MICRO THERAPEUTICS INC
10QSB, 1998-11-16
PHARMACEUTICAL PREPARATIONS
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<PAGE>   1

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-QSB

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
        EXCHANGE ACT OF 1934 

        FOR THE QUARTERLY PERIOD ENDED September 30, 1998.
                                       ------------------

[ ]     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 0-6523


                            MICRO THERAPEUTICS, INC.
        (exact name of small business issuer as specified in its charter)


            Delaware                                   33-0569235
- ---------------------------------        ---------------------------------------
 (State or other jurisdiction            (I.R.S. Employer Identification Number)
of incorporation or organization)


              1062 Calle Negocio #F, San Clemente, California 92673
                    (Address of principal executive offices)


                                 (949) 361-0616
                           (Issuer's telephone number)


                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                          if changed since last report)

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

                           YES  X      NO
                               ---        ---

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.


                    Class                      Outstanding at September 30, 1998
        -----------------------------          ---------------------------------
        Common Stock, $.001 par value                      6,708,224


                               Page 1 of 26 Pages
                            Exhibit Index on Page 22

<PAGE>   2

                            MICRO THERAPEUTICS, INC.

                              INDEX TO FORM 10-QSB

<TABLE>
<CAPTION>
                                                                                          Page Number
                                                                                          -----------
<S>                                                                                       <C>
PART I. FINANCIAL INFORMATION 

        Item 1. Financial Statements

                Balance Sheet as of September 30, 1998 (unaudited).......................     3

                Statements of Operations (unaudited) for the Three and Nine Months 
                  Ended September 30, 1997 and 1998......................................     4

                Statements of Cash Flows (unaudited) for the Nine Months Ended
                  September 30, 1997 and 1998............................................     5

                Notes to Financial Statements............................................   6-8

        Item 2. Management's Discussion and Analysis or Plan of Operation................  9-19

PART II. OTHER INFORMATION

        Item 1. Legal Proceedings........................................................    20

        Item 6. Exhibits and Reports on Form 8-K.........................................    20

SIGNATURES...............................................................................    21
</TABLE>


                                       2

<PAGE>   3

                            MICRO THERAPEUTICS, INC.

                                  BALANCE SHEET

                               September 30, 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                     ASSETS:
<S>                                                                     <C>         
Current assets:                                                                     
   Cash and cash equivalents                                            $15,334,881 
   Accounts receivable, net of allowance for doubtful accounts                      
     of $10,929                                                             797,742 
   Inventories, net of reserve for obsolescence of $61,397                  696,784 
   Prepaid expenses and other current assets                                232,763 
                                                                        ----------- 
              Total current assets                                       17,062,170 
                                                                                    
Property and equipment, net of accumulated depreciation of $770,420       1,010,295 
Patents and licenses, net of accumulated amortization of $86,959          1,052,491 
Other assets                                                                129,576 
                                                                        ----------- 
              Total assets                                              $19,254,532 
                                                                        =========== 
                                                                                    
                      LIABILITIES AND STOCKHOLDERS' EQUITY:                         
                                                                                    
Current liabilities:                                                                
   Current portion of equipment line of credit                          $    70,769 
   Accounts payable                                                         417,642 
   Accrued liabilities                                                      567,682 
   Deferred revenue                                                         500,000 
                                                                        ----------- 
              Total current liabilities                                   1,556,093 
                                                                                    
Equipment line of credit                                                     92,611 
Notes payable, net of discounts of $2,367,931                            12,632,069 
                                                                        ----------- 
              Total liabilities                                          14,280,773 
                                                                        ----------- 
Commitments and contingencies                                                       
                                                                                    
Stockholders' equity:                                                               
    Preferred stock $.001 par value, 5,000,000 shares authorized, 
      no shares issued and outstanding                                           -- 
    Common stock, $.001 par value, 20,000,000 shares authorized,                    
      6,708,224 shares issued and outstanding                                 6,708 
    Additional paid-in capital                                           28,572,138 
    Unearned compensation                                                   (54,668)
    Accumulated deficit                                                 (23,550,419)
                                                                        ----------- 
              Total stockholders' equity                                  4,973,759 
                                                                        ----------- 
              Total liabilities and stockholders' equity                $19,254,532 
                                                                        =========== 
</TABLE>


See notes to unaudited financial statements.

                                       3

<PAGE>   4

                            MICRO THERAPEUTICS, INC.

                            STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                             For the Three Months Ended         For the Nine Months Ended
                                           ------------------------------     -------------------------------
                                           September 30,    September 30,     September 30,     September 30,
                                               1997              1998             1997               1998
                                           ------------     -------------     -------------     -------------
<S>                                        <C>               <C>               <C>               <C>        
Net sales                                  $   727,474       $ 1,452,998       $ 1,876,843       $ 3,397,374
Cost of sales                                  519,930           756,782         1,564,855         1,664,911
                                           -----------       -----------       -----------       -----------
        Gross profit                           207,544           696,216           311,988         1,732,463

Costs and expenses:
   Research and development                  1,013,134         1,300,445         3,092,470         3,751,314
   Selling, general and administrative         983,851         1,569,940         3,052,422         4,399,248
                                           -----------       -----------       -----------       -----------
        Total costs and expenses             1,996,985         2,870,385         6,144,892         8,150,562
                                           -----------       -----------       -----------       -----------
        Loss from operations                (1,789,441)       (2,174,169)       (5,832,904)       (6,418,099)

Other income (expense):
   Interest income                             116,136           134,597           321,714           388,418
   Interest expense                             (7,168)         (202,863)          (22,268)         (432,741)
   Other income (expense), net                  (1,825)             (913)          160,909            (6,543)
                                           -----------       -----------       -----------       -----------
                                               107,143           (69,179)          460,355           (50,866)
                                           -----------       -----------       -----------       -----------

        Loss before provision for
          income taxes                      (1,682,298)       (2,243,348)       (5,372,549)       (6,468,965)
Provision for income taxes                          --                --               800               800
                                           -----------       -----------       -----------       -----------
        Net loss                           $(1,682,298)      $(2,243,348)      $(5,373,349)      $(6,469,765)
                                           ===========       ===========       ===========       ===========
Per share data:
  Net loss per share (basic
    and diluted)                           $     (0.26)      $     (0.33)      $     (0.99)      $     (0.97)
                                           ===========       ===========       ===========       ===========
  Weighted average shares outstanding        6,456,000         6,700,000         5,444,000         6,686,000
                                           ===========       ===========       ===========       ===========

Pro forma:
  Net loss per share (basic 
    and diluted)                           $     (0.26)           *            $     (0.88)            *
                                           ===========                         ===========
  Weighted average shares outstanding        6,456,000            *              6,079,000             *
                                           ===========                         ===========
</TABLE>

- ----------------
*   Not applicable

See notes to unaudited financial statements.

                                       4

<PAGE>   5

                            MICRO THERAPEUTICS, INC.

                            STATEMENTS OF CASH FLOWS

              For the Nine Months Ended September 30, 1997 and 1998

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                         1997            1998
                                                                     -----------     -----------
<S>                                                                  <C>             <C>         
Cash flows from operating activities:
   Net loss                                                          $(5,373,349)    $(6,469,765)
   Adjustments to reconcile net loss to cash
     used in operating activities:
    Depreciation and amortization                                        273,336        295,078
    Amortization of note payable discounts                                    --        142,737
    Common stock grant and compensation
      related to stock options                                            73,895         55,757
    Gain on sale of investment                                          (167,456)
    Loss/(gain) on sale of fixed assets                                       14          2,372
    Provision for doubtful accounts                                           --         10,929
    Provision for inventory obsolescence                                      --         30,397
    Change in operating assets and liabilities:
      Accounts receivable                                               (120,765)      (408,851)
      Inventories                                                       (158,741)      (108,509)
      Prepaid expenses and other current assets                           64,044        (99,520)
      Accounts payable                                                   (65,723)       126,891
      Accrued interest payable                                                --         41,471
      Accrued liabilities                                                 82,261         54,392
      Deferred revenue                                                        --        500,000
                                                                     -----------    -----------
      Net cash used in operating activities                           (5,392,484)    (5,826,621)
                                                                     -----------    -----------

Cash flows from investing activities:
   Purchase of short-term investments                                (10,200,076)    (3,184,134)
   Maturity of short-term investments                                  5,860,683      9,488,567
   Additions to property and equipment                                  (193,629)      (666,860)
   Additions to patents and licenses                                    (244,687)      (384,459)
   (Increase)/Decrease in other assets                                   (38,348)       (58,994)
                                                                     -----------    -----------
      Net cash (used in) provided by investing activities             (4,816,057)     5,194,120
                                                                     -----------    -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock                             10,340,586        574,561
   Costs of equity issuances                                            (529,535)            --
   Proceeds from exercise of stock options                                58,504        264,011
   Borrowings on equipment line of credit                                 25,341             --
   Borrowings on notes payable                                                --     10,000,000
   Repayments on equipment line of credit                                (39,261)       (46,878)
                                                                     -----------    -----------
      Net cash provided by financing activities                        9,855,635     10,791,694
                                                                     -----------    -----------
      Net increase (decrease) in cash and cash equivalents              (352,906)    10,159,193
Cash and cash equivalents at the beginning of the period               4,157,147      5,175,688
                                                                     -----------    -----------
Cash and cash equivalents at the end of the period                    $3,804,241    $15,334,881
                                                                     ===========    ===========
Supplemental schedule of non-cash activities:
   Unearned compensation related to terminated employees             $    62,590    $    79,542
                                                                     ===========    ===========
</TABLE>

See notes to unaudited financial statements.


                                       5

<PAGE>   6

                            MICRO THERAPEUTICS, INC.

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

1.  Description of The Company:

    Micro Therapeutics, Inc. ("MTI" or the "Company") was incorporated in June
    1993 in California and was reincorporated in Delaware in November 1996 to
    develop, manufacture and market minimally invasive medical devices for
    diagnosis and treatment of neuro and peripheral vascular diseases.

2.  Summary of Significant Accounting Policies:

    Unaudited Interim Financial Information:

    The financial statements included in this Form 10-QSB have been prepared
    pursuant to the rules of the Securities and Exchange Commission for
    quarterly reports on Form 10-QSB, are unaudited and do not contain all of
    the information required by generally accepted accounting principles to be
    included in a full set of financial statements. The financial statements in
    the Company's 1997 annual report on Form 10-KSB include a summary of
    significant accounting policies of the Company and should be read in
    conjunction with this Form 10-QSB. In the opinion of management, all
    material adjustments necessary to present fairly the results of operations
    for such periods have been included. All such adjustments are of a normal
    and recurring nature. The results of operations for any interim period are
    not necessarily indicative of the results of operations for the entire year.

    New Accounting Pronouncements:

    In June 1997, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
    of an Enterprise and Related Information", which establishes standards for
    public business enterprises to report financial and descriptive information
    about operating segments in annual financial statements on the basis that is
    used internally for evaluating segment performance and deciding how to
    allocate resources to segments. SFAS No. 131 also establishes the standards
    for related disclosures about products and services, geographic areas and
    major customers. This statement is effective for fiscal years beginning
    after December 15, 1997. Management is currently evaluating the requirements
    of SFAS No. 131.

3.  Genyx Medical, Inc.:

    On March 12, 1998, Genyx Medical, Inc. ("Genyx"), entered into a $3 million
    equity financing agreement. As a result of this financing, the Company's
    ownership in Genyx was reduced from 85% to 27%. Because the Company's
    carrying value of its investment in Genyx is $0, the Company, in conformity
    with generally accepted accounting principles, is currently not required to
    recognize its equity share of Genyx losses for the period from March 12,
    1998 through September 30, 1998. Expenditures related to Genyx for the
    period from January 1, 1998 to March 12, 1998 had been recorded by the
    Company as research and development expenses, and amounted to $38,139.

4.  Net Loss Per Share:

    Net loss per share for all periods presented is calculated under the
    provisions of Statement of Financial Accounting Standards No. 128, "Earnings
    per Share", (which the Company adopted in the fourth quarter of 1997) by
    dividing net loss by the weighted average number of common shares issued and
    outstanding during the period. For the 1997 pro forma calculation, such
    weighted average includes common shares that were issued upon conversion of
    all outstanding shares of the Company's Preferred Stock in connection with
    the Company's Initial Public Offering of its Common Stock in February 1997,
    as if such conversion had taken place at the beginning of 1997. Potential
    common shares, represented by options, warrants and convertible debt, have
    been excluded from the calculations due to their anti-dilutive effect. Basic
    and diluted loss per share are the same for the periods presented.


                                       6

<PAGE>   7

    Such calculations also conform to the requirements set forth in Staff
    Accounting Bulletin ("SAB") Topic 98, issued by the Securities and Exchange
    Commission in February 1998. SAB 98 provides that stock options and warrants
    granted during the twelve months prior to the date of the filing of a
    company's initial public offering at prices less than the per share initial
    public offering price be excluded from loss per share calculations.
    Previously existing rules set forth by SAB Topic 4-D had required that such
    options and warrants be included in loss per share calculations.
    Accordingly, the historical net loss per share amount for the three and nine
    months ended September 30, 1997 shown in the accompanying statements of
    operations is different from the $0.26 and $0.87 net loss per share for the
    three and nine months ended September 30, 1997, respectively, as reported
    previously.

    Reconciliation of net loss and shares used in the calculations of net loss
    per share for the nine months ended September 30, 1997 is as follows
    (calculations for all other periods may be derived directly from statement
    of operations data):

<TABLE>
<CAPTION>
                                                              For the Nine Months Ended 
                                                                  September 30, 1997
                                                       -----------------------------------------
                                                         Net Loss        Shares        Net Loss
                                                       (Numerator)    (Denominator)    Per Share
                                                       -------------  ------------     ---------
<S>                                                    <C>             <C>            <C>
          Loss available to common stockholders         $(5,373,349)
                                                        -----------   -----------
          Pro forma weighted average shares
            outstanding, giving effect to the
            conversion of Preferred Stock as of the
            beginning of the period
                                                        -----------   -----------       ------
          Pro forma net loss per share (basic 
            and diluted)                                                6,079,000      $(0.88)
            Reduction of weighted average shares
              outstanding, to give effect to the
              conversion of Preferred Stock as of        
              the effective date of the IPO                              (635,000)      $(0,11)
                                                        -----------    ----------       ------      
          Net loss per share (basic and diluted)        $(5,373,349)    5,444,000       $(0.99)
                                                        ===========    ==========       ======
</TABLE>

5.  Transactions With Distributors

    In April 1998, the Company achieved one of the two milestones set forth in
    its existing Convertible Subordinated Note Agreement with Guidant
    Corporation ("Guidant"). Under the terms of this agreement, achievement of
    the milestone entitled the Company to receive an additional $2.5 million
    from Guidant, in the form of either non-convertible debt or a purchase of
    common stock. The Company elected to receive $2 million under a note
    payable, which bears interest at 8% per annum payable quarterly. The entire
    principal balance of the note is due on October 31, 2002. The remaining
    $500,000 was received through the sale of 47,637 shares of the Company's
    common stock to Guidant.

    On August 12, 1998, the Company entered into a ten-year distribution
    agreement with Abbott Laboratories ("Abbott") that provides Abbott with
    exclusive rights to distribute the Company's peripheral blood clot therapy
    products in the U.S. and Canada (the "Territory"). Under the terms of the
    agreement, Abbott, in October 1998, furnished the Company with a
    non-refundable $1 million marketing payment, as defined in the agreement,
    upon Abbott's first commercial sale of product. Upon shipment of product by
    the Company to Abbott, the Company will receive an initial purchase price
    payment from Abbott, as provided in the agreement. Abbott will provide
    additional purchase price payments to the Company based upon Abbott's 
    net sales, as defined in the agreement.

    Concurrently, the Company and Abbott entered into convertible subordinated
    note, credit and security agreements, under which Abbott provided the
    Company with (a) $5 million, in exchange for a five-year subordinated note,
    convertible at Abbott's option into shares of the Company's common stock at
    a conversion rate of $13.00 per share, and (b) a $5 million credit facility,
    available for one year from the date of the agreement and repayable five
    years from the date of the agreement, with amounts borrowed under the
    facility convertible over the five-year life of the underlying note at the
    Company's option, with certain restrictions, into shares of the Company's
    common stock at a conversion rate of $15.00 per share. In October 1998, the
    Company elected to borrow the entire $5 million under this facility, the
    proceeds of which were received in November 1998. Borrowed amounts are
    collateralized by the Company's trademarks, patents and other intellectual
    property related to the Company's peripheral blood clot infusion products in
    the Territory, as defined in the aforementioned agreements.


                                       7


<PAGE>   8

    On September 23, 1998, the Company entered into a distribution agreement
    with Century Medical, Inc. ("Century"), that provides Century with exclusive
    rights to distribute all of the Company's products in Japan. Under the terms
    of the agreement, Century made a $500,000 advance payment to the Company,
    which amount is to be applied against Century's first future purchase orders
    for the Company's peripheral blood clot therapy products. The Company has
    recorded this payment as deferred revenue at September 30, 1998, and will
    recognize sales revenue from such amount as the Company makes shipments to
    Century under such purchase orders. Upon achievement of the first regulatory
    approval in Japan for application of the Company's EMBOLYX(TM) Liquid
    Embolic System, Century, under the terms of the agreement, will make a $1
    million advance payment to the Company, which amount is to be applied
    against Century's first future purchase orders for EMBOLYX(TM)-related
    product. The initial term of the agreement extends five years past the date
    on which such approval is obtained.

    Concurrently, the Company and Century entered into convertible subordinated
    note and credit agreements, under which Century provided the Company with
    (a) $3 million, in exchange for a five-year subordinated note, convertible
    at the Company's option with certain restrictions, into shares of the
    Company's common stock at a conversion rate of $15.00 per share, and (b) a
    $2 million credit facility, available commencing at such time that the
    Company obtains a CE Mark in Europe for an EMBOLYX(TM)-related product. The
    availability of such facility will expire on September 30, 1999. Amounts
    borrowed under the facility will be convertible over the five-year life of
    the underlying note at the Company's option, with certain restrictions, into
    shares of the Company's common stock at a conversion rate of 1.5 times the
    then market price, as defined in the agreements, of the Company's common
    stock.

    Borrowings through September 30, 1998 under the notes with Abbott and
    Century bear interest at 5% per annum, which the Company has determined is
    lower than interest rates typically associated with similar debt
    instruments. Accordingly, as required by generally accepted accounting
    principles, the Company recorded discounts on such notes in the aggregate
    amount of $1,558,923, resulting in an imputed interest rate over the terms
    of the notes of 10%. Such discounts had an aggregate unamortized balance of
    $1,533,497 at September 30, 1998, which is presented net of the aggregate
    principal amount of the notes in the accompanying balance sheet. Interest
    payments are due quarterly, in arrears, commencing October 31, 1998 with
    respect to the first Abbott note and the outstanding Century note, and
    commencing January 31, 1999 with respect to the second Abbott note.

6.  Employee Stock Purchase Plan

    On June 30, 1998, the Company sold 13,495 shares of common stock to
    employees of the Company under the Company's Employee Stock Purchase Plan
    for proceeds of $74,560.

7.  Office Lease

    On July 31, 1998, the Company entered into a five-year lease for a 43,538
    square foot facility located in Irvine, California. Monthly payments of
    $38,313 plus common area costs commenced on October 1, 1998, and the lease
    provides for annual escalation based on a cost-of-living index.
    Additionally, the lease provides for the landlord to share, up to $150,000,
    in the cost of certain tenant improvements. The Company anticipates
    maintaining the lease on its existing San Clemente, California facility
    through its expiration in April 1999.


                                       8

<PAGE>   9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

        The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Quarterly
Report on Form 10-QSB. This Quarterly Report on Form 10-QSB contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Certain Factors That May Affect
the Company's Business and Future Results."

OVERVIEW

        Since its inception in June 1993, MTI has been primarily engaged in the
design, development and marketing of minimally invasive devices for treatment of
vascular disease. The Company has a limited history of operations and has
experienced significant operating losses since inception. Operating losses are
expected to continue as the Company expends substantial resources to fund
research and development, clinical trials, regulatory approvals, and marketing
and sales activities.

        The Company commenced U.S. commercial shipments of its first
thrombolytic infusion catheters in November 1994, but did not generate
significant revenues until it established a direct domestic sales force in the
second half of 1995. To date, the majority of the Company's revenues have been
derived from sales of its initial infusion catheters and related accessories,
the Cragg Thrombolytic Brush(TM), which received FDA approval in August 1997 and
the Castaneda Over-The-Wire Brush(TM), which received FDA approval in February
1998. In August 1998, the Company entered into a distribution agreement with
Abbott which provides for distribution of such products by Abbott in the United
States and Canada. The Company expects such sales of peripheral vascular
products, and extensions thereof, to provide the majority of the Company's
revenues at least through 1999.

        The Company currently sells its peripheral vascular products in Europe
through a limited number of distributors. In September 1998, the Company entered
into a distribution agreement with Century which provides for distribution of
all the Company's products by Century in Japan. Significant revenues are not
expected to be derived from sales in Japan until the Company's products receive
regulatory approval in Japan, the first of which the Company expects to occur in
late 1998. In November 1997, the Company signed an agreement with Guidant to
distribute the Company's neuro products in Europe, and in August 1998, that
agreement was expanded to include distribution in Europe of the Company's
peripheral embolization products . To date, no revenues have been received under
the Guidant arrangement and no significant such revenues are expected until
applications of the Company's EMBOLYX(TM) Liquid Embolic System receive CE Mark
certification. The Company does not expect that the first such certification
will be received before mid-1999.

        The Company's products are currently manufactured by the Company at its
facility in San Clemente, California. Certain accessories are manufactured and
processes are performed by contract manufacturers.

        Future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, actions
relating to regulatory and reimbursement matters, the extent to which the
Company's products gain market acceptance, the rate at which the Company, and
third-party distributors, as applicable, establish their domestic and
international sales and distribution networks, the progress of clinical trials,
and the introduction of competitive products for diagnosis and treatment of
neuro and peripheral vascular disease. The Company's limited operating history
makes accurate prediction of future operating results difficult or impossible.
Although the Company has experienced sales growth in recent periods, there can
be no assurance that, in the future, the Company will sustain sales growth or
gain profitability on a quarterly or annual basis or that its growth will be
consistent with predictions made by securities analysts.

        The Company currently manufactures product for stock and ships product
shortly after the receipt of orders, and anticipates that it will do so in the
future. Accordingly, the Company has not developed a significant backlog and
does not anticipate that it will develop a significant backlog in the near term.


                                       9

<PAGE>   10

        RESULTS OF OPERATIONS

        Net sales for the quarter ended September 30, 1998 increased 100% to
$1,452,998 as compared to $727,474 for the corresponding quarter of 1997. While
revenues in 1998 were higher than 1997 for almost all product lines, 51% of the
revenue increase was attributable to sales of the Cragg Thrombolytic Brush and
the Castaneda Over-The-Wire Brush which were introduced in August 1997 and March
1998, respectively, and 30% of the revenue increase was attributable to higher
sales of peripheral infusion products. These increases were attributable in part
to initial shipments made to Abbott in September 1998, in partial satisfaction
of Abbott's initial stocking order. Such sales to Abbott comprised 22% of total
sales for the quarter ended September 30, 1998. Revenues were also higher as a
result of a 5% price increase which was implemented February 1, 1998 for certain
of the Company's products. International sales represented 1% of the total sales
for the quarter ended September 30, 1998 and 2% for the corresponding quarter of
1997.

        Net sales for the nine-month period ended September 30, 1998 increased
81% to $3,397,374 as compared to $1,876,843 for the corresponding period of
1997. Sales of the Cragg Thrombolytic Brush and the Castaneda Over-The-Wire
Brush accounted for approximately 61% of the increase between the two periods
with peripheral infusion devices accounting for 23% of the increase. Initial
sales to Abbott in September 1998 accounted for 9% of total sales for the nine
months ended September 30, 1998. International sales represented 2% and 3% of
total sales for the nine-month periods ended September 30, 1998 and 1997,
respectively.

        The Company expects unit volume and sales related to its U.S. peripheral
vascular products to continue to increase under the distribution agreement with
Abbott entered into in August 1998, however, there can be no assurance as to
such increases occurring. Moreover, the Company may experience a decrease in
sales for a period following the inception of the distribution agreement due to
(a) transition issues that may occur in transferring the distribution function
to Abbott, (b) lower unit prices the Company will receive from Abbott under the
agreement, relative to the unit prices the Company has been obtaining from
end-user customers, and (c) a lag in the timing of revenue recognition with
respect to the additional purchase price payments to be received from Abbott 
based upon Abbott's sales, relative to the time at which product was originally
shipped by the Company to Abbott. This decrease may exist until such time as the
expected increase in unit volume, should it occur, combined with the
aforementioned commissions, offset the effect of the factors discussed above.

        Cost of sales increased to $756,782 for the quarter ended September 30,
1998 from $519,930 for the corresponding quarter of 1997, and decreased, as a
percentage of sales, from 72% in 1997 to 52% in 1998. The dollar increase is
attributable to the increase in sales volume. The decrease in the cost of sales
percentage is due to the beneficial aspects of the increase in sales volume, and
to increased efficiencies achieved in manufacturing, which allowed the Company
to redeploy certain individuals to research and development functions starting
primarily in the fourth quarter of 1997. Cost of sales increased to $1,664,911,
or 49% of sales, for the nine months ended September 30, 1998 from $1,564,855,
or 83% of sales, for the corresponding period of 1997 due to the same factors
discussed above. The Company expects to experience an increase in cost of sales
as a percentage of sales related to products covered by the distribution
agreement with Abbott, due to the lower unit prices the Company will receive and
the lag in the timing of revenue recognition with respect to the additional 
purchase price payments to be received from Abbott based upon Abbott's sales, 
both as discussed above.

        Research and development expenses, including regulatory and clinical
expenses, increased 28% from $1,013,134 for the third quarter of 1997 to
$1,300,445 for the third quarter of 1998, and increased 21% from $3,092,470 for
the first nine months of 1997 to $3,751,314 for the first nine months of 1998.
These increases were primarily attributable to increases in the number of
employees resulting from the aforementioned redeployment of personnel, the
hiring of additional personnel in connection with Company's increased research
and development activities, related relocation and recruiting expenses,
increased expenditures related to development of neuro vascular products and a
research grant. The Company expects to continue to significantly increase
research and development costs during the remainder of 1998 particularly for
human clinical trials of EMBOLYX(TM) and other applications in the neuro and
peripheral areas.


                                       10

<PAGE>   11

        Selling, general and administrative expenses increased 60% from $983,851
for the third quarter of 1997 to $1,569,940 for the third quarter of 1998, and
increased 44% from $3,052,422 for the first nine months of 1997 to $4,399,248
for the first nine months of 1998. These increases were primarily attributable
to sales incentives related to increased revenues, the mid-1997 addition of an
Executive Vice President of Marketing and Sales, marketing studies commissioned
by the Company, expenses related to the Company's public reporting
responsibilities, costs related to a contemplated transaction that was not
pursued to finalization, and additional employees and related relocation and
recruiting expenses commensurate with the increased activity level of the
Company. The closure of the Company's European office in the fourth quarter of
1997 resulted in a $275,000 decrease in expenses for the nine months ended
September 30, 1998 as compared to the corresponding nine month period in 1997.

        Other income declined from $107,143 for the third quarter of 1997 to a
net expense of $69,179 for the third quarter of 1998, due primarily to the
interest expense related to the notes payable that originated in the fourth
quarter of 1997, and the second quarter of 1998. Other income declined from
$460,355 for the first nine months of 1997 to a net expense of $50,866 for the
first nine months of 1998 due to the aforementioned notes payable and to the
inclusion in other income for the first quarter of 1997 of non-recurring income
of $167,000 from the sale of common stock of a privately held company in which
the Company had held a minority interest. It is expected that cash received
under the terms of the convertible subordinated note and credit agreements
entered into with Abbott and Century in August 1998 and September 1998,
respectively, will result in increases in both interest income and interest
expense. Interest expense, net of interest income, is expected to increase as
cash, cash equivalents and short term investments are utilized in operations.

        As a result of the items discussed above, the Company incurred a net
loss of $2.2 million for the third quarter of 1998 compared to $1.7 million for
the third quarter of 1997, and a net loss of $6.5 million for the first nine
months of 1998 compared to $5.4 million for the same period in 1997.

        LIQUIDITY AND CAPITAL RESOURCES

        Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $23.6 million at
September 30, 1998. To fund its operations, the Company raised approximately
$15.3 million from the private placement of equity securities, and completed an
initial public offering in February 1997 of 1,840,000 shares of Common Stock,
raising net proceeds of approximately $10 million. Additionally, in November
1997, the Company received $5 million from Guidant under terms of a convertible
note agreement. The agreement with Guidant also provided the Company with the
option to require Guidant to purchase up to an additional $3 million of the
Company's stock and loan the Company up to an additional $2 million, should the
Company achieve certain milestones, as defined in the agreement, by December 31,
1998. In April 1998, the Company achieved one of the two milestones and elected
to have Guidant loan the Company $2 million and purchase from it $500,000 of the
Company's common stock at approximately $10.50 per share, the proceeds from
which were received in May 1998. There can be no assurance, however, that the
Company will be able to achieve the second of such milestones before December
31, 1998.

    Concurrent with the execution of the distribution agreement with Abbott in
August 1998, the Company and Abbott entered into convertible subordinated note,
credit and security agreements, under which Abbott provided the Company with (a)
$5 million, in exchange for a five-year subordinated note, convertible at
Abbott's option into shares of the Company's common stock at a conversion rate
of $13.00 per share, and (b) a $5 million credit facility, available for one
year from the date of the agreement and repayable five years from the date of
the agreement, with amounts borrowed under the facility convertible over the
five-year life of the underlying note at the Company's option, subject to
certain restrictions, into shares of the Company's common stock at a conversion
rate of $15.00 per share. In October 1998, the Company elected to borrow the
entire $5 million under this facility, the proceeds of which were received in
November 1998. Both notes have a stated interest rate of 5% per annum. This
rate, with respect to the note outstanding as of September 30, 1998, for
financial statement reporting purposes, has been adjusted to reflect an imputed
market rate of interest as of the date of note. The rate of the note underlying
the credit facility will be similarly adjusted in future periods. Under the
terms of the distribution agreement, Abbott, in October 1998, furnished the
Company with a non-refundable $1 million marketing payment, as defined in the
agreement, upon Abbott's first commercial sale of product. Upon shipment of
product by the Company to Abbott, the Company will receive an initial purchase
price payment from Abbott as provided in the agreement. Abbott will provide
additional purchase price payments to the Company based upon Abbott's net sales,
as defined in the agreement.


                                       11

<PAGE>   12
        Concurrent with the execution of the distribution agreement with Century
in September 1998, the Company and Century entered into convertible subordinated
note and credit agreements, under which Century provided the Company with (a) $3
million, in exchange for a five-year subordinated note, convertible at Century's
option into shares of the Company's common stock at a conversion rate of $15.00
per share, and (b) a $2 million credit facility, available until September 30,
1999 and repayable five years from the date of the agreement, with amounts
borrowed under the facility convertible over the five-year life of the
underlying note at the Company's option, subject to certain restrictions, into
shares of the Company's common stock at a conversion rate of 1.5 times the then
market price, as defined in the agreements, of the Company's common stock. Both
notes have a stated interest rate of 5% per annum. This rate, with respect to
the note outstanding as of September 30, 1998, for financial statement reporting
purposes, has been adjusted to reflect an imputed market rate of interest as of
the date of note. The rate of the note underlying the credit facility will be
similarly adjusted in future periods, in the event that amounts are borrowed
under such credit facility. Under the terms of the distribution agreement,
Century made a $500,000 advance payment to the Company on September 30, 1998,
which amount is to be applied against Century's first future purchase orders for
the Company's peripheral blood clot therapy products. The Company has recorded
this payment as deferred revenue and will recognize sales revenue from such
amount as the Company makes shipments to Century under such purchase orders.
Upon achievement of the first regulatory approval in Japan for application of
the Company's EMBOLYX(TM) Liquid Embolic System, Century, under the terms of the
distribution agreement, will make a $1 million advance payment to the Company,
which amount is to be applied against Century's first future purchase orders for
EMBOLYX(TM)-related product.

        As of September 30, 1998, the Company had cash and cash equivalents of
$15.3 million. Cash used in the Company's operations for the nine months ended
September 30, 1998 was approximately $5.8 million, reflecting the loss from
operations, as well as increases in accounts receivable, inventories, and
prepaid expenses and other current assets, net of increases in accounts payable,
accrued liabilities and deferred revenue. The increase in accounts receivable is
attributable primarily to initial shipments made to Abbott in September 1998, in
partial satisfaction of Abbott's initial stocking order. Inventory levels
increased commensurate with the increase in the sales volume during the period.
The increase in deferred revenue is due to the receipt of the $500,000 advance
payment from Century, discussed above. All other increases were commensurate
with the Company's higher operating levels during the nine months ended
September 30, 1998 relative to the comparable period in 1997. Cash provided by
investing activities for the nine months ended September 30, 1998 was $5.2
million, primarily reflecting the maturity of short-term investments, net of
expenditures for property and equipment of $666,000, and patents and licenses of
$384,000. Cash provided by financing activities was approximately $10.8 million
which was primarily attributable to the proceeds obtained from the issuance of
the subordinated convertible notes to Abbott and Century, and to the proceeds
obtained from the issuance of a note and sale of stock to Guidant. Beginning in
the second quarter of 1998, the Company made a modest expansion of its existing
manufacturing facilities to accommodate its increased activity level.
Additionally, in July 1998 the Company entered into a five year lease agreement
for a facility approximately twice the size of its current facility to enable
the Company to expand its manufacturing and research and development capacity.
It is expected that such expansion will also result in expenditures for tenant
improvements to the new facility, and additional tooling and equipment.
Moreover, in November 1998, the Company entered into an agreement providing for
the licensing and installation of an enterprise resource planning ("ERP")
system. It is expected that the installation of the ERP system will require the
acquisition of additional computer hardware and software. (As regards the
Company's compliance with issues related to the Year 2000, see "Certain Factors
That May Affect The Company's Business and Future Results -- Risks Associated
With The Year 2000 Issue.")

        The Company plans to finance its capital and operational needs
principally from its existing capital resources at September 30, 1998, and the
proceeds from the convertible subordinated notes with Abbott and Century, and
from the credit facility with Century and the remaining milestone payment from
Guidant, should the Company satisfy the conditions regarding the availability of
such funds. There can be no assurance, however, that such conditions can be
satisfied within the required time frames.

        MTI believes current resources will be sufficient to fund its operations
into 2000. However, the Company's future liquidity and capital requirements will
depend upon numerous factors, including results under the distribution
agreements with Abbott and Century, and similar future agreements, should any be
entered into, progress of the Company's clinical research and product
development programs, the receipt of and the time required to obtain regulatory
clearances and approvals, and the resources the Company devotes to developing,
manufacturing and marketing its products. The Company's capital requirements
will also depend on the demands created by its operational and development
programs, including requirements for sales and marketing growth.


                                       12

<PAGE>   13

        CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND 
        FUTURE RESULTS

        THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE
ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS OF THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION ARE UNCERTAIN AND MAY BE IMPACTED BY
THE FOLLOWING FACTORS, AMONG OTHERS, WHICH MAY CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION, THE COMPANY'S PAST PERFORMANCE SHOULD
NOT BE CONSIDERED AN INDICATOR OF FUTURE PERFORMANCE AND INVESTORS SHOULD NOT
USE HISTORICAL RESULTS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.

        EARLY STAGE OF DEVELOPMENT. The Company has only recently commercially
introduced a number of products. Several of its key products are in the early
stage of development and the Liquid Embolic System ("LES") has only recently
entered full clinical trials. Commercialization of the Company's products will
depend on a number of factors, including the Company's ability to demonstrate
the safety and efficacy of such products in the clinical setting. There can be
no assurance that the Company's products will be safe and effective in clinical
trials or will ultimately be cleared for marketing by U.S. or foreign regulatory
authorities. Failure to develop safe and effective products, which are approved
for sale on a timely basis would have a material adverse effect on the Company's
business, operating results and financial condition.

        UNCERTAINTY OF MARKET ACCEPTANCE. Even if the Company is successful in
developing safe and effective products that have received marketing clearance,
there can be no assurance that the Company's products will gain market
acceptance. Acceptance of the Company's LES and related neuro products will
require the Company to satisfactorily address the needs of potential customers.
The target customers for the Company's products are interventional radiologists
and interventional neuroradiologists. However, there can be no assurance that
acceptance of the Company's products by interventional radiologists and
interventional neuroradiologists will translate into sales. In addition, no
assurance can be given that the Company's market share for its existing products
will grow or that its products which have yet to be introduced will be accepted
in the market. If the Company is unable to gain market acceptance of its current
and future products, the Company's business, operating results and financial
condition would be materially adversely affected.

        RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT. The markets for the
Company's products are characterized by rapidly changing technologies and new
product introductions and enhancements. In addition to the risks associated with
market acceptance of the Company's products, the Company's success will depend
to a significant extent upon its ability to enhance and expand the utility of
its products and to develop and introduce innovative new products that gain
market acceptance. Moreover, the Company may encounter technical problems in
connection with its product development that could delay introduction of new
products or product enhancements. There can be no assurance that new
technologies, products or drug therapies developed by others will not reduce the
demand for the Company's products. The Company maintains research and
development programs to continually improve its product offerings, including
adding interventional devices. There can be no assurance however that such
efforts will be successful or that other companies will not develop and
commercialize products based on new technologies that are superior in either
performance or cost-effectiveness to the Company's products.


                                       13

<PAGE>   14

        INTENSE COMPETITION. The medical technology industry is characterized by
intense competition. The Company's products will compete with other medical
devices, surgical procedures and pharmaceutical products. A number of the
companies in the medical technology industry, including manufacturers of neuro
vascular and peripheral vascular products, have substantially greater capital
resources, larger customer bases, broader product lines, greater marketing and
management resources, larger research and development staffs and larger
facilities than the Company. Such entities have developed, or may develop,
additional products competitive with the Company's products. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more readily accepted than those
developed or marketed by the Company or that such competing products would not
render the Company's technology and products obsolete or noncompetitive.
Although the Company believes that its products may offer certain advantages
over its competitors' currently-marketed products, earlier entrants in the
market often obtain and maintain significant market share relative to later
entrants. While the Company has designed its products to be cost effective and
more efficient than competing technologies, there can be no assurance that
competitors will not provide better methods or products at comparable or lower
costs. The Company may experience competitive pricing pressures that may
adversely affect unit prices and sales levels and, consequently, materially
adversely affect the Company's business, operating results and financial
condition. The Company also competes with other manufacturers of medical devices
for clinical sites to conduct human trials. No assurance can be given that the
Company will be able to locate such clinical sites on a timely basis, a delay in
which could have a material adverse effect on the Company's ability to conduct
trials of its products which may be necessary to obtain required regulatory
clearance or approval of such products. Such delays could have a material
adverse effect on the Company's business, operating results and financial
condition.

        LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY. The Company was
incorporated in 1993. To date, the Company's business has generated limited
product sales. From its inception through September 30, 1998, the Company
incurred cumulative losses of approximately $23.6 million. The Company expects
to incur additional losses as it expands its research and development,
manufacturing and marketing efforts. No assurance can be given that the Company
will achieve significant sales of its products or that such sales will lead to
profitability. There can be no assurance that the Company will not encounter
substantial delays and unexpected expenses related to the introduction of its
current and future products, or the Company's research and development,
manufacturing and marketing efforts. Such delays or expenses could have a
material adverse effect on the Company's business, operating results and
financial condition.

        POSSIBLE NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF ADDITIONAL FINANCING.
The Company's operations to date have consumed substantial amounts of cash, and
the Company expects its capital and operating expenditures to increase. The
Company believes that its existing capital resources and anticipated cash flow
from planned operations, together with the net proceeds from its initial public
offering, under the terms of (a) a convertible subordinated note agreement with
Guidant entered into in November 1997 (b), a convertible subordinated note
agreement, credit agreement and distribution agreement with Abbott entered into
in August 1998, and (c), a convertible subordinated note agreement and
distribution agreement with Century entered into in September 1998, and the
interest earned thereon, should be adequate to satisfy its capital requirements
into 2000. There can be no assurance, however, that the Company will not need
additional capital before such time. The Company's need for additional financing
will depend upon numerous factors, including the extent and duration of the
Company's future operating losses, the level and timing of future revenues and
expenditures, market acceptance of new products, the results and scope of
ongoing research and development projects, competing technologies, and market
and regulatory developments. In April 1998, the Company achieved the first of
two milestones as defined in the agreement with Guidant, thereby allowing the
Company to receive $2.5 million in exchange for debt and common stock. There is
no assurance, however, that the Company will achieve the second of these
milestones before December 31, 1998. Under the terms of a credit agreement with
Century, the Company may be entitled to borrow an additional $2 million should
it achieve a milestone, defined in the agreement, before September 30, 1999,
however, there is no assurance that the Company will be able to achieve this
milestone. Moreover, should the Company achieve either or both of the milestones
defined in the Guidant and Century agreements discussed above, there is no
assurance that the resulting proceeds under such agreements would satisfy the
Company's then-current working capital requirements. Other than under the terms
of the agreements mentioned above, the Company currently has no other committed
external sources of funds. Should existing resources be insufficient to fund the
Company's activities, the Company will seek to raise additional funds through
public or private financing. There can be no assurance that additional financing
will be available or, if available, that it will be available on acceptable
terms. If additional funds are raised by issuing equity securities, further
dilution to then-existing stockholders may result. If adequate funds are not
available, the Company's business, operating results and financial condition may
be materially adversely affected.


                                       14

<PAGE>   15

        DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The success of the
Company will depend, in part, on its ability to obtain and maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of others. The patent position of a
medical device company may involve complex legal and factual issues. As of
September 30, 1998, the Company held eighteen issued U.S. patents and one issued
foreign patent, and has twenty-nine U.S. and seventeen foreign patent
applications pending.

        The Company's issued U.S. patents cover technology underlying the Cragg
MicroValve, infusion wire, Cragg Thrombolytic Brush, Liquid Embolic System and
carotid and intra-cerebral stent products. The expiration dates of these patents
range from February 2009 to June 2016. The pending claims cover various aspects
of its infusion catheter, infusion wire, Thrombolytic Brush, micro catheter,
Liquid Embolic System, carotid and intra-cerebral stent technologies, coatings
and non-vascular liquid embolic products. Each product area the Company is
pursuing is covered by at least one issued and pending patent. One of the
patents used by the Company is currently licensed by the Company from Andrew
Cragg, M.D. There can be no assurance that issued patents will provide
significant proprietary protection, that pending patents will be issued, or that
products incorporating the technology in issued patents or pending applications
will be free of challenge from competitors. There also can be no assurance that
patents belonging to competitors will not require the Company to alter its
technology and products, pay licensing fees or cease to market or develop its
current or future technology and products. The Company also relies on trade
secrets to protect its proprietary technology, and no assurance can be given
that others will not independently develop or otherwise acquire equivalent
technology or that the Company can maintain such technology as trade secrets. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the United States. The
failure of the Company to protect its intellectual property rights could have a
material adverse effect on its business, operating results and financial
condition.

        The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that infringement, invalidity, right to use or ownership claims
by third parties will not be asserted against the Company in the future.
Although patent and intellectual property disputes in the medical device
industry have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, operating
results and financial condition. In addition, should the Company decide to
litigate such claims, such litigation could be expensive and time consuming,
could divert management's attention from other matters and could have a material
adverse effect on the Company's business, operating results and financial
condition, regardless of the outcome of the litigation.

        LIMITED MARKETING EXPERIENCE; LACK OF DISTRIBUTION. The Company's
experience in working with third-party distributors is limited. In August 1998,
the Company executed a distribution agreement with Abbott to provide for
distribution of the Company's peripheral vascular products in the United States
and Canada, and in September 1998, the Company executed a distribution agreement
with Century to provide for distribution of all the Company's products in Japan.
There can be no assurance, however, that the Company will be able to
successfully transition marketing and sales responsibilities to Abbott, or that
Abbott will be successful in marketing the Company's products. Also, there can
be no assurance that Century will be successful in assisting the Company in
obtaining necessary regulatory approvals in Japan, or, if such approvals are
obtained, that Century would be successful in marketing the Company's products.
The Company's sales force consists of ten people in the United States, all of
whom have been with the Company for a limited time. There is competition for
sales personnel experienced in interventional medical device sales and, as a
result, the Company has experienced significant turnover in its sales force.
There can be no assurance that the Company will be able to successfully respond
to this competition and attract, motivate and retain qualified sales personnel.
The Company intends to market and sell its products outside the United States
principally through distributors and believes that it will need to continue to
expand its distributor network or develop its own sales force. The Company's
ability to market its products in certain areas may depend on strategic
alliances with marketing partners such as Guidant, Abbott and Century. Other
than the agreements with Guidant, Abbott and Century, there can be no assurance
that the Company will be able to enter into distribution agreements on
acceptable terms or at all. Also, there can be no assurance that such agreements
will be successful in developing the Company's marketing capabilities or that
the Company will be able to successfully develop a direct sales force. Such
failure could have a material adverse effect on the Company's business,
operating results and financial condition.


                                       15

<PAGE>   16

        LIMITED MANUFACTURING EXPERIENCE. The Company's experience in
manufacturing its products is relatively limited. The Company has found it
necessary to expand its manufacturing capacity in connection with the continued
development and commercialization of its products. Such development and
commercialization requires the additional commitment of capital resources for
facilities, tooling and equipment and for leasehold improvements. The Company
expects that the expansion of its manufacturing capacity will be achieved from
the increased floor space of its new leased facility, improved efficiencies,
automation and acquisition of additional tooling and equipment. Any delay or
inability in expanding the Company's manufacturing capacity, or obtaining the
commitment of such resources could materially adversely affect the Company's
manufacturing ability, business, operating results and financial condition.

        GOVERNMENT REGULATION. The development, testing, manufacturing and
marketing of MTI's products in the United States are regulated by the U.S. Food
and Drug Administration ("FDA") as well as various state agencies. The FDA
requires governmental clearance of such products before they are marketed. The
process of obtaining FDA and other required regulatory clearances is lengthy,
expensive and uncertain. Moreover, regulatory clearance, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed. Failure to comply with applicable regulatory requirements can result
in, among other things, warning letters, fines, suspensions of approvals,
product seizures, injunctions, recalls of products, operating restrictions and
criminal prosecutions. The restriction, suspension or revocation of regulatory
approvals or any other failure to comply with regulatory approvals or
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. The offer and sale of the
Company's current products required the submission of information to the FDA in
the form of a 510(k) pre-market notification to substantiate label claims and to
demonstrate "substantial equivalence" to a legally marketed Class I or II
medical device or a Class III medical device for which the FDA has not called
for premarket approvals ("PMAs"). Although the Company has received FDA
clearance for many of these products, there can be no assurance that the Company
will be able to obtain the necessary regulatory clearance for the manufacture
and marketing of enhancements to its existing products or future products either
in the United States or in foreign markets on a timely basis or at all. The
Company has made modifications which affect substantially all of its products
covered under 510(k) clearances, which modifications, the Company believes, do
not affect the safety or efficacy of the products and thus, under FDA
guidelines, do not require the submission of new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to a device. If the FDA requires the Company to submit a new 510(k)
notice for any device modification, the Company may be prohibited from marketing
the modified device until the 510(k) notice is cleared by the FDA. Utilization
of the Company's LES will require submission of a PMA application to the FDA,
which generally involves a substantially longer and less certain review process
than that of a 510(k) pre-market notification. In either event, such approvals
or clearances may require human clinical testing prior to any action on such
products by the FDA. Based on the information presented by the Company regarding
the material composition of the LES, the Company believes the LES would be
regulated as a device. There can be no assurance, however, that upon more
detailed review of the LES, the FDA will not at a later date determine that the
LES should be regulated as a drug. Such a change could significantly delay the
commercial availability of the LES and have a material adverse effect on the
Company's business, operating results and financial condition. Delays in receipt
of, or failure to receive, regulatory approvals or clearances to market such
products, or loss of previously received approvals or clearances, would
materially adversely affect the marketing of such products and the Company's
business, operating results and financial condition.

        In the European Union, the Company will be required to maintain the
certifications necessary to affix the CE Mark to its products other than LES,
and to obtain such certifications with respect to affixing the CE Mark to LES,
in order to sell its products in member countries of the European Union after
mid-1998. The Company received its CE Mark certifications in March 1997 with
respect to products other than the LES, however, there can be no assurance that
the Company will be able to maintain such certifications, or, with respect to
LES, obtain such certification, in the future. In addition, federal, state,
local and international government regulations regarding the manufacture and
sale of health care products and diagnostic devices are subject to future change
and additional regulations may be adopted which may materially adversely affect
the Company's business, operating results and financial condition.

        Commercial distribution and clinical trials in most foreign countries
also are subject to varying government regulations which may delay or restrict
marketing of the Company's products. Any inability or delay in obtaining
approvals would materially adversely affect the Company's business, operating
results and financial condition.


                                       16

<PAGE>   17

        Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed Quality
System Requirements, which include development, testing, control and
documentation requirements. The Company's manufacturing processes also are
subject to stringent federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. Although the Company believes that it has complied in all material
respects with such laws and regulations, the Company is subject to periodic
inspection to ensure its compliance with such laws and regulations. There can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations, or
that the Company will not be required to cease operations in the event of its
continued failure to effect compliance.

        RISK OF PRODUCT LIABILITY CLAIMS. The nature of the Company's business
exposes it to risk from product liability claims. The risk of such claims has
increased in light of a U.S. Supreme Court decision in 1996 concluding that the
FDA regulatory framework does not necessarily preempt personal injury actions
against medical device manufacturers. The Company currently maintains product
liability insurance for its products, with limits of $10 million per occurrence
and an annual aggregate maximum of $10 million. However, such coverage is
becoming increasingly expensive and there can be no assurance that the Company's
insurance will be adequate to cover future product liability claims, or that the
Company will be successful in maintaining adequate product liability insurance
at acceptable rates. Any losses that the Company may suffer from any liability
claims, and the effect that any product liability litigation may have upon the
reputation and marketability of the Company's products, may divert management's
attention from other matters and may have a material adverse effect on the
Company's business, operating results and financial condition.

        DEPENDENCE ON SINGLE SOURCE SUPPLIERS; INDEPENDENT CONTRACT
MANUFACTURERS. The Company purchases certain components used in its products and
receives certain services with respect to its products from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. Any
delays in delivery of such components or provision of such services or shortages
of such components could cause delays in the shipment of the Company's products,
which could cause the Company's business, operating results and financial
condition to be adversely affected. The Company's single-source components are
generally acquired pursuant to purchase orders placed in the ordinary course of
business, and the Company has no guaranteed supply arrangements with any of its
single-source suppliers. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could have a
material adverse effect on its business, operating results and financial
condition. There can be no assurance that the Company will not experience
quality control problems, supply shortages or price increases with respect to
one or more of these components in the future. The establishment of additional
or replacement suppliers for certain of these components may delay accessibility
of such components as the Company qualifies such suppliers. Any quality control
problems, interruptions in supply or component price increases with respect to
one or more components could have a material adverse effect on the Company's
business, operating results and financial condition.

        The Company relies on independent contract manufacturers for the
manufacture and assembly of certain of its products and components. Reliance on
independent contract manufacturers involves several risks, including the
potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Such manufacturers have
possession of and at times title to molds for certain manufactured components of
the Company's products. Shortages of raw materials, production capacity
constraints or delays by the Company's contract manufacturers could negatively
affect the Company's ability to meet its production obligations and result in
increased prices for affected parts. Any such reduction, constraint or delay may
result in delays in shipments of the Company's products or increases in the
prices of components, either of which could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
does not have supply agreements with all of its current contract manufacturers
and often utilizes purchase orders which are subject to supplier acceptance. The
unanticipated loss of any of the Company's contract manufacturers could cause
delays in the Company's ability to deliver product while the Company identifies
and qualifies a replacement manufacturer. There can be no assurance that current
or future independent contract manufacturers will be able to meet the Company's
requirements for manufactured products. Such an event would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company intends, after completing its move to its new facility,
to reduce the volume of outside manufacturing and processing, and to establish
on-site capabilities. There can be no assurance, however, as to the timing of
the establishment of such capabilities or whether such a transfer of function
from third parties could be successfully completed.


                                       17

<PAGE>   18

        DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a significant
extent upon the contributions, experience and expertise of its founders, certain
members of its management team and key consultants. The Company maintains a
key-man life insurance policy in the amount of $1 million on the life of George
Wallace, the Company's President and Chief Executive Officer, however, there can
be no assurance that the Company's insurance is adequate. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified management, sales, technical, clinical and consulting
personnel. The loss of the services of any of such key personnel or the
inability to attract and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.

        THIRD-PARTY REIMBURSEMENT. In the United States, health care providers
such as hospitals and physicians that purchase medical devices generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of therapeutic and
diagnostic procedures. With the implementation of Medicare's Prospective Payment
System for hospital inpatient care (Diagnosis Related Groups or "DRGs") in the
1980s, public and private payors began to reimburse providers on a fixed payment
schedule for patients depending on the nature and severity of the illness. Many
tests and procedures that would have been performed under cost-plus
reimbursement formulas are subject to scrutiny and must be justified in terms of
their impact on patient outcomes. As a result, the incentives are now to conduct
only those tests that will optimize cost-effective care.

        The Company could be materially adversely affected by changes in
reimbursement policies of governmental (both domestic and international) or
private healthcare payors to the extent any such changes affect reimbursement
for therapeutic or diagnostic procedures in which the Company's products are
used. Adverse changes in governmental and private third party payors' policies
toward reimbursement for such procedures would have a material adverse effect on
the Company's business, operating results and financial condition.

        RISKS ASSOCIATED WITH INTERNATIONAL SALES. To date, the Company has
derived very little revenue from international sales. The Company believes that
its future performance will be dependent in part upon its ability to increase
international sales. Although the perceived demand for certain products may be
lower outside the United States, the Company intends to continue to expand its
international operations and to enter additional international markets, which
will require significant management attention and financial resources. There can
be no assurance, however, that the Company will be able to successfully expand
its international sales. The Company's success in international markets will
depend on its ability to establish and maintain agreements with suitable
distributors, or establish a direct sales presence.

        Furthermore, international sales in general are subject to inherent
risks, including unexpected changes in regulatory requirements, fluctuating
exchange rates, difficulties in staffing and managing foreign sales and support
operations, additional working capital requirements, customs, duties, tariff
regulations, export license requirements, political and economic instability,
potentially limited intellectual property protection and difficulties with
distributors. In addition, sales and distribution of the Company's products
outside the United States are subject to extensive foreign government
regulation. The Company has in the past avoided losses due to fluctuating
exchange rates associated with international sales by selling its products in
U.S. dollars; however, the Company expects to sell products in selected markets
in local currency and thus be subject to currency exchange risks in association
with such sales. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, operating results and financial
condition.

        Large-scale market acceptance of the Company's products will depend on
the availability and level of reimbursement in international markets targeted by
the Company. Reimbursement systems in international markets vary significantly
by country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Obtaining reimbursement approvals in each country
can require 12-18 months or longer.


                                       18

<PAGE>   19
        ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation
provides for 5,000,000 authorized shares of Preferred Stock, the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any further vote or action by the
stockholders. In addition, the Company's stock option plans provide for the
acceleration of vesting of options granted under such plans in the event of
certain transactions which result in a change of control of the Company.
Further, Section 203 of the General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could materially adversely affect the price of the Company's Common
Stock.

        POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
Common Stock. In addition, the market price of the shares of Common Stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
results of operations, failure of such results of operations to meet the
expectations of public market analysts and investors, timing and announcements
of technological innovations or new products by the Company or its competitors,
FDA and foreign regulatory actions, developments with respect to patents and
proprietary rights, timing and announcements of developments, including clinical
trials related to the Company's products, public concern as to the safety of
technology and products developed by the Company or others, changes in health
care policy in the United States and internationally, changes in stock market
analyst recommendations regarding the Company, the medical device industry
generally and general market conditions may have a material adverse effect on
the market price of the Common Stock. In addition, it is likely that during a
future quarterly period, the Company's results of operations will fail to meet
the expectations of stock market analysts and investors and, in such event, the
Company's stock price could be materially and adversely affected.

        RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. In the next fifteen months, 
companies may face a potentially serious problem if information systems, 
software applications and operational programs written in the past do not 
properly recognize calendar dates beginning in the Year 2000 (the "Year 2000 
issue"). This problem could affect both information technology ("IT") systems 
(for example, computer hardware and software) and non-IT systems (for example, 
systems or machines with embedded microcontrollers) with the result being the 
possible malfunctioning or non-functioning of such systems.

        The Company's products do not contain IT or non-IT system components. 
Moreover, the Company's assessment of the Year 2000 issue indicates that its 
manufacturing processes are not significantly dependent on systems that would 
be affected by the Year 2000 issue. Accordingly, the Company believes that the 
level of incremental expenditures it may incur solely to bring the Company into 
compliance with respect to the Year 2000 issue would not exceed $250,000. This 
amount excludes planned expenditures in connection with the move to the 
Company's new facilities and the installation of an enterprise resource 
planning system, which expenditures the Company would have incurred 
irrespective of the Year 2000 issue.
       
        The Company has formed an internal task force to undertake such
activities as creating awareness within the Company of the Year 2000 issue,
assessing the Company's IT and non-IT systems' compliance with respect to the
Year 2000 issue, implementing remedial action to address non-compliance and
establishing controls for ongoing compliance. As regards IT systems, the Company
has obtained written representations from the manufacturer of the financial
system software currently utilized by the Company and from the manufacturer of
the enterprise resource planning software the Company anticipates installing
during the first half of 1999. Based on such written representations, the
Company believes that such software will not be affected by the Year 2000 issue,
and the Company believes that its existing information systems equipment,
primarily composed of personal computers, will be minimally impacted by the Year
2000 issue, as the Company intends to replace the majority of those systems
which may be affected by this problem by the end of 1999 due to technological
obsolescence. With respect to non-IT systems, the Company intends, after
completing its move to its new facility, to reduce the volume of outside
manufacturing and processing, and to establish on-site capabilities. In this
transition, the Company's intent is to install systems, as necessary, that are
Year 2000 compliant. Also in connection with the move to the new facility, the
Company intends to obtain written representations as to compliance with the Year
2000 requirements from manufacturers of systems that will be installed in the
facility. In addition, the Company intends to initiate communications with the
Company's vendors in the fourth quarter of 1998 to assess such vendors' status
with respect to the Year 2000 issue, and the Company is establishing policies
regarding internal approval for it to transact business with current and future
vendors that is predicated, in part, on such vendors' compliance with Year 2000
requirements.

       There is no assurance, however, that the Company will be successful in 
completing any of the activities described above. In certain instances where 
the Company is unable to mitigate the adverse effects of noncompliance, the 
Company may attempt to identify additional or replacement vendors, or may 
attempt to accelerate manufacturing of product prior to the beginning of the 
year 2000. There is no assurance, however, that these measures could be 
successfully undertaken, or that, even if undertaken, they would be effective 
in mitigating the problem. Accordingly, the inability of the Company to achieve 
full compliance with respect to the Year 2000 issue, or otherwise mitigate the 
effects of instances of noncompliance, could result in delays or interruptions 
in obtaining materials and services, conducting such operations as 
manufacturing and processing sales orders and payments, and performing normal 
business activities, each of which could have a material adverse effect on the 
Company's financial position and results of operations.

                                       19
<PAGE>   20

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceeding.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (A) EXHIBITS

            See Index to Exhibits on Page 22 of this Quarterly Report on
            Form 10-QSB.

        (B) REPORTS ON FORM 8-K

            On September 2, 1998, the Company filed a Form 8-K with respect
            to the execution of subordinated convertible note, credit,
            security and distribution agreements with Abbott Laboratories.

            No other reports on Form 8-K were filed, or required to be
            filed, by the Company during the quarterly period ended
            September 30, 1998.


                                       20

<PAGE>   21

                                   SIGNATURES

        In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                             MICRO THERAPEUTICS, INC.


Date: November 16, 1998                      By: /s/ HAROLD A. HURWITZ
                                                 -------------------------------
                                                     Harold A. Hurwitz
                                                     Chief Financial Officer


                                       21

<PAGE>   22

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>

   Exhibit                                                                                  Page
   Number                                    Description                                   Number
   -------                                   -----------                                   ------
<S>            <C>                                                                         <C>
    10.1       Convertible Subordinated Note Agreement dated August 12, 1998 between
                 the Company and Abbott                                                      (1)

    10.2       5% Convertible Note dated August 19, 1998 between the Company and Abbott      (2)

    10.3       Distribution Agreement dated August 12, 1998 between the Company and          (3)
               Abbott

    10.4       Credit Agreement dated August 12, 1998 between the Company and Abbott         (4)

    10.5       Security Agreement dated August 12, 1998 between the Company and Abbott       (5)

    10.6       First Amendment to Distribution Agreement dated August 12, 1998 between
                 the Company and Abbott                                                      23

    27.1       Financial Data Schedule - Nine Months Ended September 30, 1998.               25

    27.2       Financial Data Schedule - Nine Months Ended September 30, 1997 Restated
                 for Earnings per Share Data.                                                26
</TABLE>

- -------------
(1)   Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated
      September 2, 1998

(2)   Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K, dated
      September 2, 1998

(3)   Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K, dated
      September 2, 1998

(4)   Incorporated by reference to Exhibit 10.4 of the Company's Form 8-K, dated
      September 2, 1998

(5)   Incorporated by reference to Exhibit 10.5 of the Company's Form 8-K, dated
      September 2, 1998



<PAGE>   1

                                                                    EXHIBIT 10.6


               FIRST AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT

        This FIRST AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT (the
"Amendment"), is entered into as of November 16, 1998, by and between Abbott
Laboratories, an Illinois corporation, on and behalf of itself and its
Affiliates (Collectively, "Abbott") and Micro Therapeutics, Inc., a Delaware
corporation ("MTI").

                                    RECITALS

        A. Abbott and MTI entered into an Exclusive Distribution Agreement dated
August 12, 1998 pursuant to which Abbott agreed to act as an exclusive
independent distributor of MTI's Products within the Territory (the
"Distribution Agreement").

        B. Abbott and MTI have agreed to amend certain of the provisions
contained in the Distribution Agreement.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and subject to and on
the terms and conditions herein set forth, the parties hereto agree as follows:

        1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms
in this Amendment shall have the respective meanings ascribed to them in the
Distribution Agreement.

        2. DISPOSITION OF INVENTORY. Paragraph 14.5.2 shall be deleted and
replaced in its entirety with the following paragraph:

               Upon any termination of this Agreement, Abbott may sell all or
        any part of its remaining inventory of the Products to Customers, or,
        upon mutual agreement between Abbott and MTI, MTI may agree to
        repurchase all or any part of Abbott's remaining inventory of the
        Products (excluding discontinued and demonstration units). The price for
        such inventory shall be the Cost paid by Abbott to MTI for such
        Products, plus Abbott's shipping and handling costs.

        3. NO OTHER CHANGES. Except as amended by this Amendment, the
Distribution Agreement shall remain in full force and effect as originally
stated.



<PAGE>   2

        IN WITNESS WHEREOF, this First Amendment to Exclusive Distribution
Agreement has been signed on behalf of each of the parties hereto as of the date
first written above.


                                            ABBOTT LABORATORIES



                                            By:  Richard A. Gonzalez
                                                 -------------------------------

                                            Its: President, Hospital Products 
                                                 Division
                                                 -------------------------------


                                            MICRO THERAPEUTICS, INC.



                                            By:  William F. Gearhart
                                                 -------------------------------

                                            Its: Executive Vice President
                                                 -------------------------------


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance 
sheet and statement of operations in Form 10-QSB for the nine months ended 
September 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               SEP-30-1998
<CASH>                                          15,335
<SECURITIES>                                         0
<RECEIVABLES>                                      809
<ALLOWANCES>                                        11
<INVENTORY>                                        697
<CURRENT-ASSETS>                                17,062
<PP&E>                                           1,780
<DEPRECIATION>                                     770
<TOTAL-ASSETS>                                  19,255
<CURRENT-LIABILITIES>                            1,556
<BONDS>                                         12,725
                                0
                                          0
<COMMON>                                             7
<OTHER-SE>                                       4,967
<TOTAL-LIABILITY-AND-EQUITY>                    19,255
<SALES>                                          3,397
<TOTAL-REVENUES>                                 3,397
<CGS>                                            1,665
<TOTAL-COSTS>                                    8,151
<OTHER-EXPENSES>                                  (381)
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 433
<INCOME-PRETAX>                                 (6,469)
<INCOME-TAX>                                         1
<INCOME-CONTINUING>                             (6,470)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    (6,470)
<EPS-PRIMARY>                                     (.97)
<EPS-DILUTED>                                     (.97)
        

</TABLE>

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and statement of operations in Form 10-QSB for the nine months ended
September 30, 1997, restated for per share data.
</LEGEND>
<RESTATED> 
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               SEP-30-1997
<CASH>                                           3,804
<SECURITIES>                                     4,339
<RECEIVABLES>                                      365
<ALLOWANCES>                                         0
<INVENTORY>                                        590
<CURRENT-ASSETS>                                 9,296
<PP&E>                                           1,195
<DEPRECIATION>                                     538
<TOTAL-ASSETS>                                  10,584
<CURRENT-LIABILITIES>                              637
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             6
<OTHER-SE>                                       9,777
<TOTAL-LIABILITY-AND-EQUITY>                    10,584
<SALES>                                          1,877
<TOTAL-REVENUES>                                 1,877
<CGS>                                            1,565
<TOTAL-COSTS>                                    6,145
<OTHER-EXPENSES>                                  (460)
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                  22
<INCOME-PRETAX>                                 (5,372)
<INCOME-TAX>                                         1
<INCOME-CONTINUING>                             (5,373)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    (5,373)
<EPS-PRIMARY>                                     (.99)
<EPS-DILUTED>                                     (.99)
        

</TABLE>


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