures for use on its automated laboratory analyzers. The increase in the Lab Test Kit sales is due to continued sales growth in the US offset by a decline in distributor sales in markets other than Germany and the US.

      Revenue from sales of non-NMP22 products increased by $64,000 due to a $176,000 favorable exchange rate impact offset by a sales decrease. The sales decrease compared to last year is due to lower customer orders, which we attribute to a drop in office visits caused by a new patient fee structure in Germany.

      Alliance and collaboration revenue decreased by $149,000 as the 2004 period included alliance revenue related to special projects undertaken on behalf of Sysmex and reimbursed by them. Those projects were essentially completed during 2003.

      During 2003 and 2004, we shipped approximately $291,000 and $199,000 of the NMP22 BladderChek Test to distributors for which we did not have sufficient history to estimate returns. We recognize these shipments as revenue when the distributor reports to us that it has either shipped or disposed of the devices (indicating that any potential risk of return has lapsed). In the fourth quarter of 2004, we recorded approximately $60,000 of revenue from a former distributor, Cytogen, because our distribution contract with them expired, indicating that any potential risk of return has lapsed. The rest of the NMP22 BladderChek Test shipments are made directly to physicians and/or their clinics and hospitals. We recognize revenue for these transactions upon shipment when, among other conditions, the risk of loss has passed to the customer. We are focusing our sales efforts on direct sales and expect that sales to

distributors will be less significant to our results of operations in future years. See Critical Accounting Policies.

      Deferred collaboration fees represent upfront non-refundable payments that are recognized as we complete our performance obligations. During 2003 and 2004, we collected approximately $159,000 and $118,000 of collaboration fees which were deferred until we complete our obligations. See Critical Accounting Policies.

      Deferred revenue consists of the following:

      The decrease in cost of product sales on a percentage of revenue basis and the increase in our gross profit margin is largely the result of (i) higher price per unit in the United States we receive because we are now selling NMP22 products directly rather than through a distributor, (ii) increased sales of higher margin NMP22 products worldwide as a percentage of total sales and (iii) favorable exchange rates.

      Research and development, clinical and regulatory expenses increased slightly over 2003. The nature of our research and development, clinical and regulatory activities and the related expenses in 2004 have not changed significantly over 2003.

      Selling, general and administrative expenses increased primarily due to a $2,194,000 increase in payroll costs resulting from increased headcount, mainly to support direct sales efforts described above, and a $935,000 increase in sales-related marketing expenses. In addition, there was an unfavorable foreign currency exchange rate impact of $250,000 on non-US selling, general and administrative expenses, a $216,000 increase in recruiting costs and a $184,000 increase in costs incurred to comply with the Sarbanes-Oxley legislation. These increases were partially offset by a decrease in outside legal expense of $134,000.

      We believe that a decrease in our SG&A expenses as a percentage of our gross profit from 327% in 2003 to 225% in 2004 is a useful measure of our performance. We expect gross profits to increase more rapidly than sales as our higher margin NMP22 products, including our NMP22 Lab Test Kit and NMP22 BladderChek Test, become a larger percentage of our sales and the lower margin non-NMP22 products decrease as a percentage of sales. We also expect the growth in gross profits to exceed the growth in SG&A expenses, and that SG&A expenses as a percent of our gross profit should continue to decline.

      The operating loss increased primarily due to increased selling, general and administrative expenses discussed above.

      Interest income increased slightly over 2003 due to a higher average cash balance offset by lower interest rates.

      Interest expense increased substantially in 2004 because we completed a $5 million private placement of Convertible Debentures in March of 2003 and, subsequent to issuance, have recorded an additional $4.1 million of non-cash charges related to the Convertible Debentures which are being charged to our income statement through March 2006. As of December 31, 2004, approximately $3.2 million of the $4.6 million non-cash charges and deferred financing costs have been amortized and charged as interest expense and the remaining $1.4 million will be amortized using the effective interest rate method over the remaining quarters through March 2006.

      The Convertible Debentures allow the interest and principal to be paid in common stock at a discount to valuation, but only if (i) we are not in default under the terms of the Convertible Debentures, (ii) there is an effective registration statement covering such shares, (iii) our common stock is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our election to make payments in stock and have made payment of all other amounts then due under the Convertible Debentures, (v) the issuance of such shares would not cause the holders to own more than 9.999% of the outstanding shares of our common stock, (vi) no public announcement of a change of control or other reclassification transaction has been made and (vii) we have sufficient authorized but unissued and unreserved shares to satisfy all share issuance obligations under the March 2003 financing. The 2004 quarterly interest payments totaling $309,000 were made in stock and the monthly principal repayments of $192,000 each commencing in

March 2004 (totaling $1,920,000 at December 31, 2004) were made in stock and unless a default occurs, the remaining payments scheduled for both interest and principal are expected to be made in stock.

      Non-Cash Charges to Interest Expense consisted of:

      The following table demonstrates the accounting for the Convertible Debentures and related discounts during 2003 and 2004 and the resulting balance at December 31, 2004.

      None of the types of activities listed in the above table is expected to affect our cash balances unless we are unable to use our common stock to make principal and interest payments. Using our common stock for the above activities will result in additional dilution. See Factors That May Affect Future Results — “We have substantially increased our indebtedness and may not be able to meet our payment obligation.”

      The NMP22 product line increase was due to a $718,000 sales increase, primarily in the U.S. and Europe, and a $278,000 favorable exchange rate impact. This sales growth is the result of increased selling efforts applied to the NMP22 BladderChek Test, principally through continuing our direct-to-the-urologist

selling activity in Germany, assisting our distributor’s salesforce in the United States, and, in the fourth quarter, augmenting our direct-to-the-doctor selling effort in the United States.

      Product sales of the other products distributed by Matritech GmbH decreased by $400,000 due to decreased customer demand and an increased focus on the NMP22 product line. This decrease was offset by a $328,000 favorable exchange rate impact.

      During 2002 and 2003, we shipped approximately $344,000 and $291,000 of the NMP22 BladderChek Test to distributors for which we did not have sufficient history to estimate returns. Accordingly, these amounts were recorded as deferred revenue at December 31, 2002 and 2003, respectively, and are 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).

      The increase in alliance and collaboration revenue was primarily due to the timing of research and development activity under our collaboration agreements. Deferred collaboration fees represented upfront non-refundable payments that are recognized as we complete our performance obligations. See Critical Accounting Policies.

      Deferred revenue consisted of the following:

      The decrease in cost of product sales on a percentage basis and the increase in our Gross Profit Margin was largely the result of increased sales of NMP22 products which carry higher margins than other products.

      Research and development, clinical and regulatory expenses decreased primarily due to a $640,000 decrease in site payments as we finished collecting the clinical specimens which can be used to rapidly evaluate new tests under development for breast and prostate cancer. Other decreases included a $152,000 decrease in consultant costs and a $115,000 decrease in laboratory supplies.

      Selling, general and administrative expenses increased primarily due to a $488,000 increase in payroll costs resulting from increased headcount and an unfavorable foreign currency exchange rate impact of $307,000.

      The operating loss decreased primarily due to increased revenue and decreased research and development expenses discussed above.

      Interest income increased slightly over 2003 due to a higher average cash balance offset by lower interest rates.

      Interest expense increased in 2003 principally because we sold a $5 million Convertible Debenture and warrants to purchase 784,314 shares of common stock in March of 2003. The debenture allows the interest and principal to be paid in common stock at a discount to valuation, but only upon the conditions set forth above. The first of the quarterly interest payments was made in cash because our shares could not be used at that time to make the payment. The remaining two quarterly payments, totaling $193,000, were made in stock.

      Amortization of Non-Cash Charges to Interest Expense consisted of

      The following table demonstrates the accounting for the $5 million Convertible Debenture and related discounts during 2003 and the resulting balance at December 31, 2003.

      None of these activities listed in the above table is expected to affect our cash balances unless we are unable to use our common stock to make principal and interest payments. 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 obligation.”

Liquidity and Capital Resources

      We have incurred losses from operations since our inception. We have financed our operations primarily through private and public offerings of our equity securities, through funded development and marketing agreements and through product sales. Of our $90,122,000 accumulated deficit, essentially all was financed with various equity securities. At December 31, 2004, we had cash and cash equivalents of $4,906,000 and working capital of $3,180,000. Based on our expected rate of cash utilization, our cash at December 31, 2004 plus the financing we completed in March 2005 is expected to last through at least December 31, 2005 provided we pay interest and principal on our Convertible Debentures in stock. Our financing plans include continuing to seek to raise additional capital and we will consider various financing alternatives, including equity or debt financings and corporate partnering arrangements. 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. In addition, our existing financing arrangements contain anti-dilutive provisions which may require us to issue additional securities if certain conditions are met. If we do not receive additional financing or do not receive an adequate amount of additional financing, we will be required to curtail our expenses by reducing research and/or marketing or by taking other steps that could hurt our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms or the cessation of operations. Any future equity financings will dilute the ownership interest of our existing investors and may have an adverse impact on the price of our common stock. Any of the foregoing steps will have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that capital will be available on terms acceptable to us, if at all.

      Equity and convertible debt were our principal sources of cash in both 2003 and 2004, and equity is expected to be our principal source of cash in 2005. After 2005, if we need to raise additional capital in order to fund our operations, we expect it will be through third party financing of debt or equity. While we have been successful in raising adequate equity capital to fund Company operations, numerous factors could adversely affect our ability to do so in the future and could affect the Company’s operations adversely. See Recent Developments and 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.”

      Our operating activities used cash in 2003 and 2004 primarily to fund our operating losses excluding non-cash charges. The non-cash charges in 2003 and 2004 were due to amortization of debt discount and deferred charges related to our convertible debt. In 2004, Changes in Assets and Liabilities remained relatively flat mainly because the increases in accounts receivable and inventories were offset by increases in accounts payable and accrued expenses. However, we expect Changes in Assets and Liabilities to be a use of cash in the foreseeable future because we expect accounts receivable and inventory to grow as product sales increase at a faster rate than other working capital accounts.

      Direct-to-the-doctor sales represent approximately 60% of total sales worldwide. While we do not have enough data to be certain, we expect that the Days Sales Outstanding (“DSO”) is likely to be higher in the future than the 43 days measured at December 31, 2004. The comparable measurement at December 31, 2003 was 50 days.

      We will, as we deem necessary or prudent, continue to seek to raise additional capital and will consider various financing alternatives, including equity or debt financings convertible into equity and corporate partnering arrangements. We do not expect to raise significant debt capital over the next year because our Convertible Debenture has a prohibition against any debt having a ranking senior to the Convertible Debenture. Since we are obliged to retire the Convertible Debenture over the next two years and are permitted to do so with common stock, this constraint on our financing choices should be removed by the end of the first quarter of 2006.

      In July 2002, we entered into a term note for $410,000 with Citizens Bank of Massachusetts to finance an equipment purchase. The term note was payable over four years, bore interest at 1% plus the bank’s prime rate and contained a covenant which required us to maintain a cash balance of $250,000 at all times. This note was collateralized by the capital equipment. The note was repaid in full during 2004.

      If we raise funds on unfavorable terms, we may provide rights and preferences to new investors which are not available to current shareholders or debt holders. For example, the Convertible Debenture financing granted the holders anti-dilution rights which were not granted to any other equity or warrant holder. When we completed our financing in March, 2004, the conversion price of the debentures was adjusted downward from $1.87 to $1.51 which resulted in 612,944 shares of additional dilution or about 1% of the fully diluted stock on an “if converted” basis in the table below. Future sales of common stock below $1.51 could result in additional dilution for which the Company would receive no additional consideration.

      Any future equity financings will dilute the ownership interest of our existing investors and may have an adverse impact on the price of our common stock. As of December 31, 2004, our fully diluted if converted common shares were:

      The above table includes shares we may use for payment of interest on our Convertible Debenture and the extra shares which may be required if we redeem the debenture rather than the holder converting it. We plan to use our common stock to pay such interest and to redeem the debenture if it is not converted, and such use of our common stock will result in further dilution, particularly if our share price declines significantly. The above chart also does not include any additional shares we may be required to issue if we engage in a financing transaction which is deemed to be an anti-dilutive issuance under the terms of our Convertible Debenture.

      Since our authorized common stock is 90 million shares, if our shareholders do not authorize additional stock when requested, we may be unable to issue adequate amounts of additional equity to finance the Company appropriately.

      In December 2001, we completed a private placement of 113,969 units, at a purchase price of $9.44 per unit. Each unit consists of four shares of common stock and a warrant to purchase one share of common stock at a price of $2.75 per share. These warrants were exercisable over two years and were callable by us if certain conditions were satisfied. We received net proceeds of $1,061,000 after deducting transaction expenses. In 2002, warrants to purchase 4,000 shares of common stock were exercised.

      In March 2002, we completed a private placement of 538,437 units, at a purchase price of $8.00 per unit. Each unit consists of four shares of common stock and a warrant to purchase one share of common stock at a price of $3.00 per share. These warrants were exercisable until November 30, 2002 and were callable by us if certain conditions were satisfied. We received net proceeds of approximately $4,140,000 after deducting transaction expenses. None of these warrants was exercised.

      In November 2002, we entered into an exclusive worldwide license and exclusive supply agreement with Sysmex Corporation (“Sysmex”). Under the agreement, Sysmex purchased 783,208 shares of our common stock at a price of $2.55 per share. A premium of approximately $500,000 has been ascribed to the value of the license and is being recognized as revenue over the fourteen-year term of the related patents.

      In December 2002, we completed a private placement of 222,077 units, at a purchase price of $5.31 per unit. Each unit consists of three shares of common stock and a warrant to purchase one share of common stock at a price of $2.30 per share. These warrants are exercisable until December 9, 2005 and are callable by us if certain conditions are satisfied. We received net proceeds of approximately $1,155,000. None of these warrants has been exercised.

      In March 2003, we completed a private placement of $5 million of 7.5% Convertible Debentures and Warrants (the “March Warrants”) to purchase 784,314 shares of Common Stock at an initial exercise price of $2.278 (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 require quarterly payments for interest on December 1, March  1, June 1 and September 1 of each year, as well as monthly redemption payments of principal beginning March 1, 2004. Interest and redemption payments may be made in shares of common stock at a discount to valuation, but only if (i) we are not in default

under the terms of the debentures, (ii) there is an effective registration statement covering such shares, (iii) our common stock is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our election to make payments in stock and have made payment of all other amounts then due under the debentures, (v) the issuance of such shares would not cause the holders to own more than 9.999% of the outstanding shares of our common stock, (vi) no public announcement of a change of control or other reclassification transaction has been made and (vii) we have sufficient authorized but unissued and unreserved shares to satisfy all share issuance obligations under the March 2003 financing. The 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 March Private Placement prohibit us from entering into obligations that are senior to the Convertible Debentures. We received net proceeds of approximately $4.5 million. 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.

      On October 15, 2003 and on November 6, 2003, we completed private placements of 3,593,893 and 299,402 shares respectively of our common stock at a price of $1.67 and warrants to purchase 1,257,861 and 104,790 shares respectively of our common stock at a price of $2.45 per share for an aggregate consideration of $6,501,802 (before cash commissions and expenses of approximately $853,000). In addition, we issued warrants to various placement agents for a total of 546,553 shares at exercise prices ranging from $1.67 to $2.70. The warrants issued are exercisable until October 15, 2008 and November  6, 2008 respectively. Securities included in the November 6, 2003 private placement were purchased by a distributor of our products in the Far East as part of a strategic investment in Matritech. These sales have been deemed to be a dilutive issuance under the terms of the Convertible Debentures and our March Warrants. As a result, the Convertible Debentures became convertible into 2,673,797 shares of our common stock at a price of $1.87 per share, representing an increase of 713,012 shares from the conversion terms of the debenture at March 31, 2003, and the March Warrants are exercisable to purchase shares of our common stock at a price of $1.67 per share. The value of these additional shares will be treated as additional interest expense over the term of the Debentures.

      On March 19, 2004 we completed a private placement of 4,858,887 shares of our common stock at a price of $1.35 and warrants to purchase 1,214,725 shares of our common stock at a price of $2.00 per share for an aggregate consideration of $6,559,500 (before cash commissions and expenses of approximately $713,000). In addition we issued warrants to various placement agents for a total of 434,475 shares at an exercise price of $2.00 per share. The warrants issued as part of this private placement are exercisable until March 19, 2009. This sale has also been deemed to be a dilutive issuance under the terms of the Convertible Debentures and our March 2003 Warrants. As a result, the Convertible Debentures became convertible into 3,183,902 shares of our common stock at a price of $1.51 per share, representing an increase of 612,944 shares from the conversion terms of the debenture at November 6, 2003, and the March 2003 Warrants are exercisable to purchase shares of our common stock at a price of $1.35 per share. An additional beneficial conversion charge totaling approximately $1,340,000 was recorded as a debt discount in the first quarter of 2004 and is being amortized over the remaining life of the Convertible Debentures.

      On March 4, 2005, we entered into a purchase agreement (the “Purchase Agreement”) which provides for the sale through a Private Placement of an aggregate of 1,426,124 shares of our Series A Convertible Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”) and the issuance to the investors of warrants to purchase 4,991,434 shares of our common stock at a price of $1.47 per

share. Each share of our Series A Preferred Stock is convertible into ten shares of our common stock. We cannot issue all shares of the Series A Preferred Stock that we have agreed to sell without obtaining stockholder approval because the shares into which the Series A Preferred Stock are convertible would exceed 20% of our outstanding common stock.

      The table below provides highlights of the Private Placement including of the First Closing which has occurred and the Second Closing which is subject to stockholder approval.

      On March 4, 2005, we completed a private placement of 670,272 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”), with accompanying investor warrants to purchase 4,991,434 shares of our common stock, for an aggregate consideration of $5,898,394 (before cash commissions and expenses of approximately $500,000). In addition, we issued warrants to a placement agent for a total of 656,920 shares of common stock. All of the warrants have an exercise price of $1.47 per share, become exercisable on September 5, 2005 and expire on March 4, 2010. Each share of Series A Preferred Stock is convertible into ten shares of our common stock, which equates to a price of $0.88 per share of common stock. This conversion price and the exercise price of the warrants are subject to adjustment in the event of subsequent dilutive issuances. The holders of Series A Preferred Stock are entitled to a liquidation preference and have the benefit of covenants of the Company not to liquidate, merge, sell control or substantially all assets, issue debt or senior equity securities, or amend the charter in any way adverse to the holders. We have committed to file registration statements covering the shares of our common stock into which the Series A Preferred Stock is convertible and the shares for which the Warrants may be exercised. If we fail to timely register the shares we have committed to register, we may be subject to penalties, including payment of 1.5% of the consideration paid for the Series A Preferred Stock for each thirty day period of delay in registration. We are also obligated not to issue other securities that would be senior to the Series A Preferred Stock, not to incur indebtedness in excess of $2,000,000 except in limited forms, and not to enter into or consummate a transaction which would result in the holders of all the voting power of the our outstanding capital stock having less than a majority of voting power of a surviving entity after a merger, consolidation, share exchange or sale. We are further required to reserve sufficient shares of common stock for issuance upon conversion of the Series A Preferred Stock and exercise of the Warrants and to list the common shares into which the Series A Preferred Stock may be converted or which may result from exercise of the Warrants with the American Stock Exchange.

      We will seek stockholder approval of this transaction at our Annual Meeting of Stockholders to be held on May 25, 2005 or such other date to which such meeting may be adjourned. Under the Purchase Agreement and under American Stock Exchange Rule 713, we need stockholder approval to sell additional shares of Series A Preferred Stock. Stockholder approval is also necessary to enable us issue more shares of common stock upon conversion of the Series A Preferred Stock or to issue shares of common stock at a lower exercise price for the Warrants if the anti-dilution provisions that we have agreed to take effect.

      If stockholder approval is received, we intend to complete a second closing for the sale of an additional 755,852 shares of Series A Preferred Stock for an aggregate consideration of $6,651,498 (before cash commissions and expenses), and will issue additional five year placement agent warrants for a further 740,796 shares of common stock at an exercise price of $1.47 per share.

      This sale has been deemed to be a dilutive issuance under the terms of our Convertible Debentures and our March 2003 Warrants. As a result, as of March  4, 2005, the Convertible Debentures are

currently exercisable into 2,525,523 shares of our common stock at a price of $0.99 per share, representing an increase of 869,623 shares from the conversion terms of the Debentures at December 31, 2004, and the March Warrants are exercisable to purchase shares of our common stock at a price of $0.88 per share. We have calculated an additional beneficial conversion charge totaling approximately $442,000 which will be recorded as a debt discount in the first quarter of 2005 and amortized over the remaining life of the Debentures.

Contractual Obligations

      In May 2004, we signed an amendment to the original 1995 lease agreement for our space in Massachusetts which extended the lease term for an additional five years, ending December 31, 2010 and granted us an option to extend for an additional five year term commencing January 1, 2011. In June 2004, we signed an amendment to the original 1995 lease agreement to slightly increase the amount of space we lease and the amount of rent expense we pay.

      Our future commitments are described in further detail in Note 4 of the Notes to Consolidated Financial Statements. Our future commitments are as follows:

      In 2005, we entered into a 1-year maintenance contract with Apex Communications for a new telephone system installation, training and support services. There are no purchase commitments for subsequent years.

      We have no material capital expenditure commitments.

      Our intention is to pay the interest and principal on our Convertible Debentures in stock.

Off Balance Sheet Arrangements

      Currently, we have no off balance sheet arrangements.

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.

      We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and the Emerging Issues Task Force

Issue No. 00-21 (EITF 00-21) “Revenue Arrangements with Multiple Deliverables.” Revenue is recognized when the following criteria have been met:

      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. With regard to our sales to distributors, 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 104, 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 is recognized as revenue when the distributor reports to us that it has either utilized the units or the product shelf life has expired (indicating that the possibility of return is remote).

      When determining whether collectibility is reasonably assured, we evaluate the facts and circumstances associated with the individual transaction. Factors we consider differ depending on the nature of the customer (end user versus distributor), size of the transaction, whether we have a past history with the customer and the geographic location of the customer. For sales transactions to customers who are not end users, we evaluate our prior collection history with the customer and obtain credit reports from external sources, particularly for customers expected to have credit balances in excess of $10,000. We closely monitor our accounts receivable agings for these customers and establish reserves for significantly aged accounts if believed uncollectible, if any. Our collection history has been favorable and we have not been required to establish material bad debt provisions for our significant customers.

      For sales transactions to our end user customers, we generally do not perform credit checks due to the high volume and small size of the transactions. Alternatively, we establish credit limits and closely monitor the aging of our receivable balances. If a customer account ages beyond 90 days, the customer will be put on credit hold and no further revenue will be recognized related to that customer until the outstanding balances are paid in full. At the time of product shipment, we establish reserves for customer allowances based on our collection history and such reserves are recorded as a reduction of revenue. We regularly adjust the reserves based on our actual experience. To date, our history has been in line with our expectations.

      Alliance and collaboration 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 to determine if each element represents a separate unit of accounting as defined in Emerging Task Issues Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 requires the following criteria to be met for an element to represent a separate unit of accounting:

      In the event that an element of such multiple element arrangement does not represent a separate earnings process and a separate unit of accounting, we recognize revenue from this element over the term of the related contract or as the undelivered items are delivered.

      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 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 is 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. We recognize revenue from royalty payments 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.

      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. See Revenue Recognition above for further detail. 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. With the U.S. transition to a direct sales force, we will be exposed to a greater volume of transactions in the future which we expect to improve our concentration of credit risk but this benefit may be offset by an extended collection cycle.

      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 March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments, which provides new guidance for assessing

impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. The FASB has delayed the application of the accounting provisions until 2005 but requires new disclosures for annual periods ending after June 15, 2004. We do not expect the adoption of this new accounting pronouncement to have a material impact on our financial statements upon adoption.

      In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, Inventory Pricing. This standard clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and waste material (spoilage). Such abnormal expenses must be recognized in the period in which they are incurred. In addition, SFAS No. 151 requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June  15, 2005. We do not expect the adoption of this new accounting pronouncement to have a material impact on our financial statements upon adoption.

      In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (“FAS 123R”) which revises SFAS NO. 123 and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under FAS 123R, the most significant change in practice would be treating the fair value of stock based payment awards that are within its scope as compensation expense in the income statement beginning on the date that a company grants the awards to employees. This pronouncement is effective for the first fiscal period beginning after June 15, 2005. We are currently assessing the impact that the adoption of this standard will have on our financial position and results of operations.

Research and Development

      We are engaged in the research, production and marketing of cancer diagnostic technologies. 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 $45.4 million for the period since our inception in October of 1987 through December 31, 2004. Research and development expenses include the salaries and related overhead of our research personnel, laboratory supplies, payments to third parties to help us execute clinical trials, depreciation of research related equipment, legal expenses related to filing and prosecuting patents, other direct expenses and an allocation of our occupancy and related expenses based on the square footage occupied by our research and development staff and their laboratories.

      Our research and development scientists typically are assigned to one project at a time but may also provide support for other projects. In addition, our various programs share a substantial amount of our common fixed costs such as facility depreciation, utilities and maintenance. All of our research and development programs are similar in nature as they are based on our common protein discovery technology and a significant finding in any one cancer type may provide a similar benefit across all programs. Accordingly, we do not track our research and development costs by individual research and development programs.

      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. Previously, our research focused on discovering the characteristics of 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 three 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. In addition, in 2003 we commenced programs to

adapt ligand binding based technology to measure these proteins, particularly NMP66 proteins. 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.

      To develop products which will provide physicians medically useful information, we can utilize our technology in four different ways: Lab Test Kits, Point Of Care Tests, Cellular Analysis Systems and Proprietary Laboratory Procedures as described earlier. See Cancer Diagnostic Product Development. 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.

      For technological and marketing reasons, we intended to launch our newer technologies — NMP66 and NMP48 — as Proprietary Laboratory Procedures using high throughput mass spectrometry technology. Since Proprietary Laboratory Procedures 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 our NMP35 technology 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 Laboratory Procedures as a profitable service business and any future success will be dependent upon satisfaction and approval of our clinical lab partners.

      We are investigating opportunities to utilize NMP66 technology in a Proprietary Laboratory Procedure. We have entered into an agreement with MKI whereby they or their designees will serve as our Japanese lab partner for further validation of our NMP66 technology and pursuant to which we and they may negotiate the terms for distribution rights for the Japanese market for products and services incorporating the NMP66 technology. Our scientists believe they understand the general biological structure of the NMP66 protein complex identified by research mass spectrometry. We are working on an immunoassay and a PCR test for the development of a Lab Test Kit and/or a Point Of Care Test. We have elected to concentrate our development resources on NMP66 technology to increase the likelihood of the timely completion of this project for MKI as well as for a potential U.S. lab partner. To accomplish this, we have diverted product development resources from the NMP48 prostate cancer project. We not expect to implement a Proprietary Laboratory Procedure for NMP48 proteins during 2005.

      We intend to develop Lab Test Kits and Point Of Care Tests based upon our new technologies. While we have successfully configured NMP22 technology in these formats, there are always uncertainties involved in successfully creating products which perform reproducibly in every laboratory. Because our newer technologies detect different markers 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. Given our recent progress with our NMP66 technology, we now have a goal to initiate clinical for the NMP66 protein complex in 2005. Depending on our ongoing results of our progress 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. We have given our NMP66 program priority over the NMP48 program, and we do not intend to begin development of a product for our NMP35 technology until at least development for our NMP66 or NMP48 technology has been successfully completed.

      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 require different FDA approvals. While our NMP22 technology 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 most products or services, we intend to develop a claim for aiding in the diagnosis of the disease for patients who have no prior history of the disease and a claim 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.

      In May 2004, Sysmex Corporation announced the commencement of preclinical trials of a non-slide-based cellular analysis system incorporating our NMP179 technology. If Sysmex’s preclinical and anticipated clinical trials are successful, it is Sysmex’s goal to make this technology commercially available in the U.S. in 2006. It is our goal to have either Mitsubishi Kagaku Iatron, Inc. or another clinical partner undertake clinical trials in 2005 of services or products incorporating our NMP66 technology.

      Spending on Research and Development Projects. Total research and development spending in 2004 was approximately $2.7 million. We expect research and development expenditures to be less than $3.2 million in 2005 and to be devoted to our various programs as discussed below.

      NMP22 — Bladder. Except for sponsoring additional clinical trials to demonstrate different ways to use the information generated by the products, we do not currently plan to incur any significant additional research spending on any of these products. We do expect to spend, from time to time, funds for product support and manufacturing improvement which are not expected to exceed $750,000 over 2005 and 2006.

      NMP179 — Cervical. Discovery research on this product was completed prior to 2000 and our expenditures in 2002, 2003 and 2004 have been principally for technical support of the licensing activity. Substantially all future costs to support additional research and development of this product are expected to be paid for by Sysmex. If we incur any additional costs in connection with this program, we expect such costs to be aimed at licensing this technology to a company with a slide-based cervical cancer detection system.

      Breast Cancer. Over the next two years, research and development funds will be spent principally to develop products and services for breast cancer, to improve our mass spectrometry technology and to further develop our ligand binding based technology for Lab Test Kits and/or Point Of Care Tests.

      Prostate Cancer. Over the next two years, we intend to devote more research and development resources to our prostate cancer program if the NMP66 program does not require all our research and development resources. Because of uncertainties of when we will more actively pursue our prostate cancer program, we cannot reasonably estimate the likelihood or timeframe for reaching commercialization goals set forth in the table above.

      Other existing programs. We will make decisions on how and when to proceed with our other existing programs based on our progress with the breast cancer and prostate cancer programs and the availability of appropriate resources for our remaining programs. We may consider options including, but not limited to, terminating certain activities, licensing the technology to third parties or selling the technology to third parties. The nature, timing and costs of the efforts to reach our commercialization goals, and the amount or timing of the net cash inflows of our individual programs, are not possible to predict.

Agreements

      In 2001, we entered into an eight-year, non-exclusive product supply and marketing agreement with Diagnostic Products Corporation (“DPC”) enabling DPC to develop and market an automated version of our NMP22 Lab Test Kit. Under this agreement we receive royalty payments which are recognized when earned. In all such agreements, the determination of when royalties are earned is based 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.

      In March 2002, we entered into a supply and distribution agreement with Medical and Biological Laboratories Group (“MBL”) granting MBL the exclusive right in Japan to sell the NMP22 BladderChek Test. MBL is responsible for conducting clinical trials and securing the necessary regulatory approvals in Japan. Under the terms of this agreement MBL paid us a non-refundable license fee which is being recognized as revenue over the eight-year term of the agreement.

      In October 2002, we entered into a distribution agreement with Cytogen Corporation (“Cytogen”), granting Cytogen the exclusive right to market and sell the NMP22 BladderChek Test in the United States to the urology and oncology marketplace. Under the terms of the agreement, Cytogen paid a non-refundable license fee which is being recognized as revenue over term of the agreement. This agreement was amended in November 2003. Under the terms of the Restated Agreement, Cytogen will have a non-exclusive right to sell NMP22 BladderChek Tests to urologists until December 31, 2003 and an exclusive right to continue to sell NMP22 BladderChek Tests to oncologists for the term of the Restated Agreement. The term of the Restated Agreement expired on December 31, 2004.

      In November 2002, we entered into an exclusive license and supply agreement with Sysmex Corporation (“Sysmex”), which granted it the use of NMP179 technology for automated non-slide-based laboratory instruments. Under the terms of the agreement, Sysmex purchased shares of our common stock

at a premium approximating $500,000 which is being recognized as revenue over the fourteen-year term of the related patents. This agreement also contains future royalty, milestone and research and development payments. We will recognize any future milestone payments over the remaining life of the related patents and will recognize future royalty payments when they are determinable.

      In March 2003, we entered into a collaboration and commercialization agreement with Mitsubishi Kagaku Medical, Inc., a division of Mitsubishi (“MKI”) whereby they or their designees will serve as our Japanese clinical laboratory partner for further validation of our NMP66 technology and pursuant to which we and they may negotiate the terms for distribution rights for the Japanese market for products and services incorporating the NMP66 technology. Under the terms of this agreement, MKI paid Matritech an upfront fee and several milestone payments may become due in the future. These payments will be recognized over the term of the agreement.

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 incurred operating losses since we began operations in 1987. These losses have resulted principally from costs incurred in research and development and from selling, general and administrative costs associated with our market development and selling efforts. Our accumulated deficit from inception until the end of the last fiscal year is $90,122,000. Our product sales and net losses for each of the past three fiscal years have been:

      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 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, 2004, we had a net loss of $11.1 million, and as of December 31, 2004, we only had $4.9 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. In March, 2003 we completed a sale of Convertible Debentures and accompanying warrants. In October and November 2003 we completed a sale of common stock and accompanying warrants. In March 2004 we completed a sale of common stock and accompanying warrants. In March 2005 we completed a sale of convertible preferred stock and accompanying warrants for common stock and, as a result, on a pro forma basis we have $10.3 million cash and cash equivalents at December 31, 2004. We will, as we deem necessary or prudent, continue to seek to raise additional capital through various financing alternatives, including equity or debt financings and corporate partnering arrangements. However, we may not be able to raise needed capital on terms that are acceptable to us, or at all.

      The terms of our 2003 sales of Convertible Debentures and common stock greatly restrict our ability to raise capital. Under the terms of our Convertible Debenture financing, we are prohibited from entering into obligations that are senior to the debentures. These provisions may severely limit our ability to attract new investors and raise additional financing on acceptable terms. In addition, in order to attract such new

investors and obtain additional capital, we may be forced to provide rights and preferences to new investors which are not available to current shareholders.

      If we do not receive an adequate amount of additional financing in the future, we may be unable to meet any cash payment obligations required by the Convertible Debentures, or we may be required to curtail our expenses or to take other steps that could hurt our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms or the cessation of operations.

      As a result of the 2003 sale of Convertible Debentures, we substantially increased our indebtedness from approximately $475,000 at the end of 2002 to approximately $3.1 million at the end of 2004. The fair value of the Convertible Debentures at December 31, 2004 as estimated by management is approximately $2.8 million. The $1.8 million carrying value in the Company’s financial statements at December 31, 2004 reflects discounts related to beneficial conversion charges calculated in accordance with EITF Issue No. 00-27.

      The Convertible Debentures permit us to make interest and principal payments in shares of common stock instead of cash, but only if (i) we are not in default under the terms of the Convertible Debentures, (ii) there is an effective registration statement covering such shares, (iii) our common stock is listed on one of American Stock Exchange, New York Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market, (iv) we have provided proper notice of our election to make payments in stock and have made payment of all other amounts then due under the Convertible Debentures, (v) the issuance of such shares would not cause the holders to own more than 9.999% of the outstanding shares of our common stock, (vi) no public announcement of a change of control or other reclassification transaction has been made and (vii) we have sufficient authorized but unissued and unreserved shares to satisfy all share issuance obligations under the March 2003 financing. If we are not able to make interest and principal payments on the debentures in shares of stock, such payments must be made in cash and, unless we are able to raise additional capital from another source, we may not have sufficient funds to make such payments. If we make such payments in stock, however, it will result in significant dilution.

      In addition, the Convertible Debentures require us to pay interest and liquidated damages and may become immediately due and payable at a premium of 120% of the outstanding principal amount plus accrued interest and damages in the event we default under their terms. Potential defaults would include, among other things:

      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:

      Matritech GmbH, our European subsidiary, accounted for approximately 58% of our product sales for the fiscal year ended December 31, 2004. Accounts of our European subsidiary are maintained in Euros and are translated into U.S. Dollars. To the extent that foreign currency exchange rates fluctuate in the future, we may be exposed to significant financial variability, both favorable and unfavorable. During 2003 and 2004, exchange rate fluctuations were favorable as indicated in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” However, rate changes in the future may lead to unfavorable results.

      In addition, although we have integrated the operations of this subsidiary since its acquisition in June 2000, we still must coordinate geographically separate organizations, manage personnel with disparate business backgrounds and conduct business in a different regulatory and corporate culture. It remains to be seen whether the use of this subsidiary to spearhead the marketing effort of our products in Europe outside of Germany will be successful in the long-term.

      Since November 2003 we have had the responsibility for sales of NMP22 BladderChek Tests to urologists in the US, including invoicing and collecting the revenue from sales. We have increased our sales and marketing expenditures and added order processing, shipping and collection resources to perform functions which have in the past been performed by our U.S. distributor. We have limited experience in performing these functions in the United States to support sales directly to physicians, and the time and cost to develop these resources combined with the risk that they may not function effectively increases the risk that the rate of sales growth for our NMP22 BladderChek Test will slow.

      Sales of products directly to physicians may result in larger accounts receivable and longer collection cycles than sales to distributors and may increase the risk that accounts receivable will not be collected. Carrying larger accounts receivable balances and assuming greater collection risk may also increase our financing requirements. We do not expect our Days Sales Outstanding to remain at 43 days, the measurement calculated from our December 31, 2004 financial results.

      We rely primarily on distributors to market NMP22 BladderChek Tests in territories other than the United States and Germany, but our history with our distributors is limited and we do not know whether they will achieve substantial sales levels of our products.

      Although we are not aware of any other company using nuclear matrix protein technology in commercial diagnostic or therapeutic products, competition in the development and marketing of cancer diagnostics and therapeutics, using a variety of technologies, is intense. Many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engage in the research and development of cancer diagnostic products. Many of these organizations have greater financial, manufacturing, marketing and human resources than we do.

      We expect that our Lab Test Kits and our Point Of Care Tests will compete with existing FDA-approved tests, such as tests known as BTA and UroVysion bladder cancer tests, the latter of which has been approved for both monitoring and diagnosing bladder cancer and the former of which has been approved for monitoring bladder cancer and may become approved for diagnosis of bladder cancer; a test

known as CEA, which is used primarily for monitoring colorectal and breast cancers; a test known as CA19.9, which is used primarily for monitoring colorectal and gastric cancers; a test known as PSA, which is used primarily for monitoring and screening prostate cancer; tests known as TRUQUANT® BR RIA, CA15.3 and CA27.29, which are used for monitoring breast cancer; and cervical specimen collection and analysis systems known as ThinPrep® (Cytyc) and SurePath (TriPath Imaging). We are also aware of a number of companies that have announced that they are engaged in developing cancer diagnostic products based upon oncogene technology. Our diagnostic products will also compete with more invasive or expensive procedures such as minimally invasive surgery, bone scans, magnetic resonance imaging and other in vivo imaging techniques. In addition, other companies may introduce competing diagnostic products based on alternative technologies that may adversely affect our competitive position. As a result, our products may become less competitive, obsolete or non-competitive.

      Our ability to successfully convert market opportunities into significant sales for our products depends in part on the extent to which adequate reimbursement for the services based on our products will be available from government healthcare reimbursement authorities (such as Medicare in the United States), private health insurers and other third-party payors. In most countries, no reimbursement of any medical device (or a service based on a medical device) is typically provided by any insurance carrier, whether public or private, if the device or service has not received approval for clinical use from that nation’s healthcare product regulatory authorities (such as the FDA in the United States). Even if the use of a device or the performance of a service has been previously approved for reimbursement, some insurance carriers and healthcare plans may decide not to continue to reimburse it at all, not to continue to reimburse it for certain medical applications and/or to decrease the reimbursement amount. If we develop a Proprietary Laboratory Procedure for the US market that does not require FDA approval, we do not expect third-party reimbursement until we obtain FDA approval for a product which generates similar clinical data.

      Even if we obtain FDA approval for a product in the US, there is no assurance that we will receive similar approvals from national healthcare product regulatory authorities in other countries. If we obtain such approvals in other countries, reimbursement levels could be so low that it would put pressure on us to reduce our prices. Such low reimbursement would make our products much less profitable and, in the extreme, could make it uneconomical for us and/or our distributor to sell the product at all in those countries. If such a low reimbursement were to occur in the United States or in Germany, it could substantially reduce our revenues and increase our losses. On the other hand, reimbursement approval, if provided in a lower but adequate amount, could potentially broaden the number of patients who could afford the product or service. We believe this has occurred in the United States as reimbursement has been obtained in most states. We expect that reimbursement approval will be obtained in some other countries where our products are sold, but do not believe reimbursement rates in all countries will be as favorable as in the US. Reimbursement approval for the BladderChek Test has not yet occurred in the principal countries of Asia and Europe, including Germany, where the BladderChek Tests are being sold or are in the regulatory process to secure approval from national product regulatory authorities.

      Healthcare reform is an area of continuing attention and a priority of many governmental officials. In the United States, Medicare has frozen reimbursement for clinical laboratory tests at 2003 levels and future changes could impose limitations on the prices we will be able to charge for our products or the amount of reimbursement available for our products from governmental agencies or third-party payors. While we cannot predict whether any legislative or regulatory proposals will be adopted or the effect that such proposals could have on our business, the announcement or adoption of such proposals could reduce the profitability of our business and as a result could have a negative effect on our stock price because of investor reactions.

      The preferences of physicians, hospitals, clinics and other customers may also limit our per-product revenue because their profit expectations when purchasing our product may influence their use and ordering behavior. Physicians have developed an expectation for generating profits when they purchase devices for use at their practice. To the extent that we are unable to price our products to achieve physician profit expectations, sales of our devices may suffer.

      The FDA and many foreign governments stringently regulate the medical devices that we manufacture and that we and our distributors market to physicians or other customers. The FDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices in the United States and agencies in the European Union, Japan and other countries where we sell our products each have their own regulations. If our products do not receive appropriate approvals from medical device regulatory authorities in any country, we can not sell our products in that country, either on our own or through any distributor.

      Any products that we or our suppliers manufacture or distribute in accordance with FDA approvals are subject to stringent regulation by the FDA, including:

      If we fail to comply with any FDA requirement, we may face a number of costly and/or time consuming enforcement actions, including:

      The FDA and foreign governmental agencies have the authority to request the repair, replacement or refund of the cost of any device that we manufacture or distribute if it is faulty. Failure to comply with medical device and quality regulations in countries outside the United States where we sell our products can result in fines, penalties, seizure or return of products and the inability to sell the product in those countries either on our own or through our distributors.

      Labeling and promotional activities are subject to scrutiny in the United States by the FDA and, in certain instances, by the Federal Trade Commission, and by regulatory bodies in most countries outside the United States where we sell products. For example, our Lab Test Kit has received FDA approval and may be promoted by us only as an aid in the management of patients with bladder cancer or as a

diagnostic aid for use for previously undiagnosed individuals who have symptoms of or are at risk for bladder cancer. The FDA actively enforces regulations prohibiting the promotion of devices for unapproved uses and the promotion of devices for which premarket approval has not been obtained. Consequently, for example, we cannot promote the Lab Test Kit or the BladderChek Test for any unapproved use.

      In addition to federal regulations regarding manufacture and promotion of medical devices, we are also subject to a number of state laws and regulations which may hinder our ability to market our products in those states or localities. Manufacturers in general are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with these laws and regulations in the future, which could increase future losses or reduce future profitability.

      We believe the future success of our business will also depend, in part, upon Sysmex Corporation developing a satisfactory Cellular Analysis System to be used to measure clinically useful cervical disease proteins. Even if Sysmex completes its product development efforts to its satisfaction, it is expected to face significant obstacles (including but not limited to those set forth in “Factors That May Affect Future Results — Successful technical development of our products does not guarantee successful commercialization.”) in developing a system which will be approved by the FDA and selling such systems to cervical cancer testing laboratories at a satisfactory price. Our success in cervical disease Cellular Analysis Systems is almost completely dependent on the success of Sysmex in utilizing our technology and on its ability to educate physicians, patients, insurers and its distributors about the medical utility of the new products. Even if Sysmex successfully educates the market, competing products may prevent Sysmex from gaining wide market acceptance of its products.

      We believe that our ability to achieve and maintain profitability in the future will be affected by our progress in producing additional revenue-generating products. Other than the NMP22 products and allergy and other diagnostic products distributed by our European subsidiary, none of our products is close enough to commercialization to be expected to generate revenue in the foreseeable future, if at all. If we are unable to successfully develop and commercialize other products, the future prospects for our business, sales and profits will be materially impaired. In addition, if we are unable to develop and commercialize additional products and diversify our revenue streams, greater pressure will be placed on the performance of existing products and our business success will be directly related to success or failure of these few products.

      From time to time, we have encountered unexpected technical obstacles and may encounter additional ones in the course of the development process that we may not be able to overcome or may only overcome if we expend additional funds and time. For example, in 1997 we elected to terminate development of a blood-based Lab Test Kit for PC1, a candidate marker for prostate cancer, due to unexpected difficulties. Despite encouraging initial results from an earlier low throughput research testing method, we were unable to develop such a kit for use in testing prostate cancer patients even when we employed 1997 state-of-the-art detection methods. We have subsequently announced that a different set of proteins (NMP48), discovered using a different research method, would be the primary candidates in our prostate cancer program. More recently, we and others have observed that the testing methodologies of a low throughput research mass spectrometry instrument are not readily reproducible or transferable to high throughput mass spectrometry instruments. This has required us to try a number of changes in our procedures to

improve controls, reproducibility and costs in order to measure these proteins. Such changes in our technology and procedures may result in products or services that cannot reproduce our original discovery results or that do not perform at all or do not perform as well as the results reported using our discovery research procedure.

      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:

      We believe that testing the final product in a clinical setting will result in product performance which may not be as accurate as the results reported from the discovery phase. Therefore, the best comparative data to be used in evaluating our product development programs are the results of physician trials of commercial products such as those reported since 1996 for products based on NMP22 proteins.

      We believe the future success of our business will depend not only on the successful commercialization of our Lab Test Kits and BladderChek Tests, but also in part upon developing a service business based on Proprietary Laboratory Procedures which will be custom designed to the instrumentation and techniques of a specific clinical laboratory to measure clinically useful proteins. We are currently working on development of such Proprietary Laboratory Procedures using our technologies for breast cancer, but we have no demonstrated success in this area. In addition, because we expect that use of our Proprietary Laboratory Procedures will likely be confined to a limited number of licensed clinical laboratories who would be expected to invest in the development and marketing of a lab testing service specific to their equipment, processes and personnel, the success of these procedures will be dependent upon acceptance by the applicable laboratories. Although we may complete our product development efforts to our satisfaction, we may not obtain the agreement and approval from our clinical lab partner that the technology works adequately in their laboratory environment or that it has the medical performance and information value that they originally expected. Because Proprietary Laboratory Procedures utilize technologies which are, by their nature, more operator-dependent than the technologies involved in products such as Lab Test Kits and BladderChek Tests, the risks regarding successful commercial acceptance are increased in this area.

      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:

      Our success in the market for the diagnostic products we develop will also depend greatly on our ability to educate physicians, patients, insurers and our distributors on the medical utility of our new products. Even if we successfully educate the market, competing products may prevent us from gaining wide market acceptance of our products.

      We have been manufacturing and assembling our Lab Test Kits for commercial sales since 1995 but have not yet manufactured these products in the large volumes. We may encounter difficulties in scaling up production of products, including problems involving:

      These problems could make it very difficult to produce sufficient product to satisfy customer needs and could result in customer dissatisfaction. We may not be able to achieve reliable, high-volume manufacturing at a commercially reasonable cost. In addition, numerous governmental authorities extensively regulate our manufacturing operations. Failure to satisfy our future manufacturing needs could result in decreased sales, loss of market share and potential loss of certain distribution rights.

      We currently manufacture our Lab Test Kits and package our BladderChek Tests in our Newton facility but we rely on subcontractors for certain components and processes for each of these products. We do not currently have alternative suppliers for certain key components and processes which are provided by some subcontractors. If the units or components from these suppliers or the services of these assemblers should become unavailable for any reason, including their failure to comply with FDA regulations, we would need to seek alternative sources of supply or assembly. In order to maintain the FDA acceptance of our manufacturing process, we would have to demonstrate to the FDA that these alternative sources of supply are equivalent to our current sources. Although we attempt to maintain an adequate level of inventory to provide for these and other contingencies, if our manufacturing processes are disrupted because key components are unavailable, because new components must be revalidated or because an assembler fails to meet our requirements, we may be forced to modify our products to enable another subcontractor to meet our sales requirements or we may be required to cease production of such products altogether until we are able to establish an adequate replacement supplier. Disruptive changes such as these may make us unable to meet our sales commitments to customers. Our failure or delay in meeting our sales commitments could cause sales to decrease and market share to be lost permanently, and could result in significant expenses to obtain alternative sources of supply or assembly with the necessary facilities and know-how.

      If the products we distribute, but do not manufacture, should become unavailable for any reason, we would need to seek alternative sources of supply. If we are unable to find alternative sources of an equivalent product we may be required to cease distribution of this type of product, which could cause revenues to decrease and market share to be lost permanently. Furthermore, if products which we

distribute, but do not manufacture, should be found defective, we could be sued for product liability or other claims.

      During 2003, we received reports from customers that one of the products we sell through our German subsidiary failed to perform correctly and provided false readings on patients’ conditions. We believe the product performance problems have been addressed by the manufacturer of the products and that the manufacturer has accepted responsibility for defective products. We have not sought an alternate source of supply for this product line, but we have seen decreased customer demand for these products during 2004 compared to 2003. Our revenues, profits and market share for these products may be further adversely affected, and we may face product liability and other claims if the manufacturer fails to satisfactorily address all issues raised by our customers and the patients affected.

      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.

      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.

      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.

      We believe that the use of the patents for nuclear matrix protein technology owned by us or licensed to us and the use of our trademarks and other proprietary rights, do not infringe upon the proprietary rights of third parties. However, we may not prevail in any challenge of third-party intellectual property rights, and third parties may successfully assert infringement claims against us in the future. In addition, we may be unable to acquire licenses to any of these proprietary rights of third parties on reasonable terms. If our intellectual property is found to infringe upon other parties’ proprietary rights and we are unable to come to terms with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products altogether.

      Our BladderChek Test uses lateral flow technology consisting 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 lateral flow technology in certain jurisdictions will require us to obtain patent licenses. We are currently selling BladderChek Tests and are attempting to obtain appropriate licenses or waivers. In August, 2004, we entered into a license agreement, effective as of April 1, 2004, with one holder of patent rights, Abbott Laboratories, and we are continuing to investigate other licensing arrangements covering our BladderChek Tests. If we are unable to obtain patent licenses to permit us to make, use, sell, or import such products in the United States or in certain other jurisdictions, we will have to stop selling our BladderChek Tests until the expiration of the relevant patents or until we are able to arrive at a design solution that uses a different technology. In addition, we may also be subject to litigation that seeks a percentage of the revenues we have received from the sale of our BladderChek Tests. We accrue estimated royalties on sales of the BladderChek Test based on estimates of our obligations under existing licensing agreements and, when probable and estimable, based upon our appraisal of intellectual property claims to which we may be subject. If we are required to obtain additional licenses we can provide no assurances that additional royalties due when we complete those licensing agreements will not have an adverse effect on our results of operations.

      We need to attract and retain highly qualified scientific, sales and management personnel. We have at any given time only about 70 employees. The loss of multiple members of our key personnel, such as our scientists or our field sales force, at the same time or within close proximity of each other, or the failure to recruit the necessary additional personnel when needed with specific qualifications and on acceptable terms might harm our research and development efforts and/or our direct-to-the-urologist marketing strategy. We face intense competition for qualified personnel from other companies, research and academic institutions, government entities and other organizations.

      Our success is also greatly dependent on the efforts and abilities of our management team. The simultaneous loss of multiple members of senior management might delay achievement of our business objectives due to the time that would be needed for their replacements to be recruited and become familiar with our business.

      The market price of our common stock has historically been, and we expect it to continue to be, volatile. This price has ranged between $0.87 and $2.10 in the fifty-two week period ended December 31, 2004. The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the biotechnology sector, which have often been unrelated to the operating performance of particular companies. Factors such as announcements of technological innovations or new products by our competitors or disappointing results by third parties, as well as market conditions in our industry, may significantly influence the market price of our common stock. For example, in the past our stock price has been affected by announcements of clinical trial results and technical breakthroughs at other biotechnology companies. Our stock price has also been affected by our own public announcements regarding such things as quarterly earnings, regulatory agency actions and corporate partnerships. Consequently, events both within and beyond our control may cause shares of our stock to lose their value rapidly.

      In addition, sales of a substantial number of shares of our common stock by stockholders could adversely affect the market price of our shares. In fiscal year 2004, our shares had an average daily trading volume of only approximately 86,000 shares. In connection with our March 2004 private placement of common stock and accompanying warrants, we filed a resale registration statement covering up to 7,121,031 shares for the benefit of our investors. In 2003, we filed resale registration statements covering up to 5,371,332 shares for the benefit of our investors in connection with the sale of Convertible Debentures and accompanying warrants and an additional approximately 5,419,000 shares for the benefit of our investors in a private placement of common stock and accompanying warrants. We have also filed resale registration statements in connection with previous private placements. We intend to file a resale registration statement covering more than 13,200,000 shares for the benefit of our investors in connection with the sale in March 2005 of Series A Convertible Preferred Stock and accompanying warrants. 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.

      We will need to raise additional capital in the future to continue our operations. The primary source of the additional capital we raised in 2002, 2003 and 2004 has been equity and convertible debt, and we expect that equity-related instruments will continue to be our principal source of additional capital. In June 2004, our stockholders approved an increase in our authorized common stock from 60,000,000 to 90,000,000 shares. This approval provides us with greater flexibility in undertaking an additional financing without the expense and delay of obtaining stockholder approval other than as required by state law or American Stock Exchange requirements for the particular transaction. Any future equity financings will dilute the ownership interest of our existing investors and may have an adverse impact on the price of our common stock.

      In addition, the terms of the Convertible Debentures provide for anti-dilution adjustments. On October 15, 2003 and on November 6, 2003 we completed a sale of 3,893,295 shares of our common stock and warrants to purchase 1,362,651 shares of our common stock at a price of $2.45 per share for an aggregate consideration of $6,501,801 (before cash expenses of approximately $855,000). This sale was deemed to be a dilutive issuance under the terms of the Convertible Debentures and our March 2003 Warrants. On March 19, 2004 we completed a sale of 4,858,887 shares of our common stock and warrants to purchase 1,214,725 shares of our common stock at a price of $2.00 per share for an aggregate consideration of $6,559,500 (before cash expenses of approximately $713,000). This sale has also been deemed to be a dilutive issuance under the terms of the Convertible Debentures and our March 2003 Warrants. As a result, the Convertible Debentures became convertible into 3,183,902 shares of our common stock at a price of $1.51 per share, representing an increase of 612,944 shares from the conversion terms of the debenture immediately prior to the transaction. The Convertible Debentures were

convertible on December 31, 2004 into 2,037,695 shares of our common stock at a price of $1.51 per share. The March 2003 Warrants are exercisable to purchase shares of our common stock at a price of $1.35 per share representing a decrease in purchase price of $0.32 per share.

      On March 4, 2005, we completed the sale of 670,272 shares of our Series A Convertible Preferred Stock and accompanying warrants to purchase 4,991,434 of our common stock at a price of $8.80 per share of Preferred Stock for an aggregate consideration of $5,898,394 (before cash expenses and commissions estimated to be approximately $500,000). Additional warrants were issued to a placement agent to purchase 656,920 shares of our common stock at $.147 per share. Each share of the Series A Convertible Preferred Stock is convertible into ten shares of our common stock, resulting in a price per share of common stock in this transaction of $.88. This sale was deemed to be a dilutive issuance under the terms of the Convertible Debentures and our March 2003 Warrants. As a result, the Convertible Debentures became convertible into 2,525,523 shares of our common stock at a price of $.99 per share, representing an increase of 869,623 shares from the conversion terms of the Debenture immediately prior to the transaction. The exercise price of the March 2003 Warrants was also reduced to $.88 per share. If we do a future financing at a price less than $.88 per common share (the “New Base Price”), the conversion rate of the Convertible Debentures will be adjusted down to 112% of the New Base Price and additional shares of our common stock would be issuable upon such conversion. The terms of the March 2003 Warrants also provide for anti-dilution protection, so that the exercise price for such warrants would be adjusted down to the New Base Price in the event of a dilutive financing, or on a weighted-average basis if there are no longer any Convertible Debentures outstanding. The issuance of additional shares upon conversion of the Convertible Debentures would result in further dilution of the ownership interest of our other existing investors, and a decrease in the warrant exercise price may cause a decline in our stock price. The Series A Convertible Preferred Stock and the warrants issued in connection with the March 2005 transaction also have anti-dilution protection provisions which would result in the issuance of additional shares upon conversion of the Convertible Preferred Stock and in a reduction in the warrant price in the event of a subsequent dilutive financing.

      Investment Portfolio. We own financial instruments that are sensitive to market and interest rate risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations including our research and development activities. None of these market-risk sensitive instruments is held for trading purposes. Our investment policy prohibits investing in derivatives and we stringently adhere to this policy; the policy also limits the amount of credit exposure to any one issue, issuer, and type of instrument. See Note 1 of Notes to Consolidated Financial Statements — “Operations and Significant Accounting Policies.”

      We invest our cash in securities classified as cash and cash equivalents. At December 31, 2003 and 2004, these securities totaled $7.5 million and $4.9 million respectively and included money market accounts and certificates of deposit that are classified as held-to-maturity securities. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. A hypothetical 50 basis point decrease in interest rates would result in a decrease in annual interest income and a corresponding increase in net loss of approximately $30,000 for the year ended December 31, 2004.

      Foreign Exchange. The financial statements of Matritech GmbH are translated in accordance with SFAS No. 52, Foreign Currency Translation. The functional currency of our foreign subsidiary is the local currency (Euro), and accordingly, all assets and liabilities of the foreign subsidiary are translated using the exchange rate at the balance sheet date except for intercompany receivables which are of long-term-investment nature, and capital accounts which are translated at historical rates. Revenues and expenses are translated 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 $4,348,000, $3,046,000, and $2,443,000 denominated in foreign currency for the periods ended December 31, 2004, 2003 and 2002, respectively.

      The information required by this item is contained in the financial statements set forth in Item 15(a) under the caption “Consolidated Financial Statements” as a part of this report.

      Not applicable.

      As of December 31, 2004, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2004, the Company’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

      There was no information required to be disclosed in a report on Form 8-K in the fourth quarter of 2004 which was not reported.

PART III

Directors

      The following table sets forth the name of each of our Directors, including his/her age and positions with the Company.

      Each of the directors was previously elected by the stockholders at the annual meeting held in June 2004, with the exception of Dr. Niloff. Dr. Niloff was unanimously elected by the Board of Directors in February 2005.

      Mr. Chubb, a founder of Matritech, has been Chairman since October 1993 and a director and Matritech’s Chief Executive Officer since the Company’s inception in 1987. Mr. Chubb was the Company’s President until October 1993 and was also Treasurer of the Company until March 1992. From 1984 to 1986, Mr. Chubb served as President and Chief Executive Officer of T Cell Sciences, Inc., a publicly-traded biotechnology company. Prior to 1984, Mr. Chubb was President and Chief Executive Officer of Cytogen Corporation, also a publicly-traded biotechnology company. He currently serves as a director of Charles River Laboratories, a publicly-traded provider of clinical research tools and integrated support services to enable drug development.

      Mr. Corbet has been Matritech’s President, Chief Operating Officer and a director since October 1993, and joined the Company in April 1993 as Executive Vice President. Prior to joining Matritech and since 1991, Mr. Corbet had served as President and Chief Operating Officer of T Cell Diagnostics, Inc., a subsidiary of T Cell Sciences, Inc.

      Mr. Fredericks has served as a director of Matritech since July 2003. Mr. Fredericks is currently a member of, and is responsible for the financial affairs of, Adirondack Boat, LLC, a distributor of electric boats. From 1991 to 2001, Mr. Fredericks served as president, chief executive officer and director of Lifecodes Corporation, a forensics DNA testing company. Mr. Fredericks was the founder of and from 1993 to 2001 served as chief executive officer and director of Electronic Instruments International, a company focused on creating products to enhance long distance electric power distribution. From 1989 to 1997, he also served as a director of DIANON Systems, Inc., a publicly-traded oncology marketing and database company.

      Ms. Kurland has served as a director of Matritech since February 2001. Since 2004, Ms. Kurland has served as a visiting fellow at the McCormack Graduate School for Public Policy at the University of Massachusetts. She is also a self-employed consultant. From March 2001 until August 2002, Ms. Kurland was the President and Chief Executive Officer of Hunt Alternatives, a foundation. Ms. Kurland was the New England Regional Director of the United States Department of Health and Human Services from May 1997 to January 2001. Ms. Kurland served from December 1998 to December 2000 as the Acting

Editor of Public Health Reports, the journal of the U.S. Public Health Service. She is a faculty member at Tufts University Medical School, Boston University Medical School, Simmons College, and is presently on leave from teaching at the Harvard School of Public Health.

      Dr. Niloff has served as a director of Matritech since February 7, 2005. Since 2000, Dr. Niloff has served as president of Provider Services Network, Inc., a physician-driven organization providing innovative web-based tools and other infrastructure services to improve quality and reduce the cost of health care. Dr. Niloff is also a practicing physician, specializing in gynecologic oncology, and a clinical researcher in that field. Since 1990, Dr. Niloff has also served as an Associate Professor of Obstetrics, Gynecology and Reproductive Biology at Harvard Medical School.

      Mr. Sandberg has served as a director of Matritech since April 1999, excluding a brief hiatus between June 2002 and September 2002, at which time Mr. Sandberg was reappointed to the Board of Directors to fill a vacancy created by the Board. Mr. Sandberg has been Matritech’s Chief Financial Officer, Vice President Finance and Treasurer since November 2002, and served as Secretary from November 2002 to December 2003. Since December 2003, he has served as Assistant Secretary. Mr. Sandberg also serves as Manager and Chief Financial Officer of Battery Asset Management, LLC, a firm specializing in foreign exchange transactions. Mr. Sandberg devotes approximately 50% of his professional time to the business of the Company. From 1997 to 2001, Mr. Sandberg served as Chairman of the Board of Lifecodes Corporation, a manufacturer of DNA test kits and a provider of DNA testing services. In addition, Mr. Sandberg served as Chief Financial Officer of Lifecodes Corporation from May 1997 to September 1998. From 1983 to 1997, Mr. Sandberg served in a variety of positions including Chairman, Chief Executive Officer and Chief Financial Officer at DIANON Systems, Inc. a publicly-traded oncology marketing and database company. Since November 2003, Mr. Sandberg has served as director of Ethan Allen Interiors, Inc., a publicly traded home furnishings company.

      Mr. Thompson has served as a director of Matritech since May 1994. Mr. Thompson has served since 1992 as President, Chief Executive Officer and a director of Immtech International, Inc., a publicly-traded biopharmaceutical company.

      Mr. Zadel has served as a director of Matritech since December 1995. From April 2001 until December 2004, Mr. Zadel served as Chief Executive Officer of Mykrolis Corporation, formerly the microelectronics division of Millipore Corporation, a publicly-traded semiconductor equipment company. From April 1996 until August 2001, Mr. Zadel was the Chairman, President, Chief Executive Officer and a director of the Millipore Corporation. Mr. Zadel currently serves, and has served since 1989, as a director of Kulicke & Soffa Industries, Inc., a publicly-traded semiconductor assembly equipment company.

      The Audit Committee of the Board of Directors (the “Audit Committee”), consists of Mr. Thompson (chair), Ms. Kurland and Mr. Zadel, each of whom satisfies the criteria for independence as defined in Section 121A of the listing standards for the American Stock Exchange, the principal trading market of our Common Stock, and Rule 10A-3 under the Securities Exchange Act of 1934. Each member of the Audit Committee is able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement. Both T. Stephen Thompson and C. William Zadel meet the definition of “audit committee financial expert” as defined by the Securities and Exchange Commission, as well as the definition of independence of Section 121A of the listing standards of the American Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934.

      The Audit Committee oversees the accounting and tax functions of the Company, including among other things the results and scope of our annual audit and other services provided by our independent auditors and our compliance with legal matters that have a significant impact on our financial reports. The Audit Committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into various aspects of our financial affairs. In addition, the Audit Committee is responsible for the selection,

compensation, retention and replacement of our independent auditors, establishing procedures for accounting related complaints, recommending audited financials for inclusion in the Company’s Annual Report on Form 10-K and engaging advisors as necessary.

      The Audit Committee operates under a written charter adopted by the Board of Directors and reviewed at least annually. Most recently, the charter was reviewed and a revised charter was adopted in February 2005.

      The Audit Committee holds separate sessions of its meetings, outside the presence of management, with our independent auditors in conjunction with each regularly scheduled quarterly Audit Committee meeting. The Audit Committee held six meetings during the fiscal year ended December 31, 2004.

      The Board of Directors adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and Directors. Our Code of Business Conduct and Ethics is posted on our website at www.matritech.com.

Executive Officers

      The Board of Directors elects our executive officers annually at its meeting immediately following the Annual Meeting of Stockholders. Such executive officers hold office until the next annual meeting unless they sooner resign or are removed from office. There are no family relationships among any of our Directors or executive officers.

      The following table lists our current executive officers and certain information concerning our executive officers who are not also Directors. It is anticipated that each of these officers will be reappointed by the Board of Directors following the Annual Meeting:

      Dr. Domurad has been Matritech’s Vice President, Clinical and Regulatory Affairs since January 2000. From October 1997 to December 1999 she was Matritech’s Director of Clinical and Regulatory Affairs. From 1994 to 1997, she served as Director of Clinical Research of ErgoScience Development Corporation, a publicly-traded biopharmaceutical company.

      Dr. Fagan has been Matritech’s Vice President, Research and Development, since October 2004, and joined the Company in November 2003 as Senior Director of Product Development. Prior to joining Matritech, Dr. Fagan served from 1999 to November 2003 as Vice President, Research and Development, of Ischemia Technologies, an in-vitro diagnostics company. From 1989 to 1998, he served in a number of research positions at PB Diagnostics and Behring Diagnostics, both predecessor companies to Dade Behring, before serving as a senior research manager at Dade Behring, a publicly-traded diagnostics company.

      Mr. Maier has been an executive officer of Matritech since June 2003. He has served as president of Matritech GmbH, the Company’s subsidiary based in Germany, since 2000. Mr. Maier was chief executive officer of ADL GmbH, a German distributor of medical diagnostic products, from 1996 to 2000, and was a country manager for Germany for Pharmacia Diagnostics, a manufacturer of in vitro diagnostic products, from 1989 to 1995.

      Mr. Quigley has been Matritech’s Vice President, Sales and Marketing since July 2001. From December 2000 until April 2001, he was Director of Marketing for Argose, Inc., a medical diagnostic products company. From 1998 until May 2000, Mr. Quigley was the Vice President of Global Marketing for Bayer’s Critical Care business unit. From January 1997 until 1998, Mr. Quigley was Director of U.S. Marketing at Chiron Diagnostics, a publicly traded biotech and diagnostics company that was acquired by Bayer.

      Ms. Randall has been Matritech’s Vice President, General Counsel, Chief Legal Officer and Secretary of Matritech since December 2003. Ms. Randall devotes approximately 75% of her professional time to the business of the Company. Since 2003, Ms. Randall has also been a self-employed legal consultant. From 2001 to 2003, Ms. Randall served as Vice President and General Counsel of Robotic Vision Systems, Inc., a publicly traded technology company. From 1998 to 2000, she served as Vice President and General Counsel of Hadco Corporation, a publicly traded technology company. From 1980 to 1998, Ms. Randall was a partner at the Boston law firm of Hamilton, Dahmen and Randall with a focus on corporate law and civil litigation. In November 2004, more than twenty months after Ms. Randall’s departure from Robotic Vision Systems, Inc., that company filed a petition under the federal bankruptcy laws.

Executive Compensation

      The following table summarizes the compensation for services rendered to the Company for the fiscal years ended December 31, 2004, 2003, and 2002 paid to or earned by (i) Mr. Chubb, the Company’s Chairman and Chief Executive Officer, and (ii) Mr. Corbet, Dr. Domurad, Mr. Maier and Mr. Quigley, the next four most highly compensated executive officers of the Company as of December 31, 2004 (the “Named Officers”). The Company did not grant any restricted stock awards or stock appreciation rights (“SARs”) to these persons in fiscal 2004 and did not make any long-term incentive plan payouts during fiscal 2004, 2003 or 2002:

Summary Compensation Table