MZT Matritech,

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the quarterly period ended September 30, 2007

OR

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the transition period from          to     

    Commission file number: 001-12128

Matritech, Inc.

330 Nevada Street, Newton, Massachusetts 02460

(617) 928-0820

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated o       Accelerated o       Non-accelerated þ

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes        þ  No

          As of November 6, 2007, there were 62,200,272 shares of the Registrant’s Common Stock outstanding.

 

 

MATRITECH, INC.

INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007			3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2007			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2007			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4T. Controls and Procedures			40
PART II OTHER INFORMATION
Item 1A. Risk Factors			40
Item 6. Exhibits			57
SIGNATURES			59
EX-31.1 CERTIFICATION OF CEO PURSUANT TO RULE 13a-14(a)
EX-31.2 CERTIFICATION OF CFO PURSUANT TO RULE 13a-14(a)
EX-32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906
EX-32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906

PART I.  FINANCIAL INFORMATION

The accompanying Notes are an integral part of these interim condensed consolidated financial statements.

The accompanying Notes are an integral part of these interim condensed consolidated financial statements.

MATRITECH, INC.

     If the closing of the Asset Sale does not occur prior to December 13, 2007, the maturity date of the Secured Promissory Notes, we would have to seek extension agreements from the holders of our outstanding Secured Promissory Notes. We may incur higher interest costs or other costs in connection with any extension we may negotiate with these note holders. If the Asset Sale does not close prior to December 13, 2007, and if the holders of all of our outstanding Secured Promissory Notes do not agree to grant us an extension of this maturity date, we may be required to obtain additional financing to repay these outstanding Secured Promissory Notes. There can be no guaranty, however, that we will be successful in obtaining this additional financing on acceptable terms or at all. As a result, it is possible that if the Asset Sale has not closed prior to December 13, 2007, we may not have funds available to satisfy our obligations under our outstanding Secured Promissory Notes and may, as a result, default on these Secured Promissory Notes. Further, since these notes are secured by our assets, if we defaulted on our obligations under these Secured Promissory Notes, it is possible that the collateral agent, on behalf of the holders of our Secured Promissory Notes, could take action to enforce its security interest in our assets. Were this to occur, we would not likely be able to consummate the Asset Sale to Inverness or any other business combination transaction.

     Depending on the timing of the closing of the Asset Sale, even if we secure an extension of the maturity date of our Secured Promissory Notes, we may need to obtain additional capital in order to be able to continue operations until the closing of the Asset Sale. We will, as we deem necessary or prudent and subject to the terms and conditions of the Asset Purchase Agreement and our various outstanding debt and equity agreements, continue to seek to raise additional capital through various financing alternatives, including equity or debt financings, issuances of securities convertible into equity and corporate partnering arrangements. However, we have had great difficulty obtaining additional financing over the past year and may be unable to raise further capital. If we raise additional funds, we may provide rights and preferences to new investors which are not available to current shareholders or debt holders. In addition, our existing financing arrangements contain anti-dilution protection provisions which may require us to issue additional securities if certain conditions are met. Any future financings will reduce amounts that may be available for distribution to our common stockholders upon our dissolution (assuming we receive stockholder approval of and that we consummate the Asset Sale and that we receive stockholder approval of the dissolution). Future financings may also have an adverse impact on the price of our common stock and may dilute the ownership interest of our existing investors. If we do not timely receive additional financing or do not receive an adequate amount of additional financing, we will be required to cease operations and/or file for bankruptcy protection. These financial statements do not include any adjustments that would be necessary if we were unable to continue as a going concern entity.

     In September 2006, we received notice from the American Stock Exchange (“AMEX”), the principal trading market of our common stock, that we were not in compliance with certain continued listing standards relative to maintenance of stockholders’ equity and profitability. On October 23, 2006, we submitted to AMEX a plan of proposed actions we believed would bring us into compliance with applicable listing standards no later than March 21, 2008. On December 8, 2006, we received notice that AMEX had accepted our plan. AMEX may initiate delisting procedures against us if we do not make progress consistent with the plan during the plan period or we are not in compliance with applicable listing standards at the end of the plan period. Delisting of shares of our common stock would violate terms of our various financing documents, could result in the declaration of an event of default in our Secured Convertible Notes and could cause holders of those notes to seek to recover potential damages from us. In addition, any suspension of trading or delisting of our shares could jeopardize the consummation of the Asset Sale and could make it more difficult for us to raise any additional capital we may need to continue operations until the closing of the Asset Sale. Further, suspension of trading or delisting of our shares could seriously impair the ability of our stockholders to sell shares of our stock.

     The terms of the Asset Purchase Agreement prevent us from incurring more debt without the prior written consent of Inverness. In addition, the terms of our existing securities greatly restrict our future financing options. For example, the terms of our Series A Convertible Preferred Stock (“Series A Preferred Stock”) impose a limitation on indebtedness not outstanding on March 4, 2005 in excess of $15,300,000 except in limited forms. While our Secured Promissory Notes are outstanding, we have restrictions on incurring additional indebtedness (other than receivables financing not to exceed 80% of receivables and equipment purchase or lease financing not to exceed $200,000), as well as restrictions on payment of cash dividends and redemption of securities. Moreover, we have granted to a collateral agent on behalf of the holders of the Secured Promissory Notes a security interest in collateral including some cell lines, equipment, inventory and general intangibles related to our NMP22 ^® product line, as well as proceeds from any sale of the product line. We also granted contingent license rights to the collateral agent on behalf of the holders of the Secured Promissory Notes in the field of bladder cancer detection to some of our patents related to the NMP22 products, sublicense rights to patents licensed to us and used in connection with the NMP22 product line, and license rights to trademarks used exclusively in connection with the NMP22 product line. The NMP22 product line, portions of which serve as collateral for the Secured Promissory Notes, includes all of our currently commercialized products. The agreements reflecting the collateral and license arrangements contain restrictions on our sale or abandonment of the collateral and the patent rights. Further, these agreements afford the collateral agent the right to assume control of and sell the collateral and to use the contingent license rights exclusively within the field of bladder cancer detection in the event of our default in our obligations under the Secured Promissory Notes. If we default on these obligations, and the collateral is sold, we will lose our primary source of operating income, which would have a material adverse effect on our business and would severely jeopardize our ability to continue operations.

2. Summary of Significant Accounting Policies

      (a) Principles of Consolidation

     The consolidated financial statements include the accounts of Matritech, Inc., a Delaware corporation, and our wholly-owned subsidiary, Matritech GmbH, based in Freiburg, Germany. All intercompany balances and transactions have been eliminated at consolidation level.

      (b) Inventories

     Inventories are stated at the lower of cost (determined on a first-in first-out basis) or market and consist of the following:

      (c) Revenue Recognition

     Deferred revenue consists of the following:

     On September 26, 2007, we entered into a Termination Agreement with Sysmex Corporation, providing for the immediate termination of the Exclusive License and Exclusive Supply Agreement dated November 20, 2002 between Sysmex and us. As a result of the termination of this agreement, we recognized all remaining deferred revenue relating to the license and supply agreement. This resulted in our recognizing approximately $609,000 of revenue which consisted of the remaining amount of the license, which previously was being recognized over the fourteen-year term of the related patents, as well as remaining unamortized amounts related to payments for research and development services.

      (d) Comprehensive Loss

     Comprehensive loss comprises net loss and certain changes in stockholders’ deficit that are excluded from net loss. We include in other comprehensive loss those foreign currency adjustments related to the translation of the assets and liabilities of Matritech GmbH into U.S. dollars as the functional currency of Matritech GmbH is the euro. The composition of comprehensive loss is as follows:

      (e) Stock-Based Compensation

     Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, (“SFAS 123R”), Share-Based Payment , which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

      (f) Net Loss per Common Share

     We compute earnings per share in accordance with SFAS No. 128, Earnings per Share . Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is the same as basic loss per share as the effects of our potential dilutive common shares are anti-dilutive. Potential common stock equivalents consist of stock options, warrants and restricted stock units, convertible preferred stock and Secured Convertible Notes. The number of anti-dilutive securities excluded from the computation of diluted loss per share was 31,846,840 and 39,417,156 for the periods ended September 30, 2006 and 2007, respectively.

      (g) Recent Accounting Pronouncements

     We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 , on January 1, 2007. This interpretation prescribes new methodology by which we must measure, report, present, and disclose in our financial statements the effects of any uncertain tax return reporting positions that we have taken or expect to take. The interpretation requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of the tax reporting positions as well as all of the pertinent facts and circumstances, but it prohibits any discounting of these effects for the time value of money. In addition, the interpretation also mandates expanded financial statement disclosure about uncertainty in tax reporting positions. As a result of the implementation of FIN 48, we recorded no adjustment for unrecognized income tax benefits. At the adoption date of January 1, 2007 and also at September 30, 2007, we had no unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits will significantly increase in the next twelve months. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject, which are primarily the United States and Germany. In addition, carryforward attributes that were generated prior to 2003 may still be adjusted upon examination if they either have been or will be used in a future period.

     At December 31, 2006, we had federal and state net operating loss carryforwards (“NOL”) of approximately $79,623,000 and $36,620,000, respectively, expiring at various dates from 2007 through 2026. At December 31, 2006, we had federal and state research and experimentation (“R&D”) credit carryforwards of approximately $1,671,000 and $1,159,000, respectively, which will, if not used, expire at various dates from 2007 through 2026.

     Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If we have experienced a change of control at any time since our formation, utilization of our NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. No amounts are currently being reported as an uncertain tax position under FIN 48.

3.  Stockholders’ Deficit

     On March 4, 2005, we sold 670,272 shares of Series A Preferred Stock initially convertible into 6,702,720 shares of our common stock and warrants to purchase 4,991,434 shares of our common stock (the “2005 Warrants”), for aggregate consideration of $5,898,394 (before cash commissions and expenses of approximately $610,000). In addition, we issued

warrants to a placement agent for a total of 656,920 shares of common stock (with a value of approximately $562,000). Both the 2005 Warrants and the placement agent warrants (collectively, the “March 2005 Warrants”) had an initial exercise price of $1.47 per share, became exercisable on September 5, 2005, and expire on March 4, 2010.

     See Note 5, “Secured Convertible Notes”, for information about changes in the conversion rates for the Series A Preferred Stock and the exercise price of the March 2005 Warrants.

     During the three and nine month periods ended September 30, 2006, investors exercised their rights to convert 0 and 487,852 shares of Series A Preferred Stock into 0 and 6,133,000 shares of common stock, respectively. No investors exercised their rights to convert shares of Series A Preferred Stock into shares of common stock for the three and nine month periods ended September 30, 2007.

      Warrant Repurchase

     On July 27, 2007, we entered into an Agreement and Amendment to our Secured Convertible Notes (the “Agreement and Amendment”) with the holders of a majority of outstanding principal value of our 2006 Secured Convertible Notes and the holders of a majority of outstanding principal value of our 2007 Secured Convertible Notes. The Agreement and Amendment authorized the redemption of the outstanding warrants we originally issued on March 31, 2003 (the “2003 Warrants”). We decided to repurchase the 2003 Warrants in anticipation of entering into a strategic transaction.

     On July 31, 2007, we entered into Purchase and Sale Agreements with all holders of 2003 Warrants, pursuant to which we redeemed the 2003 Warrants for a purchase price of $0.04 per share. In addition to the $0.04 purchase price to redeem the warrants, the Purchase and Sale Agreements also provided for potential additional payments to be made to the holders if, prior to April 1, 2008, we engaged in a transaction that would have triggered an anti-dilution adjustment to the exercise price of the redeemed 2003 Warrants.

     Between July 31 and August 10, 2007, pursuant to the terms of the Purchase and Sale Agreements with the warrant holders, we paid an aggregate of approximately $31,373 to redeem the 2003 Warrants.

4. Convertible Debentures Issued March 2003

     A summary of our convertible debt accounting for the convertible debentures issued in March 2003 (the “March 2003 Convertible Debentures”) is as follows:

     The debt discount was amortized as interest expense using the effective interest method over the term of the debt. This debt was fully repaid as of March 31, 2006. For the three and nine month periods ended September 30, 2006, $0 and $134,000, respectively, representing amortization of the debt discount, are included in interest expense.

     Debt issuance costs attributable to the March 2003 Convertible Debentures, which totaled approximately $475,000, have been capitalized as other assets and other current assets on the condensed balance sheet and were amortized based on the effective interest method over the term of the debt. For the three and nine month periods ended September 30, 2006, we

included $0 and $7,000, respectively, (representing amortization of these costs) in interest expense. As of December 31, 2006, there were no unamortized debt issuance costs related to the March 2003 Convertible Debentures.

5. Secured Convertible Notes

      2006 Secured Convertible Notes Issued January 2006

     On January 13, 2006, we entered into a purchase agreement and related documents, pursuant to which we sold the 2006 Secured Convertible Notes, which were initially convertible into 10,766,092 shares of our common stock, and accompanying warrants to purchase up to 6,459,655 shares of our common stock (“2006 Purchaser Warrants”), for an aggregate consideration of $6,997,960 (before cash commissions and expenses of approximately $813,000). The 2006 Secured Convertible Notes bear interest at the rate of 15% per annum. The 2006 Secured Convertible Notes were initially convertible into shares of our common stock at a conversion price of $0.65 per share of common stock and matured on January 13, 2009. The 2006 Purchaser Warrants, which became exercisable on July 14, 2006 and expire on January 13, 2011, had an initial exercise price of $0.67 per share. Both the conversion price of the 2006 Secured Convertible Notes and the exercise price of the 2006 Warrants are subject to adjustment in the event of subsequent dilutive issuances. In addition, we issued warrants to two placement agents for a total of 1,036,609 shares of our common stock (“2006 Agent Warrants” and collectively with the 2006 Purchaser Warrants, the “2006 Warrants”). The 2006 Agent Warrants, which became exercisable on July 14, 2006 and expire on January 13, 2011, had an initial exercise price of $0.65 per share, and are also subject to adjustments in the event of subsequent dilutive issuances. Our sale of the 2007 Secured Convertible Notes was deemed to be a dilutive issuance under the terms of the 2006 Secured Convertible Notes and 2006 Warrants. As a result, both the conversion price of the 2006 Secured Convertible Notes and the exercise price of the 2006 Warrants were adjusted to $0.63 per share. We had previously reserved shares sufficient to cover this adjustment in conversion price. In addition, in connection with the sale of the 2007 Secured Convertible Notes we entered into an agreement with the holders of a majority of the outstanding principal value of the 2006 Secured Convertible Notes that shortened the scheduled maturity date of the 2006 Secured Convertible Notes to December 13, 2007.

     The proceeds of approximately $6,998,000 and the closing costs of $1,285,000 were allocated to our balance sheet in the following manner:

     The allocation of the total proceeds among these elements requires us to separately record the registration rights liability at its full fair value (approximately $306,000) and then allocate the remaining value between the 2006 Purchaser Warrants and the 2006 Secured Convertible Notes based on their relative fair values. The fair value of the registration rights liability was determined using a probability weighted discounted cash flow technique based on the potential cash penalties, and subsequent changes in its fair value are reflected in the statement of operations. We valued the 2006 Purchaser Warrants using the Black-Scholes pricing model with the following assumptions: dividend yield of zero percent; expected volatility of 68%; risk free interest rate of 4.14% and a term of five years.

     Total closing costs were approximately $1,285,000 and included the costs associated with 2006 Agent Warrants, which we valued at approximately $472,000 using the same method used for valuing the 2006 Purchaser Warrants. Debt issuance costs of $912,000 were allocated to the 2006 Secured Convertible Notes, have been capitalized as other assets on our condensed consolidated balance sheet and are being amortized based on the effective interest rate method over the term of the 2006 Secured Convertible Notes. The $337,000 of costs allocated to the 2006 Purchaser Warrants were deducted from the net proceeds attributable to the 2006 Purchaser Warrants. We expensed $36,000 of costs allocated to the registration rights liability upon the closing of this transaction.

     The difference between the effective conversion price of the 2006 Secured Convertible Notes and the fair value of our common stock on the date of issuance of the 2006 Secured Convertible Notes equals the beneficial conversion feature calculated in accordance with EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments . The

first step in this calculation shown below divides the value allocated above to the 2006 Secured Convertible Notes by the shares issued upon conversion to determine the effective conversion price:

     The second step in this calculation, as shown below, determines the discount to market based on the effective conversion price and uses this discount to determine the beneficial conversion feature:

     This beneficial conversion feature of approximately $2,975,000 was recorded as a debt discount and resulted in a carrying value for the 2006 Secured Convertible Notes of $1,909,000 at closing. The difference between the carrying value recorded at closing and the $6,998,000 face value of the 2006 Secured Convertible Notes is being accreted through December 13, 2007 using the effective interest rate method.

     When note holders convert any of the 2006 Secured Convertible Notes prior to maturity, the proportionate share of the remaining unamortized debt discount, debt issuance costs and beneficial conversion feature related to the amount of converted principal is charged to expense in the current period and the amount remaining is charged to expense over the remaining term of the 2006 Secured Convertible Notes.

     The sale of the 2006 Secured Convertible Notes was deemed to be a dilutive issuance under the terms of the Series A Preferred Stock and our March 2005 Warrants. As a result, the price per share at which the Series A Preferred Stock became convertible into common stock was reduced from $0.88 to $0.70 and the exercise price of the March 2005 Warrants was reduced from $1.47 to $1.34 per share. Both the $0.70 conversion price and the $1.34 warrant exercise price are the established floors for these securities and no further price reductions will occur as a result of any future dilutive issuances. We had previously reserved shares sufficient to cover the adjustment in conversion price.

     For the three and nine month periods ended September 30, 2006 and 2007, we included $87,000 and $133,000, respectively, and $310,000 and $378,000, respectively, (representing amortization of deferred financing costs) in interest expense. For the three and nine month periods ended September 30, 2006 and 2007, we included $488,000 and $774,000, respectively, and $1,728,000 and $2,287,000, respectively, (representing accretion of debt discount and beneficial conversion feature) in interest expense. For the three and nine month periods ended September 30, 2006 and 2007, we included $0 and $174,000, respectively, and $0 and $174,000, respectively, (representing accretion of premium) in interest expense.

     During the three and nine month periods ended September 30, 2006 and 2007, there were $30,000 and $0, respectively, and $785,000 and $0, respectively, of optional conversions of principal of the 2006 Secured Convertible Notes by holders into equity. In the first nine months of 2007, we issued stock to holders of the 2006 Secured Convertible Notes as payment of principal and interest. In the first, second and third quarters of 2007 we made interest payments of $925,000, $259,000, and $13,000, respectively in stock by issuing 1,594,658, 645,074 and 46,338 shares of our common stock, respectively. We also made principal payments in the first, second and third quarters of 2007 of $862,000, $569,000 and $28,000, respectively, by issuing 1,550,197, 1,434,612 and 96,376 shares of our common stock, respectively. In the third quarter of 2007, we also paid approximately $55,000 in cash as payment of the August and September 2007 principal payments due on the 2006 Secured Convertible Notes.

     We need to comply with all stock payment conditions of the 2006 Secured Convertible Notes in order to make payments in shares of our common stock. Those stock payment conditions include a requirement that our common stock be selling at $0.40 per share or higher. Our common stock has not traded at or above $0.40 per share since June 12, 2007. In the third quarter of 2007, holders of our 2006 Secured Convertible Notes elected to defer approximately $107,000 of interest payments due in July 2007 and approximately $973,000 of principal due from June, July, August and September 2007 until the earlier of (i) a sale of substantially all our assets or a merger or (ii) the scheduled maturity date of December 13, 2007. At September 30, 2007, holders of approximately 95% of the outstanding principal value of our 2006 Secured Convertible Notes had agreed to defer receipt of further payments on the 2006 Secured Convertible Notes until the earlier of (i) a sale of substantially all our assets or a merger or (ii) the scheduled maturity date of December 13, 2007.

     In the third quarter of 2007, we and the holders of a majority of outstanding principal value of the 2006 Secured Convertible Notes entered into an Agreement and Amendment pursuant to which the signing holders agreed not to issue a default notice (as defined in the 2006 Secured Convertible Notes) until the later of (a) ten business days after a registration statement on Form S-3 is declared effective by the Securities and Exchange Commission for the resale by us of shares of Inverness common stock we receive as proceeds of the Asset Sale or (b) the date of the closing of the Asset Sale. The holders’ forbearance on issuance of a default notice is limited to a maximum of ninety days after the closing of the Asset Sale. In addition, we agreed to pay to the signing holders a 15% prepayment premium, already designated in the 2006 Secured Convertible Notes, upon repayment of these notes held by the signing holders, regardless of the date of repayment. The Agreement and Amendment further provides that the signing holders shall not be entitled to both a default amount (as defined in the 2006 Secured Convertible Notes) and a prepayment premium. The prepayment premium is being amortized to interest expense through December 13, 2007 using the effective interest method.

     A summary of the accounting for the 2006 Secured Convertible Notes is as follows:

     Minimum future payments on the debt are as follows:

     In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements , (“EITF 00-19-2”), which addresses an issuer’s accounting for registration payment arrangements. EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies . The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities , and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with US GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. Upon adoption of EITF 00-19-2, we applied the recognition and measurement provisions of EITF 00-19-2 to the outstanding registration rights associated with the 2006 Secured Convertible Notes. As result, we believe that the contingent obligation to make future payments is not probable upon adoption of EITF 00-19-2. Therefore, we have reported a change in accounting principle through a cumulative-effect adjustment to the opening balance of accumulated deficit upon adoption of EITF 00-19-2 of approximately $325,000 by debiting registration rights liability and crediting accumulated deficit.

      2007 Secured Convertible Notes Issued January 2007

     On January 19, 2007, upon the receipt of the consent of the holders of at least 75% of the outstanding Series A Preferred Stock, we amended our Certificate of Designations, Preferences and Rights of the Series A Preferred Stock, to increase the amount of indebtedness we may incur, assume or suffer to permit from $7,500,000 to $12,000,000. On January 22, 2007, we entered into two new agreements with the holders of a majority of the outstanding principal value of our 2006 Secured Convertible Notes, which included a Consent under the 2006 Secured Convertible Notes (the “Consent”) and the Agreement and Amendment to the which included the 2006 Secured Convertible Notes. The execution of these two agreements was completed contemporaneously with the sale of the 2007 Secured Convertible Promissory Notes.

     The Consent allowed us to issue the 2007 Secured Convertible Notes, in an aggregate principal amount not to exceed $4.5 million, which rank the 2007 Secured Convertible Notes on a pari passu basis with the 2006 Secured Convertible Notes as to payment and security and allowed us to incur increased indebtedness to cover the 2007 Secured Convertible Notes in addition to the outstanding indebtedness under the 2006 Secured Convertible Notes. The Consent also directed the collateral agent for the holders of the 2006 Secured Convertible Notes to consent to and to enter into an amendment and restatement of the existing security agreement and contingent license agreement so that the holders of the 2007 Secured Convertible Notes would have a pari passu position with the holders of the 2006 Secured Convertible Notes.

     The Agreement and Amendment changed the potential events of default under the 2006 Secured Convertible Notes also to include non-payment of, or default on another obligation related to, the 2007 Secured Convertible Notes; shortened the scheduled maturity date of the 2006 Secured Convertible Notes to December 13, 2007; eliminated certain Stock Payment Conditions (as defined in the 2006 Secured Convertible Notes), including the volume trading limitation, provided for the designation by ProMed Partners, L.P. of a representative, initially David B. Musket, to our Board of Directors and made further changes to the 2006 Secured Convertible Notes primarily to reflect events occurring since their issuance in January 2006.

     On January 22, 2007, we also entered into a purchase agreement and related documents, pursuant to which we sold the 2007 Secured Convertible Notes, which were initially convertible into 6,928,572 shares of our common stock, and accompanying warrants to purchase up to 4,157,143 shares of our common stock (the “2007 Purchaser Warrants”), for an aggregate consideration of approximately $4,365,000 million (before cash commissions and expenses of approximately $520,000). The 2007 Secured Convertible Notes are convertible into shares of our common stock at an initial conversion price of $0.63 per share of common stock and bear interest at the rate of 15% per annum. The 2007 Purchaser Warrants, exercisable over a five year period from their date of issuance, have an exercise price of $0.63 per share. We also issued to a placement agent warrants to purchase, at any time within five years of issuance, up to 55,556 shares of our common stock at an exercise price of $0.76 per share (the “2007 Agent Warrants” and collectively with the 2007 Purchaser Warrants, the “2007 Warrants”). Both the conversion price and the exercise prices of these securities are subject to adjustment in the event of subsequent dilutive issuances as a result of the approval by our stockholders in June 2007 of a proposal to allow issuances of shares at a price below $0.63 per share.

     The 2007 Secured Convertible Notes mature December 13, 2007 and allow for payment of both principal and interest in shares of our common stock, so long as certain stock payment conditions are satisfied. The conversion price for payments to be made in stock is the lower of the then conversion price, currently $0.63, or 85% of the 10 day volume weighted average price of common stock (the “10-day VWAP”) on AMEX at the time any payment is due. Interest is payable quarterly, in arrears, beginning in June 2007, and principal payments are due monthly beginning in July 2007.

     We must meet all of the following stock payment conditions in order to make interest and principal payments on the 2007 Secured Convertible Notes in shares of our common stock instead of cash: (i) issuance of the shares of common stock will not result in a 2007 Secured Convertible Note holder and its affiliates owning more than 9.99% of the outstanding shares of our common stock, unless waived by the holder; (ii) the number of shares to be issued to all holders of Secured Convertible Notes on a specific payment date shall not exceed 20% of the trading volume (as reported by Bloomberg) of our common stock for the period of 20 consecutive trading days ending on the trading day immediately prior to such payment date; (iii) our common stock is not selling at a price below $0.40 per share; and (iv) we have not issued any notice relating to the redemption of any warrant(s) during the 30 day period immediately prior to the payment date. Our common stock has not traded at or above $0.40 per share since June 12, 2007.

     While the 2007 Secured Convertible Notes are outstanding, we are restricted from incurring additional indebtedness (other than receivables financing not to exceed 80% of receivables and equipment purchase or lease financing not to exceed $200,000) and from paying cash dividends or redeeming securities. In connection with the sale of our 2007 Secured Convertible Notes, we entered into an amended and restated security agreement and an amended and restated contingent license agreement with the collateral agent, SDS Capital Group SPC, Ltd. As a result, our obligations under the 2007 Secured

Convertible Notes (as well as the 2006 Secured Convertible Notes) are secured by liens against certain assets related to our NMP22 product line. The security interest covers cell lines, equipment, inventory and general intangibles related to the NMP22 product line, as well as proceeds from the sale of the product line. We also entered into an amended and restated contingent license agreement with the collateral agent granting license rights in the field of bladder cancer detection to some of our patents related to the NMP22 products, sublicense rights to patents licensed to us and used in connection with the NMP22 product line, and license rights to trademarks used exclusively in connection with the NMP22 product line. The contingent license allows the collateral agent to rely on and use the licensed patent rights if we default in our payment obligations under the Secured Convertible Notes. The license rights will terminate upon payment in full of all amounts payable under the Secured Convertible Notes or earlier upon the expiration date of the underlying licensed patents.

     We have granted the holders of the 2007 Secured Convertible Notes or the holders of shares of our common stock issued upon conversion of the 2007 Secured Convertible Notes, either cumulatively valued at or in excess of $250,000, the right to participate in future equity-based financing transactions, up to a maximum of 50% of the new transaction. Holders of the 2007 Secured Convertible Notes may not generally exercise these rights if they have exercised similar rights under the 2006 Secured Convertible Notes. If, however, all participating holders of the Secured Convertible Notes do not elect to purchase the full 50% of a future financing transaction, then those holders who have exercised rights under only the 2006 Secured Convertible Notes or the 2007 Secured Convertible Notes will have the right to further participate based on their cumulative holdings of their other year’s Secured Convertible Notes. The holders of the 2007 Secured Convertible Notes who qualify for participation rights in our future financing transactions also have the right to exchange up to 50% of the then-held principal value of their 2007 Secured Convertible Notes for participation in the transaction, subject to an overall restriction for all holders that limits them to an aggregate of 50% of each future financing transaction.

     The 2007 Secured Convertible Notes require us to pay interest and liquidated damages and may become immediately due and payable in cash at a premium of 120% of the outstanding principal amount plus accrued interest and damages in the event we default under their terms. Potential defaults would include, among other things:

	•		our failure to make payments as they become due;
	•		our failure to remain listed on any of the Nasdaq Markets, New York Stock Exchange (“NYSE”) or AMEX;
	•		our failure under certain circumstances to have an effective registration statement available (after a valid demand for registration) for resale of the shares upon conversion of the 2007 Secured Convertible Notes;
	•		failure to timely remove restrictive legends from any stock certificates delivered upon conversion;
	•		our written notice or public announcement of the intention not to issue shares upon conversion;
	•		our making an assignment for the benefit of creditors, or applying for or consenting to the appointment of a receiver or trustee for a substantial portion of our property or business or that of any subsidiary;
	•		bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
	•		a sale or disposition of substantially all our assets;
	•		our default on our existing or future liabilities in excess of $250,000, including the 2006 Secured Convertible Notes; and
	•		a breach of any material term of any other transaction document we entered into with the purchasers of the 2007 Secured Convertible Notes.

     Under the terms of the transaction documents for the 2007 Secured Convertible Notes, we may be required to file with the SEC a registration statement covering the shares into which the 2007 Secured Convertible Notes may be converted and the shares for which the 2007 Warrants may be exercised if the purchasers holding at least 22% of the aggregate amount of securities initially acquired in the sale of the 2007 Secured Convertible Notes, based on the conversion price in effect at the time of filing the registration statement, demand that we file such a registration statement. No demand for registration has been made and, in view of our stock trading price, we do not expect any request to be made. If a demand is made, we will have 90 days in which to have a registration statement declared effective (or 150 days in the event the registration statement is reviewed by the SEC). We are also obligated to keep our stock listed for trading on AMEX, NYSE or Nasdaq. If, after demand, we fail to register the shares we have committed to register on a timely basis other than if the SEC will not declare the registration statement effective due to interpretations of Rule 415 of the Securities Act of 1933, we may be subject to penalties, including payment of 1.5% of the consideration paid for the 2007 Secured Convertible Notes for each thirty day period of delay in registration. Further, we agreed to seek, and we received in June 2007, stockholder approval of the issuance of our common stock in satisfaction of our obligations under the 2007 Secured Convertible Notes and upon exercise of the 2007 Warrants at a conversion price or exercise price below $0.63 per share.

     The sale of the 2007 Secured Convertible Notes and the 2007 Purchaser Warrants has been deemed to be a dilutive issuance under the terms of our 2006 Secured Convertible Notes and the 2006 Warrants. As a result, as of January 22, 2007, the 2006 Secured Convertible Notes became convertible at a price of $0.63 per share, and the exercise price of the 2006 Warrants was reduced to $0.63 per share. We had previously reserved shares sufficient to cover this adjustment in conversion price. We have calculated an additional beneficial conversion charge totaling approximately $208,000, which was recorded as a debt discount in the first quarter of 2007 and will be amortized as interest expense over the remaining life of the 2006 Secured Convertible Notes.

     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 to us that they acquired 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.

     The proceeds of approximately $4,365,000 and the closing costs of $542,000 were allocated in the following manner:

     The total proceeds of $4,365,000 were allocated between the 2007 Purchaser Warrants and the 2007 Secured Convertible Notes based on their relative fair values. We valued the 2007 Purchaser Warrants using the Black-Scholes pricing model with the following assumptions: dividend yield of zero percent; expected volatility of 68%; risk free interest rate of 4.24% and a term of five years. In accordance with EITF 00-19-2, we did not record a liability associated with the registration rights from the 2007 Secured Convertible Notes since the obligation regarding the registration rights is not probable.

     Total closing costs were approximately $542,000 and included the costs associated with the 2007 Agent Warrants, which we valued at approximately $23,000 using the same method used for valuing the 2007 Purchaser Warrants. Debt issuance costs of $395,000 were allocated to the 2007 Secured Convertible Notes and have been capitalized as other assets on our condensed consolidated balance sheet and are being amortized based on the effective interest rate method over the term of the 2007 Secured Convertible Notes. The $147,000 of costs allocated to the 2007 Purchaser Warrants were deducted from the net proceeds attributable to the 2007 Purchaser Warrants.

     The difference between the effective conversion price of the 2007 Secured Convertible Notes and the fair value of our common stock on the date of issuance of the 2007 Secured Convertible Notes equals the beneficial conversion feature calculated in accordance with EITF 00-27. The first step in this calculation, as shown below divides the value allocated above to the 2007 Secured Convertible Notes by the number of shares issued upon conversion to determine the effective conversion price:

     The second step in this calculation, as shown below, determines the discount to market based on the effective conversion price and uses this discount to determine the beneficial conversion feature:

     This beneficial conversion feature of approximately $1,670,000 was recorded as a debt discount and resulted in a carrying value for the 2007 Secured Convertible Notes of $1,508,000 at closing. The difference between the carrying value recorded at

closing and the $4,365,000 face value of the 2007 Secured Convertible Notes is being accreted over their 11 month term using the effective interest rate method.

     If note holders convert any of the 2007 Secured Convertible Notes prior to maturity, the proportionate share of the remaining unamortized debt discount, debt issuance costs and beneficial conversion feature related to the amount of converted principal will be charged to expense in the current period and the amount remaining will be charged to expense over the remaining term of the 2007 Secured Convertible Notes.

     In the third quarter of 2007, the holders of our 2007 Secured Convertible Notes elected to defer approximately $398,000 of interest payments, including some previously postponed until July 2007, and approximately $2,033,000 of principal due from July, August and September 2007 until the earlier of (i) a sale of substantially all our assets or a merger or (ii) the scheduled maturity date of December 13, 2007. In the third quarter of 2007, we paid approximately $10,000 in cash as payment of interest due on the 2007 Secured Convertible Notes and we paid approximately $150,000 in cash as payment of principal payments due on the 2007 Secured Convertible Notes.

     In the third quarter of 2007, we and the holders of a majority of outstanding principal value of the 2007 Secured Convertible Notes entered into an Agreement and Amendment pursuant to which the signing holders agreed not to issue a default notice (as defined in the 2007 Secured Convertible Notes) until the later of (a) ten business days after a registration statement on Form S-3 is declared effective by the Securities and Exchange Commission for the resale by us of shares of Inverness common stock we receive as proceeds of the Asset Sale or (b) the date of the closing of the Asset Sale. The holders’ forbearance on issuance of a default notice is limited to a maximum of ninety days after the closing of the Asset Sale. In addition, we agreed to pay to the signing holders a prepayment premium, already designated in the 2007 Secured Convertible Notes, upon repayment of these notes held by the signing holders, regardless of the date of repayment. We and the signing holders further agreed to amend the 2007 Secured Convertible Notes of those holders to provide that the default amount (as defined in the 2007 Secured Convertible Notes) shall include a premium of 25%, rather than 20%, to make it equivalent to the amount of prepayment premium. The Agreement and Amendment further provides that the signing holders shall not be entitled to both a default amount (as defined in the 2007 Secured Convertible Notes) and a prepayment premium. The prepayment premium is being amortized to interest expense through December 13, 2007 using the effective interest method.

     For the three and nine month periods ended September 30, 2007, we included $102,000 and $307,000, respectively, representing amortization of deferred financing costs, and $735,000 and $2,222,000, respectively, representing accretion of debt discount and beneficial conversion feature, in interest expense related to the 2007 Secured Convertible Notes. For the nine month period ended September 30, 2007, we paid approximately $28,000 in cash as payment of interest on the 2007 Secured Convertible Notes.

     A summary of the accounting for the 2007 Secured Convertible Notes is as follows:

     Minimum future payments on the debt are as follows:

6. Notes Payable

     On August 30, 2007, we entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors pursuant to which we sold the Series C Notes for an aggregate purchase price of $3,500,000 (the “Financing”).  The Series C Notes bear interest at the rate of 15% per annum for the first ninety days after issuance and thereafter bear interest at the rate of 18% per annum.  The scheduled maturity date of the Series C Notes is December 13, 2007, or earlier in the event of the consummation of a change of control.  At the time of repayment, regardless of whether the Series C Notes are paid at the maturity date, we must also pay a premium of 29% of the principal amount outstanding. The premium will be amortized to interest expense using the effective interest method over the life of the Series C Notes.

     Prior to the Financing, on August 10, 2007, we amended our Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of Matritech, Inc. with the written consent of the holders of more than 75% of the outstanding Series A Preferred Stock, to increase the amount of indebtedness we may incur, assume or suffer to permit without the prior consent of the holders of at least 75% of the outstanding Series A Preferred Stock from $12,000,000 to $15,300,000. On August 9, 2007, we also entered into a Consent with the holders of a majority of outstanding principal value of our 2006 Secured Convertible Notes and the holders of a majority of outstanding principal value of our 2007 Secured Convertible Notes to allow us to incur an increased amount of indebtedness sufficient to permit us to issue additional notes in an aggregate principal amount not to exceed $3.5 million and ranking on a pari passu basis with the Secured Convertible Notes as to payment and security. The Consent also directed the collateral agent for the holders of the Secured Convertible Notes to consent to and enter into an amendment and restatement of the existing security agreement and contingent license agreement so that the holders of the additional notes would have a pari passu position with the holders of the Secured Convertible Notes.

     In connection with the Financing, we entered into a Second Amended and Restated Security Agreement with the collateral agent on behalf of itself and the holders of all of our Secured Promissory Notes, pursuant to which we granted liens against certain assets related to our NMP22 ^® product line.  The security interest covers cell lines, equipment, inventory and general intangibles related to the NMP22 product line, as well as proceeds from the sale of the product line.  We also entered into a Second Amended and Restated Contingent License Agreement with the collateral agent, granting license rights in the field of bladder cancer detection to some of our patents related to the NMP22 products, sublicense rights to patents licensed to us and used in connection with the NMP22 product line, and license rights to trademarks used exclusively in connection with the NMP22 product line. In connection with the Financing, the holders of the Series C Notes directed the collateral agent, at the closing of the Asset Sale to (i) release existing collateral, terminate the Second Amended and Restated Security Agreement, terminate the Second Amended and Restated Contingent License Agreement and terminate existing UCC-1 financing statements, and (ii) enter into a pledge agreement, pursuant to which we will grant the collateral agent a security interest in shares of Inverness common stock equal in value to 150% of the outstanding amounts owed on the Series C Notes. On August 31, 2007, we and the holders of a majority of outstanding principal value of the 2006 Secured Convertible Notes and of the 2007 Secured Convertible Notes entered into a Consent that also directs the collateral agent, at the closing of the Asset Sale to (i) release existing collateral, terminate the Second Amended and Restated Security Agreement, terminate the Second Amended and Restated Contingent License Agreement and terminate existing UCC-1 financing statements, and (ii) enter into a pledge agreement, pursuant to which we will grant the collateral agent a security interest in shares of Inverness common stock equal in value to 150% of the outstanding amounts owed on the Secured Convertible Notes.

     The Series C Notes may become immediately due and payable in cash at a premium of 129% of the outstanding principal amount plus accrued interest and damages in the event we default under their terms. Potential defaults would include, among other things:

	•		our failure to make payments as they become due;
	•		our making an assignment for the benefit of creditors, or applying for or consenting to the appointment of a receiver or trustee for a substantial portion of our property or business or that of any subsidiary;
	•		bankruptcy, insolvency or similar proceedings being filed by or against us or any subsidiary;
	•		our default on our existing or future liabilities in excess of $250,000, including the Secured Convertible Notes; and
	•		a breach of any material term of any other transaction document we entered into with the purchasers of the Series C Notes.

     The Series C Notes provide that the holders may not issue a default notice (as defined in the Series C Notes) for our failure to pay any of the Secured Convertible Notes that become due as a result of the closing of a change of control transaction, such as the Asset Sale, until the later of (a) ten business days after a registration statement on Form S-3 is declared effective by the Securities and Exchange Commission for the resale by us of shares of Inverness common stock we receive as proceeds of the Asset Sale or (b) the date of the closing of the Asset Sale.

     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 to us that they acquired 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 received net proceeds of approximately $3.4 million after deducting the estimated expenses we incurred in connection with the Financing.  We intend to use the net proceeds from the Financing for general corporate purposes.

     A summary of the accounting for Series C Notes is as follows:

     Minimum future payments on the debt are as follows:

7. Stock-Based Compensation

     Effective January 1, 2006, we adopted the provisions of SFAS 123R, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

     The effect of recording stock-based compensation expense in our consolidated statement of operations for the three and nine months ended September 30, 2006 and 2007 was as follows:

Stock option activity for the nine month period ended September 30, 2007 is summarized as follows:

Restricted Stock and Restricted Stock Units

     Restricted stock and restricted stock unit activity for the nine month period ended September 30, 2007 is summarized as follows:

8. Contingencies

      Intellectual Property Rights

     Our NMP22 BladderChek Test is a point-of-care device which may infringe the intellectual property rights of third parties.  In August 2004, we entered into a license agreement, effective as of April 1, 2004, with one holder of such patent rights, Abbott Laboratories.  On November 3, 2006, we executed a supply agreement with Inverness, which holds substantial patent rights in the lateral flow area covering the professional field, which includes licensed health care providers and diagnostic laboratories. As part of this agreement, we have secured protection from claims by Inverness of infringement of its lateral flow patent rights for products we purchase from Inverness and resell in the professional field. Inverness has also agreed not to sue us, our resellers, distributors and end-customers for infringement of these lateral flow patent rights for products sold prior to November 3, 2006, the date of our agreement with Inverness. We do not expect our future profit margins to be significantly affected by this new supply agreement. We may need to secure additional licenses or other similar rights to lateral flow technology in the United States or elsewhere. If we are required to obtain additional licenses, we cannot currently estimate the extent of any liabilities we may incur or whether future profit margins will be significantly affected by the arrangements we may negotiate.

9. Accrued Expenses

     Accrued expenses consist of the following:

10. Asset Sale

     On August 27, 2007, we entered into the Asset Purchase Agreement with Inverness and Milano, a wholly owned subsidiary of Inverness, pursuant to which Milano has agreed to acquire substantially all of our assets for aggregate consideration of $36 million, payable in Inverness common stock (based on the weighted average closing price of Inverness common stock for the consecutive 10-trading day period ending on the second trading day immediately preceding the closing of the Asset Sale). In addition, Milano may be required to pay up to an additional $2 million, which Milano may elect to pay in cash and/or Inverness common stock, conditioned on the achievement of certain revenue targets for the twelve month period following the closing. The closing of the transaction is conditioned upon our receipt of (i) the approval of the transaction and the Asset Purchase Agreement by the holders of 75% or more of the shares of our outstanding Series A Preferred Stock; (ii) the approval of the transaction and the Asset Purchase Agreement by the holders of a majority of our outstanding shares of both common and preferred stock, voting together as a single class; and (iii) the consent of Inverness’ lender, if required, as well as the satisfaction of regulatory and other customary conditions. If our stockholders approve the transaction and the other conditions are satisfied, we expect the Asset Sale to close in the fourth quarter of 2007. Following the closing of the Asset Sale and subject to the approval of our stockholders, we intend to dissolve in compliance with the applicable provisions of the Delaware General Corporation Law.

     The Asset Purchase Agreement obligates Inverness to file with the Securities and Exchange Commission a registration statement on Form S-4 covering the shares of Inverness common stock comprising the purchase price for the Asset Sale, which registration statement shall include Matritech’s proxy statement in connection with our stockholder meeting to approve the Asset Sale and subsequent dissolution. An initial version of this registration statement was filed on October 23, 2007. Inverness is obliged to file a registration statement on Form S-3on or before the end of the trading day after closing of the Asset Sale, which registration statement will enable us to promptly sell all of the shares of Inverness common stock received as consideration in the Asset Sale. We intend to promptly sell the shares of Inverness stock we receive at closing of the Asset Sale in order to obtain the cash necessary to satisfy our existing obligations, to fund our operations through the dissolution process, and to preserve the value of the consideration received in the Asset Sale. Our existing obligations include outstanding secured indebtedness, transaction fees, and various employee costs, including certain change of control payments.

     The Asset Purchase Agreement provides for Milano to acquire substantially all of our assets, including our intellectual property rights, equipment, raw materials, inventory, contracts, the stock of our German subsidiary and any cash in excess of $100,000. The assets excluded from the Asset Sale include documents relating to our corporate existence and outstanding securities, records we are required to retain, and contracts with employees not hired by Inverness, including change of control agreements with management employees.

     The Asset Purchase Agreement provides for Milano to assume substantially all of our liabilities, but we will retain liabilities relating to (a) all our outstanding Secured Promissory Notes (which we intend to pay in full following our sale of Inverness common stock as described above); (b) all investment banker, legal and accounting fees incurred in connection with our consummation of the Asset Sale; (c) all outstanding warrants issued by us for the purchase of shares of our common stock; (d) all employee expenses incurred in connection with and employee compensation earned prior to the closing of the Asset Sale; (e) all obligations owed to employees who are not hired by Inverness, Milano or one of their affiliates following the closing of the Asset Sale, including obligations under change of control agreements entered into with management employees in the spring of 2006; and (f) income tax liabilities.

     Prior to the closing, except as consented to by Inverness, we have agreed to continue our operations in the ordinary course of business and, with limited exceptions, not to declare or pay dividends; redeem securities; issue additional securities; amend our organizational documents; increase the compensation due to directors or officers or materially amend or terminate any employment, severance or similar agreements or benefit plans; adopt a shareholder rights plan; acquire any other business; encumber our assets; incur further indebtedness; accelerate the payment or vesting of any material compensation of benefit

arrangements; grant equity awards; make substantial capital expenditures; initiate, compromise or settle any material litigation or arbitration proceeding; enter into or amend material contracts; or make material changes in our accounting or tax elections.

     We are also restricted from soliciting or entering into negotiations for or agreements related to the sale or merger of the Company, except upon compliance with required notices to Inverness and as required by applicable fiduciary duties. In addition, we will be required to pay Inverness a break-up fee of $1.08 million under certain circumstances as further described in the Asset Purchase Agreement.

     There can be no assurance that the conditions to closing the Asset Sale will be satisfied or that the Asset Sale will be completed on the terms set forth in the Asset Purchase Agreement or at all. Following the closing of the Asset Sale and subject to the approval of our stockholders, we intend to dissolve in compliance with the applicable provisions of the Delaware General Corporation Law. As part of the dissolution process, we expect to distribute to our common stockholders the available net proceeds, if any, beginning no earlier than the third quarter of 2008. The amount ultimately available to be distributed to our stockholders will depend on a number of future events, including, without limitation:

	•		the timing of sales of Inverness common stock by us and the proceeds received by us in connection with such sales;
	•		our operating costs until the closing; and
	•		the costs we will incur and be required to pay on and after the closing such as transaction fees, obligations to employees, taxes, obligations related to liabilities not assumed by Inverness, obligations related to funding the Company through dissolution and any claims that may arise during the dissolution process.

We will only be able to distribute the remaining proceeds from the Asset Sale to our stockholders after we satisfy all of our obligations to creditors and comply with applicable statutory requirements. Though we expect to make an initial distribution to the holders of our common stock in the third quarter of 2008, we do not expect a final distribution to be made until at least 2011.

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

     This Quarterly Report on Form 10-Q, our other reports and communications to our 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. In particular, certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute forward-looking statements. Also, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance or the outcome of litigation (often, but not always, using words or phrases such as “believes,” “expects” or “does not expect,” “is expected,” “anticipates” or “does not anticipate” or “intends” or stating that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken or achieved) are not statements of historical fact and are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or developments in our business or industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Such risks and uncertainties include the factors set forth in “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in our other reports filed with the SEC. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements are based on our management’s current plans, estimates, opinions and projections, and we assume no obligation to update forward-looking statements if assumptions regarding these plans, estimates, opinions or projections should change. This discussion should be read in conjunction with the consolidated financial statements and related Notes for the periods specified. Further reference should be made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on March 27, 2007 (File No. 001-12128).

Overview

     On August 27, 2007, we entered into an Asset Purchase Agreement with Inverness and Milano, a wholly owned subsidiary of Inverness, pursuant to which Milano has agreed to acquire substantially all of our assets. If our stockholders approve the Asset Sale and the other conditions to closing are satisfied, we expect the Asset Sale to close in the fourth quarter of 2007. Following the closing of the Asset Sale and subject to the approval of our stockholders, we intend to dissolve in compliance with the applicable provisions of the Delaware General Corporation Law.

     In order to finance our operations until the closing of the Asset Sale, on August 30, 2007 we sold our Series C Notes for aggregate consideration of $3.5 million (before expenses). All of the principal, interest and premium on the Series C Notes are due and payable no later than December 13, 2007, the same date on which all unpaid principal, interest and premium on our

Secured Convertible Notes are due. At September 30, 2007, the outstanding principal balance of our Secured Promissory Notes was $12.3 million.

     At September 30, 2007, we had cash and cash equivalents of $2.8 million and negative working capital of $10.8 million. Currently, the holders of more than 96% of our outstanding Secured Convertible Notes agreed to defer receipt of further payments on the notes until December 13, 2007. If the Asset Sale is not closed by December 13, 2007, we would need to seek an agreement from each of the holders of our outstanding Secured Promissory Notes to extend the maturity dates of those Secured Promissory Notes and/or to secure additional capital in order to continue operations. We will, as we deem necessary or prudent and subject to the terms and conditions of the Asset Purchase Agreement with Inverness and our various outstanding debt and equity agreements, continue to seek to raise additional capital through various financing alternatives. A failure to adequately finance the Company would have a material adverse impact on our ability to consummate the Asset Sale and to operate as a going concern.

     In order to preserve cash resources and to seek to avoid, or reduce, the need for any further borrowing, we have selectively curtailed expenditures and decreased staff in regulatory affairs, marketing and administration. We have also terminated most of our research and development staff and are no longer pursuing further development or submission on any of our research and development programs. Notwithstanding these efforts, if the closing of the Asset Sale is delayed beyond December 2007, we may be required to obtain additional financing to fund our operations through the closing date.

     On September 26, 2007, we entered into a Termination Agreement with Sysmex Corporation that provided for the immediate termination of the Exclusive License and Exclusive Supply Agreement dated November 20, 2002 between Sysmex and us. As a result of this termination, we have no near term prospect for securing additional revenue from commercialization of our NMP179 ^® technology.

     Our most important source of revenue and revenue growth continues to be our NMP22 ^® BladderChek ^® Test, a point-of-care test product developed by our scientists based upon our proprietary NMP technology. Our own sales forces, based in the U.S. and Germany, sell our NMP22 BladderChek Test directly to physicians. Distributors sell our NMP22 BladderChek Test in countries other than the U.S. and Germany. We also sell our NMP22 Test Kit, which is part of our bladder cancer detection product line, directly and through distributors in the U.S. In Europe, our German subsidiary directly sells both our NMP22 Test Kit and allergy and other diagnostic products manufactured by others. The NMP22 Test Kit and the allergy and other diagnostic products sold by our German subsidiary are less important sources of revenue for us than the NMP22 BladderChek Test.

     AMEX, the exchange where our common stock is currently listed, maintains standards and requirements for initial and continued listing of securities. In September 2006, we received notice from AMEX that we were not in compliance with certain continued listing standards relative to maintenance of stockholders’ equity and profitability. In October 2006, we submitted to AMEX a plan of proposed action we believed would bring us into compliance with applicable listing standards no later than March 21, 2008, and in December 2006, we received notice that AMEX had accepted our plan. AMEX may initiate delisting procedures against us if we do not make progress consistent with our plan during the plan period or if we are not in compliance with applicable listing standards at the end of the plan period. A delisting of the shares of our common stock would violate terms of our various financing documents, make it more difficult for us to raise additional capital and could jeopardize the consummation of the Asset Sale.

Results of Operations

Quarter Ended September 30, 2006 (“Q3 2006”) Compared with Quarter Ended September 30, 2007 (“Q3 2007”)

     The increase in revenue in the third quarter of 2007 compared to the third quarter of 2006 from sales of our NMP22 BladderChek Test is the result of $463,000 in increased sales and a $145,000 favorable exchange rate impact. The $463,000 increase in NMP22 BladderChek Test sales consists of a $308,000 increase in the volume of tests sold and a $155,000 increase in the average revenue per test. The average revenue per test increased in 2007 over the same period in 2006 due to more favorable customer mix. NMP22 BladderChek Test sales accounted for approximately 90% and 94% of sales in the NMP22 product line in the third quarters of 2006 and 2007, respectively. The decrease in revenue from our NMP22 Lab Test Kit sales is the result of a $78,000 decrease, principally the result of decreased volumes, offset by a $9,000 favorable exchange rate impact.

     The increase in revenue from our non-NMP22 products (listed in the table above as Other Product Sales) is mainly due to favorable exchange rates.

     The increase in revenue from alliance and collaboration is due mainly to the termination of the license and supply agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result of the termination of this agreement, we recognized all remaining deferred revenue relating to the license and supply agreement. This resulted in our recognizing approximately $609,000 of revenue which consisted of the remaining amount of the license, which previously was being recognized over the fourteen-year term of the related patents, as well as remaining unamortized amounts related to payments for research and development services.

     When we have sufficient history to estimate product returns for a distributor, we recognize revenue when we ship our NMP22 BladderChek Tests to that distributor. In the third quarter of 2007, we sold approximately $90,000 of our NMP22 BladderChek Tests to distributors for which we had sufficient history to estimate returns and approximately $44,000 to distributors for which we did not have such history. Accordingly, shipments in the amount of $44,000 were recorded as deferred revenue that we will recognize as revenue when the distributor reports to us that it no longer has the product, when we determine the shelf life of the product has expired (each indicating that the possibility of return is remote) or after we have ten quarters of experience with the distributor. At December 31, 2006 and September 30, 2007, $91,000 and $103,000 remained in deferred product revenue, respectively. See “Critical Accounting Policies and Estimates” for a description of our revenue recognition policy.

     During the third quarter of 2007, we determined that we had sufficient history to estimate product returns for one additional distributor and therefore are now recognizing revenue when we ship our NMP22 BladderChek Tests to this distributor. There was no deferred revenue recognized in the third quarter of 2007 as a result of commencement of recognition of revenue from sales to of this distributor upon shipment.

     Deferred revenue consists of the following:

     The deferred product revenue balance increased from the fourth quarter of 2006 to the third quarter of 2007 because we shipped more NMP22 BladderChek Tests to distributors for which we do not have sufficient history to estimate product returns than these distributors shipped to end user customers. Unless we change distributors or add significant new distributors, we expect our deferred product revenue will decrease in the future.

     The deferred revenue related to alliance and collaboration decreased from the fourth quarter of 2006 to the third quarter of 2007 mainly due to the termination of the license and supply agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result the termination of this agreement, we recognized all remaining deferred revenue relating to the license and supply agreement.

     Cost of product sales includes (a) payroll-related expenses related to employees involved in the production of our products, (b) product materials, (c) rent and related expenses allocated to employees involved in the production of our products, (d) supplies, (e) depreciation of fixed assets used in production and (f) royalties paid to third parties. Gross profit on product sales is calculated by deducting the cost of product sales from product sales. The decrease in cost of product sales on a percentage basis and the increase in our gross profit margin on product sales is largely the result of a decrease in the amount of royalties paid to Massachusetts Institute of Technology (“MIT”) on sales of our NMP22 BladderChek Tests and our NMP22 Lab Test Kits as the majority of the patents licensed to us by MIT expired in the fourth quarter of 2006.

Research & Development and Clinical & Regulatory Expenses

     Research & development and clinical & regulatory expenses include (a) the salaries and related overhead of our research and clinical personnel, (b) laboratory supplies, (c) payments to third parties and sites to help us execute clinical trials, (d) depreciation of research related equipment, (e) legal expenses related to filing and prosecuting patents, (f) other direct expenses and (g) an allocation of our occupancy and related expenses based on the square footage occupied by our research & development staff, their laboratories and clinical & regulatory staff. Research & development and clinical & regulatory expenses decreased in the third quarter of 2007 compared to the third quarter of 2006 primarily due to a $130,000 decrease in payroll costs, a $24,000 decrease in supply costs and a $15,000 decrease in consultant costs.

Selling, General and Administrative Expenses (“SG&A”)

		Q3 2006				Q3 2007				$ Change				% Change
SG&A		$	3,529,000			$	4,647,000			$	1,118,000				32	%

     SG&A increased in the third quarter of 2007 compared to the third quarter of 2006 primarily due to a $385,000 increase in legal costs incurred in connection with consideration and pursuit of various transactions including the Asset Sale and the Financing, a $360,000 increase in investment banker costs incurred in connection with our exploration of strategic options, a $104,000 unfavorable currency exchange rate impact on non-US SG&A, a $100,000 increase in payroll costs resulting from increased headcount, mainly to support direct sales efforts, a $70,000 increase in sales-related marketing expense, a $56,000 increase in accounting-related professional fees, a $45,000 increase in recruiting and relocation costs and a $39,000 increase in management information system related costs, partially offset by a $36,000 decrease in temporary help costs.

     The operating loss in the third quarter of 2007 decreased as compared to the same period in 2006 primarily due to the decrease in research & development and clinical & regulatory expenses as well as the increase in total revenue discussed above.

Interest Income

		Q3 2006				Q3 2007				$ Change				% Change
Interest Income		$	28,000			$	9,000			$	(19,000	)			(68	%)

     Interest income decreased in the third quarter of 2007 compared to the third quarter of 2006 due to a decrease in the average daily cash balances, partially offset by higher interest rates during the third quarter of 2007.

     Interest on debt consists primarily of interest accrued or paid in the quarter related to our Secured Promissory Notes. For the third quarter of 2006, interest on debt was attributable to our 2006 Secured Convertible Notes. In the third quarter of 2007, interest on debt was attributable to the 2006 Secured Convertible Notes, the 2007 Secured Convertible Notes and the Series C Notes, resulting in a larger outstanding debt balance.

     In the third quarter of 2007, we issued common stock in payment of approximately $13,000 of interest on the 2006 Secured Convertible Notes and we made a cash payment of approximately $10,000 in respect of interest on the 2007 Secured Convertible Notes. In the third quarter of 2007, holders of our Secured Convertible Notes elected to defer approximately $107,000 of interest payments due in July 2007 on the 2006 Secured Convertible Notes and approximately $398,000 of interest payments due on the 2007 Secured Convertible Notes until the earlier of (i) a sale of substantially all our assets or a merger or (ii) the scheduled maturity date of December 13, 2007.

     The interest on debt and non-cash charges increased over the third quarter of 2006 primarily due to the increase in interest on debt charges and non-cash interest charges related to the Secured Convertible Notes and the Series C Notes, as further described below.

Series C Notes

     In August 2007, we sold the Series C Notes and as a result incurred the obligation to pay a premium of 29% of the principal at the time of repayment, or approximately $1,015,000. As of September 30, 2007, approximately $256,000 of the $1,015,000 have been accreted and recorded as interest expense and the remaining $759,000 is scheduled to be accreted to interest expense using the effective interest method over the life of the Series C Notes.

     The following table demonstrates the accounting for the Series C Notes from the date of issuance, August 30, 2007, to September 30, 2007;

2007 Secured Convertible Notes

     In January 2007, we sold the 2007 Secured Convertible Notes and recorded approximately $3,253,000 of related non-cash charges which are being recorded in our statement of operations through December 2007, the life of the obligations. As of September 30, 2007, approximately $2,529,000 of the $3,253,000 of non-cash charges and deferred financing costs have been amortized and recorded as interest expense and the remaining $724,000 is scheduled to be amortized using the effective interest rate method over the remaining quarter through the final payment due date in December 2007.

Non-cash charges to interest expense in the third quarter of 2007 related to the 2007 Secured Convertible Notes consisted of:

•

$102,000 of amortized deferred financing costs, which reduced the original $395,000 balance of deferred financing costs to $88,000 at September 30, 2007; and

•

$735,000 of amortized debt discount, which reduced the $2,857,000 of debt discount to $636,000 at September 30, 2007.

     The following table demonstrates the accounting for the 2007 Secured Convertible Notes and related discounts from the date of issuance, January 22, 2007, to September 30, 2007;

2006 Secured Convertible Notes

     In January 2006, we sold our 2006 Secured Convertible Notes and recorded approximately $6,001,000 of related non-cash charges which are being recorded in our statement of operations through December 2007. As a result of the issuance of the 2007 Secured Convertible Notes, we recorded an additional beneficial conversion feature of approximately $208,000 on the 2006 Secured Convertible Notes in the first quarter of 2007. These additional non-cash charges are being recorded in our statement of operations through December 2007. As of September 30, 2007, approximately $5,422,000 of the $6,209,000 non-cash charges and deferred financing costs have been amortized and recorded as interest expense and the remaining $787,000 will be amortized using the effective interest rate method over the remaining quarters through December 2007. On January 22, 2007 the scheduled maturity date for the 2006 Secured Convertible Notes was shortened to December 13, 2007.

     Non-cash charges to interest expense in the third quarter of 2007 related to the 2006 Secured Convertible Notes consisted of:

•

$133,000 of amortized deferred financing costs, which contributed to the reduction of the original $912,000 of deferred financing costs to $116,000 at September 30, 2007;

•

$774,000 of amortized debt discount, which contributed to the reduction of the $5,296,000 of debt discount to $670,000 at September 30, 2007; and

•

$10,000 of non-cash charges to record the discount from fair value when making the principal and interest repayments on the 2006 Secured Convertible Notes in stock rather than cash.

     The following table demonstrates the accounting for the 2006 Secured Convertible Notes and related discounts from the date of issuance, January 13, 2006, through September 30, 2007:

     Mark-to-market adjustment from registration rights represents the change in the estimated fair value of the registration rights liability associated with our sale of the 2006 Secured Convertible Notes.

     Net loss increased in the third quarter of 2007 as compared to the same period in 2006 primarily due to increased SG&A expenses as well as increased non-cash interest charges related to the Secured Convertible Notes, partially offset by the increase in total revenues, including the deferred revenue recognized as a result of the termination of the Sysmex agreement, the increase in gross profit margins on product sales and the decrease in research & development and clinical & regulatory expenses.

Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2007

     The increase in revenue for the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006 from sales of our NMP22 BladderChek Test is the result of $1,052,000 in increased sales and a $413,000 favorable exchange rate impact. The $1,052,000 increase in NMP22 BladderChek Test sales consists of $143,000 related to an increase in the average revenue per test and a $909,000 increase in the volume of tests sold. The average revenue per test increased in 2007 over the same period in 2006 due to more favorable customer mix. The increase in volume is due to an increase of $1,142,000 in markets where we sell directly offset by a $233,000 decrease in markets where we sell to distributors. This $233,000 decrease arises in large part because in the first nine months of 2006, we recognized $172,000 of revenue from sales to distributors that had previously been in deferred revenue, compared to $0 that we recognized in the first nine months of 2007 from such distributors. NMP22 BladderChek Test sales accounted for approximately 90% and 91% of sales in the NMP22 product line for the nine months ended September 30, 2006 and 2007, respectively. The increase in revenue from our NMP22 Lab Test Kit sales is the result of a $28,000 favorable exchange rate impact, offset by a $10,000 decrease in sales.

     The increase in revenue from our non-NMP22 products (listed in the table above as Other Product Sales) is mainly due to favorable exchange rates.

     The increase in revenue from alliance and collaboration is due mainly to the termination of the license and supply agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result of the termination of this agreement, we recognized all remaining deferred revenue relating to the license and supply agreement. This resulted in our recognizing approximately $609,000 of revenue which consisted of the remaining amount of the license, which previously was being recognized over the fourteen-year term of the related patents, as well as remaining unamortized amounts related to payments for research and development services.

     When we have sufficient history to estimate product returns for a distributor, we recognize revenue when we ship our NMP22 BladderChek Tests to that distributor. During the first nine months of 2007, we sold approximately $242,000 of our NMP22 BladderChek Tests to distributors for which we had sufficient history to estimate returns and approximately $83,000 to distributors for which we did not have such history. Accordingly, $83,000 of shipments were recorded as deferred revenue and will be recognized as revenue when the distributor reports to us that it no longer has the product, when we determine the shelf life of the product has expired (each indicating that the possibility of return is remote) or after we have ten quarters of experience with an individual distributor. At December 31, 2006 and September 30, 2007, $91,000 and $103,000 remained in deferred product revenue, respectively. See “Critical Accounting Policies and Estimates” for a description of our revenue recognition policy.

     During the first nine months of 2006, we determined that we had sufficient history to estimate product returns for three additional distributors and therefore are now recognizing revenue when we ship our NMP22 BladderChek Tests to these distributors. We also recognized all deferred revenue relating to our NMP22 BladderChek Test shipments to these distributors in the nine months ended September 30, 2006. This has resulted in our recognizing $172,000 of our NMP22 BladderChek Test shipments to distributors that previously would have been in deferred revenue.

     Deferred revenue consists of the following:

     The deferred product revenue balance increased from the fourth quarter of 2006 to the third quarter of 2007 because we shipped more NMP22 BladderChek Tests to distributors for which we do not have sufficient history to estimate product returns than these distributors shipped to end user customers. Unless we change distributors or add significant new distributors, we expect our deferred product revenue will decrease in the future.

     The deferred revenue related to alliance and collaboration decreased from the fourth quarter of 2006 to the third quarter of 2007 mainly due to the termination of the license and supply agreement for NMP179 technology with Sysmex Corporation effective September 26, 2007. As a result the termination of this agreement, we recognized all remaining deferred revenue relating to the license and supply agreement.

     Cost of product sales includes (a) payroll-related expenses related to employees involved in the production of our products, (b) product materials, (c) rent and related expenses allocated to employees involved in the production of our products, (d)

supplies, (e) depreciation of fixed assets used in production and (f) royalties paid to third parties. Gross profit on product sales is calculated by deducting the cost of product sales from product sales. The decrease in cost of product sales on a percentage basis and the increase in our gross profit margin on product sales is largely the result of a decrease in the amount of royalties paid to MIT on sales of our NMP22 BladderChek Tests and our NMP22 Lab Test Kits as the majority of the patents licensed to us by MIT expired during the fourth quarter of 2006.

Research & Development and Clinical & Regulatory Expenses

     Research & development and clinical & regulatory expenses include (a) the salaries and related overhead of our research and clinical personnel, (b) laboratory supplies, (c) payments to third parties and sites to help us execute clinical trials, (d) depreciation of research related equipment, (e) legal expenses related to filing and prosecuting patents, (f) other direct expenses and (g) an allocation of our occupancy and related expenses based on the square footage occupied by our research & development staff, their laboratories and clinical & regulatory staff. Research & development and clinical & regulatory expenses decreased in the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006 primarily due to a $317,000 decrease in payroll costs, a $101,000 decrease in supply costs, and a $56,000 decrease in consultant costs.

Selling, General and Administrative Expenses

     SG&A increased in the nine month period ended September 30, 2007 compared to nine month period ended September 30, 2006 primarily due to a $647,000 increase in legal costs incurred in connection with consideration and pursuit of various transactions including the Asset Sale and the Financing, a $492,000 increase in investment banker costs incurred in connection with our exploration of strategic options, a $485,000 increase in payroll costs resulting from increased headcount, mainly to support direct sales efforts, a $297,000 unfavorable currency exchange rate impact on non-US SG&A, a $141,000 increase in management information system related costs, a $90,000 increase in sales-related marketing expense and a $72,000 increase in accounting-related professional fees, offset by a $135,000 decrease in corporate communication costs.

     The operating loss for the nine month period ended September 30, 2007 decreased as compared to the same period in 2006 primarily due to the decrease in research & development and clinical & regulatory expenses as well as the increase in total revenue discussed above.

     Interest income decreased in the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006 due to a decrease in the average daily cash balances, partially offset by higher interest rates during the first nine months of 2007.